Automobiles & Components: Improving near-term CV trends; medium-term unchanged by Kotak Institutional Equities
Improving near-term CV trends; medium-term unchanged
Near-term momentum in the M&HCV truck segment remains strong, led by e-commerce and higher infrastructure spends. We expect M&HCV truck industry volumes to grow 8% yoy in FY2026E (versus 5% earlier), but we maintain our FY2026-28E CAGR expectations at 4-5%. We expect the M&HCV buses and LCV segments to deliver steady 7-8% CAGRs, led by post-GST affordability gains and STU fleet additions. Increase EPS estimates and retain our ratings on AL (REDUCE) and TMCV (ADD).
Near-term trends remain strong for domestic M&HCV truck segment
We expect the M&HCV truck segment to continue its strong momentum in 2HFY26E, led by (1) a strong uptick in ICV, Haulage and MAV segment demand, driven by e-commerce and a steady uptick in the infrastructure segment, (2) a recovery in the tipper segment’s demand, driven by a seasonal uptick in construction, mining and infrastructure-related activities and (3) steady freight rates and improving fleet utilization levels of fleet operators. Overall, we expect M&HCV truck demand to grow 8% yoy in FY2026E (5% yoy earlier) and deliver a 6% CAGR in FY2025-28E (4.5% CAGR earlier), supported by 5-6% CAGR in road freight and a gradual increase in utilization levels.
Expect M&HCV bus trends to continue over FY2025-28E
We expect M&HCV bus volumes to report a 6.5% CAGR over FY2025-28E, driven by lower acquisition costs after the GST cut, particularly in ICE buses. While the long-term trend remains tilted toward electrification, the GST cut improves the near-term affordability of conventional ICE fleets, enabling budget-constrained STUs to accelerate fleet additions. This will be supported by an infrastructure push and urbanization, driving demand for small buses.
LCV segment growth to outpace M&CHV segment over FY2025-28E
We expect the domestic LCV segment volumes to report a 7-8% CAGR over FY2025-28E. The LCV segment has seen demand revival after GST cuts and we expect trends to continue, driven by (1) a decline in acquisition costs for small fleet operators, (2) strong e-commerce demand and (3) an increased demand for the hub-and-spoke model and rising last-mile connectivity needs.
Pricing remains steady; mix and commodity may offset op lev benefits
Pricing in the M&HCV and LCV segments remains steady; OEMs are focusing on further improving net pricing, which augurs well for profitability. However, mix (incremental growth is driven by ICV and haulage—margin dilutive) and commodity headwinds (base metal and PGM inflation) could partly offset operating leverage benefits in the near term.
Increase our FY2026-28E EPS estimates; retain ratings on AL and TMCV
We have increased our FY2026-28E EPS estimates for AL and TMCV, driven by increased volume assumptions (exports and M&HCV) and EBITDA margin. We retain our ratings on AL (REDUCE) and TMCV (ADD), with revised FVs of Rs165 (Rs140 earlier) for Ashok Leyland and Rs425 (Rs350 earlier) for TMCV.
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