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Prioritizing profitability to mitigate near-term headwinds

In 3QFY24, Ashok Leyland (AL) reported EBITDAM of 12%, 100bps above JMFe. Sequential improvement in margin (+80bps) was led by better price realisation, cost reduction initiatives and softening RM cost. Near-term demand momentum is expected to be muted owing to high base of last year and general election. The company re-iterated its focus on profitable growth. Medium-term demand drivers (higher infra spends, scrappage policy, etc.) remain intact and AL aims for higher share in MHCVs (to c.35%) led by network expansion (in North and East) and addressing product gaps. Benign commodity cost and cost control initiatives are expected to support profitability. We estimate EPS CAGR of c.30% during FY23-26E. Maintain BUY with Mar’25 TP of INR 200 (20x fwd. EPS). Increase in competitive intensity remains key monitorable going forward.

3QFY24 - Margin beats estimate: In 3QFY24, AL reported net sales of INR 92.7bn (+3% YoY, -4%QoQ), 2% above our estimate. Blended realisation increased c.3% YoY (+1.5% QoQ). Total volume was flattish YoY (-5% QoQ). EBITDA margin stood at 12% (+320bps YoY, +80bps QoQ), 100bps above JMFe. Margin beat was led by lower than expected RM costs. EBITDA stood at INR 11bn (+40% YoY, +3% QoQ). Adj. PAT stood at INR 5.8bn (+63% YoY, flattish QoQ), c.6 % above JMFe.

Demand outlook: AL indicated that volume growth during 3QFY24 was flattish on YoY basis owing to high base and state elections. The management expects CV demand to remain muted over next 2 quarters owing to high base (for 4Q) and upcoming general elections. Continued focus of GOI on infrastructure remains industry tailwind for mediumto-long term. Order book for state transport buses remains healthy. And the company expects bus, tractor trailers and tippers to lead the MHCV segment demand going forward. AL has lost MHCV market share in the recent quarters owing to aggressive competitive intensity. However, it’s LCV / Bus segment market share has been gradually rising. The management indicated that focus is on profitable growth and the company will not resort to aggressive pricing to gain market share. AL is focusing on dealer network expansion to cover underpenetrated areas (added 44 touch points in North and East). In exports, volumes grew by (c.6% YoY) and the management indicated that other businesses (defence, aftermarket and powertrain) continue to perform well with healthy order pipeline (esp. for defence segment).

Profitability outlook: During 3Q, gross margins improved c.130bps QoQ led by better price realisation, cost reduction efforts and softening RM costs. Realisations improved by c.1.5% QoQ led by lower discounts and better mix. The company re-iterated its focus on pricing discipline and profitable growth. Benign commodity price, cost control initiatives and better pricing (net of discount) is expected to support margins going forward.

Update on EV business: During the quarter, the company invested INR 6.6bn in Switch Mobility / Optare PLC to fund the latter’s investment for new product development. Switch Mobility has a healthy order book of 1,000 e-buses and has received LOIs for c.12k units of its e-LCV. Focus is on reducing the TCO. AL recently launched 14T electric truck in select markets and the company reiterated that new product pipeline for both India and EU market remains healthy. Management expects Switch India to acheive cash breakeven by FY25 end.

Other highlights: 1) HLFL performed well; Current order book stands at c.450bn, PAT Margin was c.13% and NPA c.2.8%. 2) Capex during 3QFY24 stood at INR 0.9bn (9MFY24: INR 2.9bn). 3) Net Debt stands at INR 17.5bn and the company expects reduction in net debt during 4Q.

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SEBI Registration Number is INM000010361