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In 2QFY24, Ashok Leyland (AL) EBITDAM came in at 11.2% (+120bps QoQ), 20bps above JMFe. Improvement in margin was led by benign commodity cost and higher operating leverage. Higher discounts during 2Q impacted realisation (-2% QoQ). Management indicated that demand momentum is expected to remain healthy and MHCV industry is expected to grow by 8-10% during FY24 owing to pre-election led govt. infra spends. AL aims for higher share in MHCVs (to c.35%) led by network expansion (in North and East) and addressing product gaps. LCV demand, which has been lagging so far, is also expected to improve during 2H led by rural recovery. Intensity of discounts remain key monitorable. Benign commodity cost and cost control initiatives are expected to support profitability. We estimate revenue CAGR of 9% and healthy growth in profitability during FY23-26E. We maintain BUY with Sept’24 TP of INR 200 (20x fwd. earnings). Slowdown in economy and increase in competitive intensity are the key risks.

* Revenue misses; margin tad higher than JMFe: In 2QFY24, AL reported net sales of INR 96.4bn (+17% YoY, +18%QoQ) 3% below estimate. Blended realisation decreased c.2% QoQ (+6% YoY). Total volume increased by c.10% YoY (+21% QoQ). EBITDA margin stood at 11.2% (+470bps YoY, +120% QoQ), 20bps above JMFe. YoY improvement in margin was led by softening RM cost, higher operating leverage and cost control initiatives. EBITDA stood at INR 10.8bn (+32% YoY, -1% QoQ). Adj. PAT stood at INR 5.8bn (+2x YoY, +1% QoQ).

* Demand outlook: AL indicated that healthy vol. growth (+10% YoY) during 2QFY24 was led by higher demand for tractor trailers and tippers from sectors like Cement, Steel, IronOre etc. Demand momentum is expected to remain robust led by expected govt. infra spends (owing to pre-election) and healthy replacement demand. The company maintained MHCV industry growth guidance 8-10% during FY24. LCV is expected to grow by 4-5% during FY24. Order book for state transport buses remains robust. AL’s MHCV trucks market share declined by c.40bps during 1H to 31.4% AL is focusing on dealer network expansion to cover underpenetrated areas (added 47 touch points in North and East). In exports, volumes grew by (1% YoY). Defence revenue for 1H stood at INR 3bn and AL expects to end FY24 with over INR8bn defence revenue on the back of robust order pipeline.

* Profitability outlook: Realisations declined by 2% QoQ as the company could not retain c.3% price hike taken during 1Q. The company indicated that net price realisation continues to improve for the industry and it intends to increase net realisation by avg. c.1% per quarter. Benign commodity price, cost control initiatives, better pricing (net of discount) and higher operating leverage is expected to support margins going ahead.

* Update on EV business: During the quarter, the company invested INR 12bn in Switch Mobility to fund the latter’s investment for new product development. Switch Mobility has a healthy order book of 1,100 e-buses and has received LOIs for 10k units of its eLCV (deliveries to start in 4QFY24). New product pipeline for both India and EU market remains healthy.

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