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* Ashok Leyland (AL)’s 3QFY24 results was a beat, led by savings in RM costs, which led to EBITDA margins expanding 320bp YoY to 12% (vs. est.10.5%). While volume growth is expected to remain moderate, the focus on profitable growth should aid overall margins.

*  We cut FY24E/FY25E EPS estimates by 6% each to factor in demand moderation in domestic MHCV volumes. We reiterate our BUY rating with a TP of INR205 (based on 10x Mar’26E EV/EBITDA + ~INR17/sh for the NBFC).

Better ASPs on the back of price hikes in both MHCVs and LCVs

* 3QFY24 revenue/EBITDA/adj. PAT grew ~3%/40%/63% YoY to INR92.7b/11.1b/5.8b (vs. est. INR91.8b/9.6b/4.9b). 9MFY24 revenue/EBITDA/adj. PAT grew ~10.5%/82%/1.8x YoY.   

* Net realizations grew 3% YoY (+1.5% QoQ) to INR1.96m (vs. est. INR1.94m). Volumes remained flat YoY (-5% QoQ).

* Gross margins expanded 400bp YoY (-130bp QoQ) to 27.8% (vs. est. 26.3%).

* EBITDA margins expanded 320bp YoY (+80bp QoQ) to 12% (vs. est. 10.5%).

* Net Debt stood at INR17.5b at the end of 3QFY24 (vs. net debt of INR11.4b at the end of 2QFY24) with debt to equity at 0.2x. 

Highlights from the management commentary

* MHCV growth outlook: FY24 volumes are estimated to be below FY18 peak as 4QFY24 is expected to see some moderation in growth due to the high base of last year. The management expects volumes to see moderation till elections (1QFY25) as the tendering process across underlying industries slow down. However, macro indicators such as GDP growth, government focus on infrastructure, etc., are intact for the underlying CV industry growth.

* LCVs: Domestic LCV industry for AL’s addressable market has declined 3% YoY for 9MFY24, while AL has seen a growth of 2% YoY, indicating market share gain.

* EVs: The first batch of e-LCVs will roll out in a few months. It has signed MoU with customers for ~12-13k units. Similarly, it has an order book for ~1,000 e-buses.  

* The board has earlier approved INR12b of equity investment in Optare PLC (holding company of Switch and Ohm mobility). It has invested INR6.6b in 3QFY24 into Optare PLC/Switch, driven by the promising prospects of e-LCVs and eBuses.  

 Valuation and view

*  With the high base of 4QFY23 and upcoming general elections in 1HCY24, demand momentum for domestic CVs is expected to see moderation. However, on the back of stable RM cost, lower discounting, and cost-saving initiatives AL should be able to maintain double-digit margins.

*  While valuations at ~17.5x FY25E P/E and 11x EV/EBITDA are reflecting the mid-cycle recovery, they do not fully reflect AL’s focus on diversifying new revenue streams and increasing profit pools. We reiterate our BUY rating with a TP of INR205 (premised on 10x Mar’26 EV/EBITDA + ~INR17/share for the NBFC).

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