Buy Ashok Leyland Ltd For Target Rs.255 by Motilal Oswal Financial Services Ltd
Strong margin performance amid demand weakness
Seeing market share recovery in high-margin MAVs and tippers
* Ashok Leyland (AL) delivered an encouraging 3QFY25 performance, surpassing estimates across all metrics. Despite a YoY volume decline, EBITDA margin expanded by 80bp YoY to 12.8% (est. 11.7%), supported by a favorable product mix and lower other operating expenses.
* AL’s focus on profitable growth, driven by lower discounts, a better mix, and cost-control measures, should bode well for EBITDA margin expansion over FY25-27E. To factor in better than expected performance in Q3, we raise our FY25E/26E EPS estimates by 7%/4%. We reiterate BUY with a TP of INR255 (11x Dec’26E EV/EBITDA + ~INR18/sh for the NBFC)
EBITDA margin expansion driven by favorable mix and cost control
* AL’s 3QFY25 revenue/EBITDA/PAT grew by ~2%/9%/31% YoY to INR94.8b/INR12.1b/7.6b (est. INR90.5b/INR10.5b/6.3b). 9MFY25 revenues declined 1% YoY while EBITDA/adj.PAT grew 4.1%/14% YoY.
* Net realizations grew by 4% YoY (6% QoQ) to INR2.04m (est. INR1.95m). Volumes declined 1.4% YoY. Net pricing impact (price hikes net of discounts) has been stable QoQ. Although the company raised prices in Jan, it had to claw back the hikes due to competitive pressure.
* Domestic trucks contributed about 55% of revenues, of which ILCVs accounted for 25%. Revenue contribution from Bus + LCV stands at 23- 24%, while the non-CV segment mix (defense, spare parts, engines, etc) contributes 20%. Engine volumes were up 3.5% YoY, while spare parts revenues grew 14% YoY.
* Gross margin expanded 70bp YoY (-30bp QoQ) to 28.5% (est. 28.8%). The gross margin decline QoQ was driven by a reduction in defense offtake, from INR1.5b in 2Q to INR1b in 3Q. Gross margins were also partially impacted by an increase in tire costs.
* Lower other operating expenses led to EBITDA growth of 9% YoY to INR12.1b (est. INR10.55b).
* EBITDA margin expanded ~80bp YoY/ 120bp QoQ to 12.8%. Margin expansion in 3Q was driven by an improved mix in trucks towards MAVs and tippers, along with a reduction in other expenses, which the company was able to curb effectively.
* Healthy operating performance, coupled with lower interest cost and tax, led to Adj. PAT beat at INR7.6b (up 31% YoY, est. INR6.3b).
Highlights from the management commentary
* Outlook: In Jan’25, the CV industry saw positive growth, and February is expected to show similar growth. As a result, AL is hopeful that the industry will continue to grow in 4Q. Key demand indicators for CVs are in place, including: 1) healthy fleet operator economics, supported by improving utilization levels and the ability to pass on freight rate increases, and 2) the beginning of the interest rate cut cycle.
* While the company has good visibility for the next 6 months, management is hopeful that all segments within the CV industry will post growth in FY26. Management has also indicated that it continues to make good progress toward its medium-term targets, which include: 1) a 35% share in MHCV, 2) mid-teens EBITDA margin, 3) strong growth in non-CV businesses, 4) leadership in alternate fuels, and 5) value unlocking in subsidiaries.
* Defense: Although the 3Q ramp-up from this segment was slower, management is confident of strong growth from this business in the long run, driven by its order backlog. It expects the Army will likely require 10-12k new trucks over the next 3-4 years.
* Switch: The Indian business continues to perform very well and now has an order backlog of 1,800 buses. Management is hopeful that Switch India can be EBITDA positive by 2QFY26 at the latest, though this will depend on its ability to execute the orders, which have an execution timeline of 12-18 months.
Valuation and view
* While ongoing CV demand remains under pressure, we still anticipate a demand recovery in FY26E, driven by stable fleet utilization, the government’s focus on infrastructure, and rising replacement demand. Although the recovery may take a few more quarters, we view AL as the top investment choice in the CV growth cycle, given its positioning to expand revenue and profit pools. Moreover, its focus on profitable growth, driven by lower discounts, a better mix, and costcontrol measures, should bode well for EBITDA margin expansion over FY25- 27E.
* We raise our FY25E/FY26E EPS by ~7%/4% to factor in better profitability. We reiterate our BUY rating with a TP of INR255 (based on 11x Dec’26E EV/EBITDA + ~INR18/sh for the NBFC).
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