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Operationally in line; higher other income drives PAT beat

Reiterates its target to achieve mid-teen EBITDA margin

* Ashok Leyland's (AL) 2QFY25 results were operationally in line, reporting a robust margin of 11.6% (+100bp QoQ) despite weak demand. Margin was supported by lower steel prices (+50bp impact) and cost savings (+50bp). Management is optimistic about recovery in CV demand in 2H, driven by expected benefits of revival in Govt spending, healthy freight rates, and an extended replacement cycle.

* Given the weak demand in H1, we have cut our FY25E/FY26E EPS by ~11%/8%. We view AL as the top investment choice in a CV growth cycle, given its positioning to expand revenue and profit pools. Reiterate our BUY rating with a TP of INR255 (based on 11x Sep’26E EV/EBITDA + ~INR19/sh for the NBFC).

Yet another quarter of healthy margins

* AL’s 2QFY25 revenue/EBITDA declined ~9%/6% YoY to INR87.7b/INR10.2b (est. INR88.5b/INR10.2b). PAT grew 20% YoY to INR6.9b (est.INR6.3b). 1HFY25 revenues declined 3% YoY, while EBITDA/adj. PAT grew 1.5%/6% YoY. For 2HFY25, we expect revenue/EBITDA to decline 2%/4% YoY, while adj. PAT to grow ~10% YoY.

* Net realizations declined 1% YoY (-2% QoQ) to INR1.92m (est. INR1.94m). Volumes declined 8.5% YoY (+4% QoQ). Within non-CV business, revenue growth was ~17% YoY for Engine and ~13% for spares.

* Gross margins expanded 240bp YoY (+100bp QoQ) to 28.8% (est. 28%).

* Despite operating deleverage, EBITDA margins expanded 40bp YoY (+100bp QoQ) to 11.6% (in line). Margin expansion was aided by reduction in steel prices and its cost cutting initiatives. EBITDA declined 6% YoY to INR10.2b (in line). The company has maintained its guidance of mid-teens EBITDA margin in the medium term.

* There was an extraordinary income of INR1.2b from fair valuation of investment in subsidiary.

* Higher other income drove 20% YoY growth in adj. PAT to INR6.9b (est. INR6.3b).

* AL declared its first interim dividend of INR2/share for FY25.

* FCF turned positive in 1HFY25, mainly aided by better operating cash flow, which jumped 3.8x YoY. Capex also doubled from 1HFY24 levels.

* AL reported net debt of INR5.01b as of 1HFY25 end vs. INR11.39b in 2QFY24 and INR12.95b in 1QFY25. Debt-to-equity ratio stood at 0.05x.

Highlights from the management commentary

* Demand outlook: Demand is expected to improve, with anticipated government spending. ICRA projects 0-3% YoY growth MHCV trucks for FY25, suggesting high single-digit growth in 2HFY25. AL continues to aspire for 35% market share in MHCVs.

* Freight utilization and freight rates are moving in the right direction. While freight utilization averaged 60-65% in the central and eastern regions in JulAug’24, it has now revived back to ~95% in October.

* Capex: The management has guided for capex of INR7.5-8b for FY25 (invested capex of INR1.53b for 2Q and INR3.07b for 1HFY25). While they have not invested anything in subsidiaries and associates in H1, they intend to invest about INR2-2.5b in HFL in H2.

* EV buses: The order book of 2k buses should take 15 months to execute. Its subsidiary Ohm has received orders of 500 buses from Chennai MTC and 300 buses from Bangalore. Switch is actively working on fulfilling an order for ~1,200 buses from DTC, with deliveries expected to begin later this year. Switch India aims to achieve EBITDA breakeven this year.

Valuation and view

* We are optimistic about a recovery in CV demand, driven by strong fleet utilization, government 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 cost-control measures, should bode well for EBITDA margin expansion over FY24-26E.

* We have cut our FY25E/FY26E EPS by ~11%/8% to factor in near-term weakness in CV demand. Reiterate our BUY rating with a TP of INR255 (based on 11x Sep’26E EV/EBITDA + ~INR19/sh for the NBFC).

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