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Revenues grew 9% yoy (+2% qoq) at ~Rs.87.7b as ASP declined ~0.6% yoy/-1.9% qoq at ~Rs.1.92m/unit, while volumes declined by 8.5% yoy (+3.9% qoq) at 45.6k units. Decline in ASP is led by unfavorable mix even within M&HCV, while LCVs increased to 38.2%. AL’s Q2 FY25 operating performance was slightly better as EBITDA margins came in at 11.6%, +40bp/+100bp yoy/qoq). This was led by better than expected gross margins as RM continues to be benign and cost control initiatives. We believe, despite volumes trajectory likely to be uncertain (flat to mid-single digit growth), margins would likely expand led by, 1) benign RM, 2) stable net pricing & favorable mix and 3) cost controls initiatives. Performance of non-auto business continues to be healthy in Q2 FY25 led by, 1) Aftermarket (+13% yoy), 2) Defence revenues grew >2x yoy in H1 FY25 and 3) Engines +17% YoY and exports growth despite macro challenges in key markets.

Volume growth to revive by Q4 FY25, FY 26 to see a strong growth

AL gained market share of ~60 bps in Q2 in MHCV industry, which it aims to increase to ~35%. We believe market share gains shall continue, led by product expansion and new product launches. The management sounded positive on demand momentum to buildup in H2 FY25 led by likely pickup in fleet sentiments and improvement in infra activities. We are building in ~4% MHCV volume CAGR over FY24-27E with decline of ~7% in FY25E. However, we believe AL’s de-risking strategy to help as it reduces domestic MHCV exposure by adding new revenue pools such as LCVs and nonvehicle revenues.

Replacement cycle for MHCV has got considerably stretched in this up-cycle largely because of improved vehicle quality and better service support. Average commercial fleet age stands at ~10-12 years now while average replacement cycle used to be 6-7 years earlier. We however, believe replacement demand will come back in the next 12-18 months with ageing fleet population and improving fleet utilization. Further, we believe LCV volumes will also recover on the back of a pickup in consumption.

Margins to be driven by various factors

Q2 witnessed a yoy growth of 40 bps in margins. We saw a decline in input costs as RM to sales came down to 71.2% from 73.5% yoy and 72.2% qoq. Going forward, management expects input costs to remain benign. The CV industry has been oligopolistic in nature.

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