Buy Ashok Leyland Ltd for Target Rs. 264 by ARETE Securities
Despite volume declines, Ashok Leyland saw strong financial growth, driven by improved margin expansion from a favourable product mix in both truck and bus segments, particularly in multi-axle vehicles and tippers with higher ASPs. Looking ahead, the management expresses a positive outlook for the CV sector in Q4, buoyed by increased government CapEx and an ambitious goal of exporting 15k units this fiscal year—78% of which has been accomplished by Jan-25. Revenue grew by 2% YoY to Rs.94,787 million on the back of a 2% YoY decline in volumes and a 4% YoY rise in ASPs. EBITDA saw a rise of 9% YoY to Rs.12,114 million, and an EBITDA Margin increase of 77.5 bps YoY to 12.8%, driven by favourable steel prices, improved realizations, and ongoing cost reduction initiatives over the past two years. PAT rose by 31% YoY to Rs.7,617 million with PAT margin improving by 178 bps YoY to 8%
Industry Performance
After a slowdown in Q2, the MHCV industry saw a recovery in Q3, primarily driven by increased consumption demand during the festive season and a better flow of government capital expenditure towards the quarter's end. This resulted in a 10% sequential increase in domestic MHCV TIV for Q3, though it was still down by 1% YoY. However, this was a significant improvement from Q2's 12% YoY decline, indicating a market comeback. The industry momentum continued into Q4, with January recording positive growth, further supported by expectations for a strong February and March. This performance suggests a stabilization and potential growth in the CV sector, aligning with broader economic recovery signals in India
Market Share Expansion in MHCV and LCV Segments
The company is focused on expanding its MHCV and LCV market presence. In the MHCV segment, it holds a 30% market share for 9MFY25, targeting 35%. Despite a slight volume decline in Q3FY25, market share remained stable. The bus segment is strong, with a 4,000-unit order book for Q4 and a 38%+ market share. Truck volumes fell 2% YoY in Q3, but premiumization and rising replacement demand due to an aging fleet are key growth drivers. In defence, they expect 10,000-12,000 truck replacements over
the next 3-4 years, with 70,000 trucks in service. For LCVs, the company plans to increase its 2-4 tonne category market share from 18.5% to 25% in the medium term, supported by new products like SAATHI and an expansion strategy to grow market coverage from 50% to 80%. The quick commerce boom is expected to further benefit the ICV and LCV segments
Strategic Focus on Electric and Alternative Fuel Vehicles
The company is positioning itself at the forefront of the transition to electric and alternative fuel vehicles, which is the future of CV sector. Switch Mobility, has made significant strides with an order book of over 1,800 eBuses by the end of Q3FY25, including exports to Mauritius. They've also introduced innovative products like the Switch EiV 12 for the Indian market and the e1 bus for Europe, indicating a global approach to e-mobility. Additionally, the company displayed concepts like an electric port terminal tractor and a 15-meter bus with unique features at the Auto Expo, signalling their commitment to product innovation in sustainable transport solutions. With expectations of growth in the eBus market in India and ongoing evaluations for the UK market, company's focus on EVs could lead to a significant market share in this emerging sector
Robust Growth in Non-CV and Export Businesses
The company's non-CVs and export market shows promising growth prospects. Non-CV revenues saw a 14% increase in spare parts revenue and a 4% rise in engine volume in Q3 FY '25. The defence segment experienced a 33% degrowth in the current quarter, with revenue at INR 100 crore. However, with a significant pipeline and expected replacement demand for over 70,000 trucks currently in service, there's potential for substantial future orders. On the export front, there was a 33% growth in Q3, with the company aiming for 15k units for FY25, up from around 12k units last year. This is part of a broader goal to reach 25k units in the medium term. The focus on these areas not only diversifies revenue sources but also positions the company to mitigate risks associated with domestic market fluctuations, thereby supporting consistent growth.
Outlook and Valuation
Anticipating growth, Ashok Leyland aims to increase market shares in MHCV and LCV, supported by export gains and non-CV businesses. Their EV strategy and market expansion plans suggest future upside, with the company confident of achieving good margins irrespective of cycle type. We expect Revenue/EBITDA/PAT to rise by 18%/21%/ 25% in FY26(E). Given the positive sentiment in the MHCV sector, we maintain our BUY rating with a target price of Rs.264, based on a multiple of 14.6x FY26E EPS and 18.1x FY26E PE.
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