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In 1QFY25, Ashok Leyland (AL) reported EBITDAM of 10.6%, 90bps below JMFe. 160bps YoY improvement in gross margin was led by better price realisation, cost reduction initiatives and steady RM cost. Demand momentum in domestic market continues to remain healthy led by pick-up in replacement demand. The company re-iterated its focus on profitable growth. Medium-term demand drivers (higher infra spends, scrappage policy, etc.) remain intact and AL aims for higher share in MHCVs (to c.35%) and LCV led by network expansion and addressing product gaps. Focus on higher net realisation and cost control initiatives are expected to support profitability. We estimate 7% / 16% revenue / EPS CAGR over FY24-27E. Maintain BUY with Jun’25 TP of INR 275 (20x fwd. EPS). Increase in competitive intensity remains key monitorable going forward

* 1QFY25 - Margin below estimate: In 1QFY25, AL reported net sales of INR 86bn (+5% YoY, -24%QoQ), 2% below JMFe. Blended realisations declined c.1% YoY (-2% QoQ). Total volume increased c.6% YoY (-22% QoQ). EBITDA margin stood at 10.6% (+60bps YoY; -350bps QoQ), 90bps below JMFe. Margin miss was due to higher other expenses on account of one-time spend towards development of centre of excellence for battery packs, electric drive units and software defined vehicles. EBITDA stood at INR 9.1bn (+11% YoY, -43% QoQ). Adj. PAT was at INR 5.3bn (-9% YoY; -46% QoQ)

* Demand outlook: AL indicated despite on-going general elections in India, underlying demand for MHCV remained healthy. Truck fleet age remains high (10-11yrs vs. 7-8yrs historically) and the company expects acceleration in replacement demand going forward to drive volume momentum. Continued focus of GOI on infrastructure remains industry tailwind for medium-to-long term. AL highlighted that currently 3.7mn CV trucks are on road of which ~50% are aged over 11 years and thus it expects healthy pickup in replacement demand. Overall it remains optimistic for FY25 and expects bus, tractor trailers to lead the MHCV segment demand going forward. AL’s LCV segment market share has been gradually increasing and the company targets further expansion led by new launches (6 in FY25) that will address white spaces in product portfolio (addressable mkt. to increase from 50% to 80%). AL’s focus is on profitable growth and it does not plan to resort to aggressive pricing to gain market share. AL’s export business is witnessing early signs of recovery (vol. grew by c.5% YoY in 1Q) and the management indicated that other businesses (defence and aftermarket) continued to grow strongly with healthy order pipeline (esp. for defence which it plans to double in next 2 years)

* Profitability outlook: During 1Q, gross margins improved c.160bps YoY led by better price realisation, cost reduction efforts and steady RM costs. AL has not taken a price hike so far (during Apr-Jul’24). The company re-iterated its focus on pricing discipline and profitable growth. Commodity prices are expected to increase during 2Q. Astute cost controls and better pricing (net of discount) is expected to support margins going ahead.

* Update on EV business: AL indicated Switch Mobility India has a healthy order book of 1,500+ e-buses. Recently launched e-LCV has also received strong response especially from e-commerce and delivery companies. AL’s e-MaaS subsidiary OHM is managing ebus operations in Bengaluru, Ahmedabad, Bihar and Chandigarh. The company reiterated that new product pipeline for both India and EU market remains healthy.

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