Buy Ashok Leyland Ltd For Target Rs. 280 By Emkay Global Financial Services Ltd
CV growth likely to come back; pricing environment conducive
Following two years of consolidation, TTMT—the market leader in CVs— highlighted (refer to Analyst meet presentation) that near-term demand would improve, on healthy fleet operator utilization and profitability. Over the longer term, it expects 3-5% industry CV volume CAGR. Importantly, like AL, TTMT has also voiced its intent of continued focus on value-led growth and margin expansion in the CV business across business cycles; this augers well for profitability of the overall CV industry, as players focus on profitable growth vs market-share gains ‘at any cost’. AL targets 35% MHCV market share in the medium term (30.7% in FY25), while also improving its profitability (aims for mid-teens margin vs 12.7% in FY25) aided by improving mix/vehicle premiumization, operating leverage, sustained cost reduction measures, and higher non-vehicle (non-cyclical) revenue – this re-affirms the stance around enhanced focus on profitable growth in the CV industry as opposed to discountled volume growth. Growth come-back in MHCVs following the 2Y consolidation, coupled with enhanced focus on profitable volume growth, is likely to act as a catalyst for AL. We retain BUY on the stock with unchanged TP of Rs280.
Near term demand improving amid health fleet operator profitability/utilization
Following 2 years of consolidation, TTMT (market leader in CVs) highlighted near-term demand improving amid healthy fleet operator utilization and profitability. Over the longer term, TTMT expects 3-5% CV volume CAGR. AL also remains optimistic about FY26, and anticipates growth across segments (buses growing ahead of the CV portfolio) driven by increased GoI capex, healthy monsoon outlook, and pent-up industry demand. In the near term, this would be aided by pre-buying due to the regulation changes (AC cabins for an over 3.5-ton CV applicable from Oct-25). AL is committed to achieving its mid-term MHCV market share ambition of 35%, and aims to address 80% of the LCV market (vs ~48% now) in coming 3-4Y via new product launches.
Guides to profitable volume growth; targets mid-teen EBITDA margin
The CV industry maintains its shift to higher-tonnage vehicles which would drive revenue growth higher. AL’s product mix to is increasingly tilting toward higher-tonnage vehicles which has led to better realization/margin (EBITDA margin at a fresh high of 12.7% in FY25), with more scope for expansion (targets mid-teen EBITDA margin), on improving mix, premiumization, operating leverage, sustained cost reduction, and higher nonvehicle/non-cyclical revenue. Like AL, TTMT has also given guidance of value-led growth with margin expansion in its CV business across business cycles. This augers well for the CV industry as players focus on profitable growth vs market share gains at any cost.
Profitable volume growth could act as a re-rating catalyst; maintain BUY
We believe that an improving CV outlook and sustained efforts toward profitable (valueled) volume growth (thereby also strengthening the balance sheet), amid the continued shift toward higher-tonnage vehicles and supported by higher non-vehicle (non-cyclical) revenue, could act as a re-rating catalyst for AL. We maintain BUY with TP of Rs280.
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