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Positive volume growth despite weak quarter.

Ashok Leyland Ltd. (AL) is the second-largest Commercial Vehicle (CV) manufacturer in India. It has a strong presence in the truck segment, with a market share of 33% as of FY24.

*  Despite a weak quarter due to pre buying in March and election concerns, volume grew by 6.2% YoY for Q1FY25.

* EBITDA Margin came at 10.6% (+57bps) owing to lower metal price, efficiency in sourcing and better product mix.

* AL achieved a market share of 31% in line with the industry growth. This is due to new launches and a strong presence in the higher tonnage category with healthy double digit growth.

* We expect earnings to grow by 12% CAGR over FY24-26E, factoring in margin expansion, superior product mix, and pick up in the infrastructure activities.

* On a 1yr. fwd. basis, AL is trading at 15x in line with its historical avg. We value AL at 15x FY26E EV/EBITDA and maintain Buy rating with a target price of Rs.280/- at CMP.

Both heavy and light truck volume to gain attraction…

Q1FY25 revenue grew by 5% YoY driven by growth in the heavy truck & bus segments, supported by a favourable mix. However, the tipper segment saw a decline, largely due to delay in project execution related to election. The domestic volume for the quarter grew by 6% over the same period last year, marginally outperforming the industry. As a result, AL maintained its market share compared to the same quarter last year. For Q1FY24, the Medium & Heavy truck segment (M&HCV) and LCV (Light commercial vehicle) volume grew by 7% and 6% YoY, respectively. However, export volume remains muted. EBITDA margin expanded by 57bps YoY due to softening steel prices, cost control initiatives, and superior product mix. We expect the demand to improve going forward owing to a pick-up in construction activity, higher budget allocation in rural infrastructure segment

Medium to long term triggers to remain

The CV industry may experience normal growth for the fiscal year, and we expect the industry to grow by 7-8% in FY25 due to a revival in the bus segment, a recovery in replacement demand, and continued momentum in the MHCV segment. The company underlined strong momentum in the power solutions, spare parts and defence sectors, and anticipates that defence business revenues will double within in next 2 to 3 years. In addition, the company seeks to outperform the market by increasing market share in its weak territories (North and East markets), expanding its dealer network, and launching new products frequently. On account of the anticipated resurgence of a few of its export markets, it is projected that export volumes will pick up during the fiscal year 2024. Capital expenditures: Rs. 500-700cr. for FY25.

Expansion in the LCV & EV business

The company has been successful in gaining market share in the LCV segment with its modular platform strategy to reduce the number of parts per vehicle, which has resulted in better economies of scale, better production planning, and improved supply chain management to reduce the cost of the vehicle. AL is also optimistic about the growth prospects in the E-LCV space. Initial response for the first IEV4 space had a goods response, and has lined 4 more launch for FY25. The company’s EV arm, Switch, received an order for E-Buses 950 units for Delhi, 300 units for Bengaluru, and 100 for UP

Valuations

AL has taken a continuous price hike and is not expecting any further decline in the margin owing to a softening commodity price and inventory correction. Despite challenges in the tipper truck segment, management anticipates improved demand in H2FY25, driven by optimism in infrastructure and rural construction sectors. Given strong margin expansion and earnings recovery in H2, we value AL at 15x EV/ EBITDA and have a target price of Rs.280, and recommend Buy rating at CMP.

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