Buy Ashok Leyland Ltd For Target Rs.300 By Emkay Global Financial Services
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AL posted an inline Q1 (margin up 57bps YoY to 10.6%, despite one-offs related to new-age R&D set-up). AL has turned more positive on volume outlook, expects better margin in FY25 vs FY24, and retains medium term mid-teen margin guidance. We believe MHCVs would enter an upcycle from FY26E after 2 likely flattish years (FY23-25E), amid macros remaining favorable. This, with healthy fleet profitability (refer to Expert Call), would enable margin expansion at CV OEMs, thus driving strong EPS growth. We raise FY26E EPS by 11%, introduce FY27 estimates (build-in 4%/13% CAGR in MHCV vol./FY24-27E EPS), and retain BUY. We raise our TP to Rs300/sh (from Rs250; on 13x Jun26E EV/EBITDA+2x P/B for HLFL; implied 22x Jun-26E PER). AL is among the least expensive OEMs (13% EPS CAGR; net-cash balance sheet; >25% RoCE).
In-line performance in Q1
Revenue/EBITDA grew 5%/11% YoY to Rs86bn/Rs.9.1bn (in-line). Margins rose by 57bps YoY (down by 354bps QoQ) to 10.6%; the sequential decline was largely owing to lower volume; gross margin saw a ~40bps dip QoQ. Reported margin featured a material one-off related to R&D costs for battery packs, electric drive units, and software defined vehicles. Overall, adjusted profit stood at Rs5.2bn vs our estimate of Rs5bn.
Earnings Call KTAs
1) The company turned more optimistic on the CV outlook; a traditionally weaker Q1 has clocked 10% growth this year, contrary to fears of a slow down; Q2 is witnessing good momentum on-ground; macros remain supportive and public infra thrust is still in place, with profitability of fleet operators also healthy; AL expects some growth this year, with flattish performance in the worst case.
2) Replacement demand is yet to kick in, with average fleet age at an all-time high of ~10-11 years vs. LTA of ~7-8 years; this grants confidence on a positive outlook over coming 2-3 years; ~50% of the current truck parc belongs to BS-3 or earlier era and would see natural replacement at some point.
3) Within trucks, all segments are expected to do well except for the multi axle haulage category, which is seeing some shift to tractor-trailers.
4) Dedicated Freight Corridors (DFCs) are not seen impacting heavy truck demand over the next 2 years, as the related ecosystem around it still needs to develop.
5) AL is confident of market-share gains in MHCVs and LCVs, driven by product launches (e.g. 6 launches in LCVs this year, along with launches for the school and staff bus segment).
6) EV transition in buses is happening faster than anticipated; AL is participating in tenders and has ~1,400 deliveries lined up over coming quarters.
7) AL continues to aspire for mid-teen margins over the medium term; it expects full year margins this year to be higher than in FY24 driven by continued pricing discipline, operating leverage, stable RM, further cost actions, and improving mix.
8) The defense order pipeline is strong; AL expects to double FY24 revenue in 2-3 years.
9) Investment spends for FY24 stand at ~Rs5-7.5bn
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
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