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In Q1 FY25, Ashok Leyland's M&HCV segment achieved solid growth, capturing a 31% market share, despite negative sentiment surrounding the H1 FY25 outlook in the CV industry. While the overall LCV segment remained flat YoY, AL's domestic LCV sales rose by 8%, although both domestic and international sales experienced significant double-digit declines quarterly. AL's defence and spare parts segments, particularly the defence sector nearing the Rs. 1000 crore revenue mark, contributed positively to revenues with higher margins. Conversely, the power solutions business saw a 20% decline compared to last year due to last year's pre-buy. The company reported an 11% EBITDA margin, improved from last year but down 43% from the prior quarter due to a 30% increase in employee expenses. Looking ahead, AL plans various product launches and the establishment of Centres of Excellence to drive innovation and maintain control over its offerings.

CV Industry Outlook

Management indicates a modest growth of 10% across the entire CV segment, with buses being the standout performer-sales increased by 50% within the industry. However, the truck segment experienced a decline of 2-3% for the company, primarily due to the impact of the election season, which stalled many projects and delayed the initiation of new ones. Management views this downturn as temporary, particularly in the tipper truck segment, and is optimistic about a recovery beginning in Q2.

Product Launches

Ashok Leyland has an ambitious product launch strategy for the current year, planning to unveil six new products. Company aims to expand its addressable footprint in the LCV segment from 50% to 80% of the domestic market. The company launched two new models in Q1 FY25 and plans to introduce four additional models by March 2025.However, it is important to note that the muchanticipated sub-2 tonne segment LCV is a medium-term project and will not be launched this year. In the bus segment, the company aims to introduce new vehicles, particularly in the ICV category, where AL currently holds a market share of approximately 20%. Despite being a leader in the general bus segment, the company's limited presence in the ICV bus segment presents significant growth opportunities. Additionally, the company is responding to rising demand for SWITCH buses, receiving multiple tenders from various regions across the country

Developments in EVs

Ashok Leyland is sharpening its focus on enhancing technological capabilities and integrating its product designs, moving away from reliance on suppliers. The company boasts a robust range of EV products and is taking significant steps to bolster its EV business by establishing three Centres of Excellence. These centres will specialize in battery packs and modules, electric drive units, and software-defined vehicles (SDVs). This strategic initiative is aimed at enhancing the company's autonomy in developing innovative EV solutions. Additionally, Switch India has commenced deliveries of e-LCVs from last quarter and is expected to launch new products and platforms in the upcoming quarters, further enhancing its competitive position in the EV market.

Defence and Spare Parts Performance

Both the defence vehicle and spare parts segments are high-margin businesses for Ashok Leyland, contributing significantly to overall profitability. The defence vehicle segment has demonstrated remarkable growth, with revenues nearing Rs.1,000 crores in Q1 which is a substantial increase compared to the previous year's figure. Additionally, the spare parts business has also performed well, experiencing a 12% increase in revenue overall.

HLF Update

The establishment of Hinduja Leyland Finance (HLF) is progressing as planned, with an anticipated launch by the end of March 2025. HLF will serve as the parent company for HLF Housing Finance, which is projected to contribute Rs.11,500 crore to the collective AUM of Rs.51,500 crore. In Q1, HLF reported revenues of Rs.1,377 crore and a profit of Rs.130 crore, underscoring a strong start for this financial initiative. This strategic alignment positions HLF and HLF Housing Finance for significant growth in the financial services sector.

Outlook & Valuation

The CV market is currently experiencing sales volatility that is likely to persist until the end of Q2 FY25. However, we anticipate that once the effects of the general elections and the monsoon season conclude in September, the government's planned focus on infrastructure development will drive sales growth for AL, leading to enhanced earnings potential. We project EBITDA margins to be approximately 11.1% for FY25E and 11.5% for FY26E. With a positive outlook for domestic M&HCV sales, we are maintaining our BUY rating and setting a target price of Rs. 333, based on a multiple of 12.2x FY25E EPS and 21x FY25E PE.

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