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Improved mix drives margin expansion

Finance arm gets RBI approval for reverse merger

• Ashok Leyland’s (AL) 1Q PAT stood at INR5.9b, marginally ahead of our estimate of INR5.8b, led by a slight beat on margins (30bp) and higher other income. Its margins expanded 50bp YoY to 11.1% despite subdued demand, led by a healthy non-CV mix in 1Q.
• Over the years, AL has effectively reduced its business cyclicality by focusing on non-MHCV segments. Its continued emphasis on margin expansion is expected to support stronger returns in the long run. Further, a net cash position will enable AL to invest in growth avenues in the coming years. We reiterate our BUY rating with a TP of INR141 (based on 11x June27E EV/EBITDA + ~INR10/sh for NBFC)

Improved mix drives margin expansion

• AL revenue grew 1.5% YoY (in line with our estimates) to INR 87.2b, led by marginal growth in both volume and blended ASP.
• Despite subdued volumes, EBITDA margin expanded 50bp YoY to 11.1% and was slightly ahead of our estimate of 10.8%.
• EBITDA margin was supported by a favorable shift in the mix, driven by higher non-CV sales, with spare parts growing 8% YoY and the power solutions business growing 29% YoY. Within the CV segment, the mix improved with an increase in MAV sales, while exports also recorded strong growth of 29% YoY.
• As a result, EBITDA grew 6% YoY to INR 9.7b, largely in line with our estimate.
• Overall, PAT grew 13% YoY to INR5.9b, marginally ahead of our estimate of INR5.8b.
• AL has undergone significant deleveraging over the past 12 months, moving to a net cash position of INR8b, compared to a net debt of INR12b previously.

Highlights from the management commentary

• Management expects the MHCV industry to post mid-single-digit growth in FY26, while the LCV segment is expected to grow at a slightly higher rate.
• Backed by a healthy order backlog, management remains confident of achieving double-digit growth in the defense segment in FY26 and sustaining the momentum into FY27.
• Exports grew 29% YoY in 1Q, and management expects this momentum to continue in the coming quarters.
• Switch India reported a positive PBT in 1QFY26 and is targeting PAT breakeven in FY26E. As of the end of 1Q, it had an order backlog of over 1,500 buses.
• Hinduja Leyland Finance Ltd. (HLFL) has received RBI approval for its merger with NxT Digital, with remaining statutory and regulatory approvals still in process. According to management, the HLFL listing is likely to take at least 3-4 quarters.

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