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Strong outlook amid cost pressures MHCV industry to see high-single-digit growth in FY27E

* Ashok Leyland’s (AL) 1QFY27 PAT at INR6b was 12% ahead of estimates. EBITDA margin fell 100bp YoY to 10.1% due to high commodity costs, though still 100bp ahead of our estimates. * CV demand trends have been better than expected so far, with the industry posting mid-teen growth on YTD basis. The industry also seems to have weathered the surge in input costs well. Given these factors, we now expect AL to post 6%/10% volume growth in FY27E/FY28E. Overall, we factor in revenue/EBITDA/PAT CAGR of 11%/15%/17% over FY26-28E. Over the years, AL has effectively reduced its business cyclicality by focusing on non-truck segments. Its continued emphasis on margin expansion and prudent capex control should help improve 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 INR198 (based on 13x FY28E EV/EBITDA + ~INR10/sh for NBFC).

Highlights from the management commentary

* Management indicated that domestic CV demand improved materially from June, with the momentum sustaining in July and remaining favorable in early August. It expects 2Q industry growth to be stronger than the ~13- 14% recorded in 1Q.

* Even after assuming a more conservative second half, management believes the M&HCV industry can deliver high-single-digit growth in FY27, with an even stronger growth outlook for LCVs.

* Management currently expects commodity cost pressure to peak in 2Q, begin easing in 3Q and see a more visible turnaround in 4Q. 2Q is expected to be the most challenging quarter from a raw material cost perspective, based on management's current expectations.

* Management is prioritizing higher-margin businesses and products, including higher-horsepower M&HCVs, defense, power solutions, LCVs and other non-core-truck businesses, to offset commodity pressure.

Valuation and view

CV demand trends have been better than expected so far, with the industry posting mid-teen growth on YTD basis. The industry also seems to have weathered the surge in input cost well. Given these factors, we now expect AL to post 6%/10% volume growth in FY27E/FY28E. Overall, we factor in a CAGR of 11%/15%/17% in revenue/ EBITDA/PAT over FY26-28E. Over the years, AL has effectively reduced its business cyclicality by focusing on non-truck segments. Its continued emphasis on margin expansion and prudent capex control should help improve 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 INR198 (based on 13x FY28E EV/EBITDA + ~INR10/sh for NBFC).

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