Buy Ashok Leyland Ltd For the Target Rs. 260 by Choice Broking Ltd
Switch Mobility UK’s Cessation to Have a Limited Short-Term Impact but is LongTerm Positive for AL
* Despite Switch Mobility UK’s revenue growth from £13.9Mn (INR 1,539Mn) in FY23 to £24.8Mn (INR 2,817Mn) in FY24, its contribution to Switch’s total revenue declined from 60.7% to 37.2%, as Switch Mobility India outpaced it with stronger growth. However, Switch UK accounted for only 0.7% of AL's consolidated revenue in FY24, highlighting its diminishing relevance at the top line.
* We expect the cessation of Switch UK’s operations to have a 2–4% impact on AL’s consolidated net profit in the short term due to a one-time payout of £5–10Mn (INR 553.6Mn – 1,107.1Mn). However, in the long term, the move is likely to be positive, reducing cash burn and improving economies of scale in India. The cessation is expected to eliminate monthly losses of £2–3Mn (INR 221.4Mn – 332.1Mn), potentially boosting PAT by 8–12%. With the UK operations ceasing, we expect AL to strengthen its consolidated earnings, as the business will no longer weigh down overall profitability.
AL Restructures Switch Mobility: Scaling Down UK Operations, Betting on India
* AL plans to scale down operations at its step-down subsidiary, Switch Mobility UK, due to weak demand for EV buses, an uncertain e-bus outlook in the UK, and an unsustainable cost structure. The company has initiated a 45–90 day consultation process with employees, which may lead to the closure of manufacturing and assembly activities at its Sherburn facility, incurring an estimated cost of £5–10Mn (INR 553.6Mn – 1,107.1Mn). Despite this, Switch UK will continue fulfilling existing orders and offering aftermarket services from its Rotherham and Thurrock facilities.
* Switch UK currently has a net debt of £80Mn (INR 8857Mn), which is due for repayment by FY29. The INR 5Bn equity infusion approved by AL in Feb 2025 will be partly used for debt repayment and partly for closure-related expenses. Management does not foresee any further fund requirements for either Switch UK or Switch India in the near future.
* Going forward, AL aims to reduce its UK exposure and prioritize growth in India, where Switch India is expected to deliver INR 9–10Bn in revenue in FY25 and turn EBITDA positive. Backed by a strong order backlog of 1,300 buses, Switch India is projected to achieve PAT break-even over the next 4–6 quarters. The company does not expect any impairment of investments in Switch, as the decline in value at the UK unit is expected to be offset by gains at the India entity.
* Although AL is scaling down UK operations, it does not intend to exit the UK market entirely. The company plans to cater to the UK and Europe through its India and UAE manufacturing sites once market conditions improve.
Hinduja Group Increases Share Pledge in AL
* Hinduja Automotive Limited (the Borrower) holds 1,019.4Mn shares in AL Limited, constituting 35.01% of its issued and paid-up share capital. As of Dec 2024, 15.38% of this stake was pledged. Subsequently, on 26th and 28th March 2025, Hinduja Automotive pledged an additional 18.55%, increasing the total pledged stake to 33.93%.
* March 26, 2025: 300Mn shares were pledged, representing 10.21% of AL's share capital.
* March 28, 2025: 245Mn shares were pledged, representing 8.34% of the share capital.
* Both pledges were made in favor of Catalyst Trusteeship Limited, acting as the onshore security agent for Hinduja Automotive’s lenders under a Facility Agreement dated March 24, 2025.
Recent Update: AL Secures INR 7,000Mn Defense Order
On March 28 2025, AL secured INR 7,000Mn worth of defense vehicle orders, strengthening its position as a key supplier to the Indian Army. The contracts include specialized vehicles such as the Stallion 4x4, Stallion 6x6, Short Chassis Bus, and Mobility System Travelling Platform, catering to troop transportation, logistics, and specialized mobility needs under the Close-in Weapon Systems (CIWS) program.
View and Valuation:
We do not revise our estimates following the INR 7,000Mn defense order, as the potential upside from such contract wins is already factored into our valuation. Similarly, we do not expect a significant impact on EPS from the cessation of Switch Mobility UK in the near term, as the company is valued on a standalone basis. We maintain our ‘BUY’ rating with a target price of INR 260 (valued at 20x FY27E EPS plus the value of Hinduja Leyland Finance Limited).
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