IGI Logo

AL’s Q2 revenues were below estimates, with margins in-line (up by 118bps QoQ to 11.2%, on operating leverage benefits). We continue to believe that while the domestic CV industry would scale a fresh peak in FY24E, the best of the current upcycle may be behind (with trucking system capacity up 40-50% now vs. FY19, similar to increases seen in the past two upcycles). Further, while AL’s relative outperformance is likely to endure (better growth in highertonnage categories, buses, new products, etc), current valuations (~1SD above LTA on P/B basis) leave risk-reward balanced. We raise FY25E/FY26E EPS by ~7% each (on shift to 25% tax rate) and retain our HOLD rating with a revised down TP of Rs180/share (9x FY26E core EV/EBITDA, rolled over + 20% discount on 1x FY23 P/B for subsidiary Hinduja Leyland Finance).

Ashok Leyland: Financial Snapshot (Standalone)

Revenues below estimates; margins in-line

Revenues grew ~17% YoY (up 18% QoQ) to Rs96bn (below estimates), despite volume growth of 20% sequentially to 49,846 units, amid realization de-growth of ~2% QoQ to ~Rs1,933K/unit. EBITDA grew 32% QoQ to Rs10.8bn; EBITDA margin expanded by 118bps QoQ to 11.2% (in-line). Margins were higher sequentially, largely driven by operating leverage. Overall, adjusted profit stood at Rs5.8bn (Emkay est.: Rs6.1bn; Consensus est.: Rs6.2bn), slightly below estimates mainly due to miss on revenues.

Earnings call KTAs

1) Expects the domestic M&HCV industry to remain strong for the rest of the year and next year, driven by healthy replacement demand and favorable macros; retains M&HCV industry growth guidance of 8-10% (grew ~10% YTD; no guidance for FY25E); LCV industry seen growing ~4-5% (vs. ~3% growth YTD). 2) Seeing softening of steel prices (major contributor to the RM basket); this, along with focus on cost controls (e.g., saved ~Rs6bn in costs during FY23; targeting similar quantum going ahead), to help improve margins further. 3) AL has approved equity infusion of Rs12bn in Switch (EV arm) over the coming 3-6 months; Switch has an order-book of over 1,100 e-buses, and has received letters of intent for over 10K e-LCVs; would introduce e-LCV in Q4. 4) Lower discounts have aided improved price realization across M&HCVs and LCVs; expects the trend to continue; could raise prices by ~1-1.5% in Q3FY24. 5) Would move to 25% tax rate from FY25E onwards; AL had an adjustment to the tune of Rs1.75bn, in deferred tax. 6) H1 capex stood at Rs2bn; full-year capex would be up to Rs6bn. 7) Defence business can clock ~Rs8-10bn revenues in FY24 (vs. ~Rs3bn domestic revenues in H1); the vertical has a strong pipeline with strong growth outlook for the next year as well. 8) Subsidiary Hinduja Leyland Finance may possibly get listed in Q4; currently has an orderbook size of Rs420bn.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf

& SEBI Registration number is INH000000354