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Commodity inflation clouds outlook

Ashok Leyland (AL IN) reported Q1FY27 revenue of INR 96.3bn, up 10.4% YoY, led by broad-based growth across MHCV trucks, LCV, and non-CV businesses. EBITDA was flat YoY at INR 9.7bn, with EBITDA margin at 10.1%, down ~105bp YoY. Despite sharp commodity inflation, gross margin remains relatively resilient at 28.6% in Q1, down 10bp QoQ, aided by consumption of lower-cost opening inventory, price hikes, cost savings initiatives, and improving business mix. Management sees potential for high single-digit MHCV industry growth in FY27, with LCV growth slightly better. However, commodity pressure is likely to peak in Q2 before easing from Q3 and seeing a more meaningful turnaround in Q4, keeping near-term margin under pressure. We tweak our FY27-29E earnings by 1% to factor in near-term commodity pressure. We raise our TP to INR 166 as we roll forward by a quarter valuing the business at 12x September 2028E EV/EBITDA. We retain Reduce.

Pricing and cost savings to partly offset commodity inflation:

Material cost increased ~90bp YoY to 71.5% of revenue in Q1, as higher commodity prices and supply chain disruption weighed on profitability. AL took a ~1.20-1.25% price rise during Q1, with management indicating nearly half of the commodity impact was offset through pricing and the balance through cost savings and inventory benefits. With commodity pressure set to intensify in Q2, AL has undertaken further price hikes of >1% in CV and >2% in LCV from July, taking cumulative FY27 increase to ~2.00-2.25% and >3.5%, respectively, while further pricing and discount optimization remain under consideration. Benefits from the cost savings program, richer mix from high-horsepower trucks, and tighter overhead control should partly cushion the near-term RM impact, although employee cost is likely to rise ~4-5% QoQ in Q2, following annual wage revisions

Non-CV businesses strengthen diversification; Switch orderbook healthy:

Non-CV businesses continue to outpace core, with aftermarket, Power Solutions and defence revenue growing 12.7% YoY, 51% YoY, and 64% YoY in Q1, respectively, while defence orderbook and tender pipeline remain healthy. Management continues to focus on scaling these highermargin businesses to reduce dependence on the cyclical domestic MHCV segment; the number of monthly domestic MHCV truck volume required to cover fixed cost has reduced to ~1,000-1,500 units from ~6,000-7,000 units a few years ago. Switch Mobility secured a fresh 650 eBus order, taking its eBus orderbook to ~2,100 units, while Q1 deliveries stood at 225 eBuses and ~300 eLCV. In Q1FY27, the company invested ~INR 3.3bn in Optare (subsidiary) and INR 5bn in HHFL (step-down subsidiary).

Reiterate Reduce with a higher TP ofINR 166:

While stronger CV demand and scaling of nonCV businesses support growth, elevated commodity cost is likely to keep Q2 margin under pressure before easing from Q3. We remain cautious on near-term MHCV industry growth, and we expect a mere 3-4% CAGR during FY27-29E. We tweak our FY27-29E by ~1%. We retain Reduce with a higher TP of INR 166 from INR 160 on 12x (unchanged) September 2028E EV/EBITDA.

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