IGI Logo

Impressive margin; CV cyclicality, a concern

Ashok Leyland’s (AL IN) Q3 revenue increased by 2% YoY, mainly driven by better mix, which was helped by higher multi axle and higher tipper segment volumes. Total volume declined by 1.4% YoY (+1.7% QoQ) to 46,404 units. Realization/vehicle improved 3.7%YoY (6.3% QoQ) to INR 2.04mn in Q3. Given better mix, and cost control measures, margins rose by 77bps YoY and 118bps QoQ to 12.8% in Q3. Adjusted PAT came in ahead of our estimates at INR 6.9bn, up by 31% YoY and 17% QoQ on better operating performance and lower-than-expected interest expenses. While MHCV industry volumes have not crossed FY19 peaks, tonnage is above FY19 peaks and we remain concerned on the cyclicality of the MHCV industry. Even if the downcycle is not as sharp as historical downcycles (peak to trough 40-60% lower), risk-reward seems unfavorable at current levels. We reiterate Reduce with TP unchanged at INR 230.

CV demand likely to improve in Q4: Demand for the MHCV industry in 9MFY25 was impacted by reduced construction and mining activity, elections and prolonged monsoons. However, going forward, on the back of improved construction activity and healthy fleet utilization, AL expects the CV industry to script a positive trend in Q4, which was already visible in January sales. Hence, for FY25, the industry may witness a slight decline. Importantly, despite weaker demands, the industry maintained pricing discipline with lower discounts

Increased focus on revenue from non-commercial vehicle to reduce cyclicity: Revenue from the non-commercial vehicle segment posted healthy growth in Q3. High-margin spares and aftermarket revenue grew a healthy 14% YoY. AL derives ~20% of its revenue from spares, engines, exports and defence, which are less cyclical in nature. Also, MHCV’s contribution to total revenue is ~50-60%, which is highly cyclical in nature. The focus on increasing the proportion of the less cyclical business is auguring well for AL, and even in the case of a CV downcycle, it may protect margins, which was not the case historically. The medium-term target of achieving mid-teen margin also looks achievable.

Switch Mobility expected to turn profitable in FY26: The orderbook for Switch Mobility was 1,800 units in Q3. AL expects Switch India to turn profitable in early FY26, while Switch UK may remain a drag. AL will invest ~INR 5bn in Optare, the holding company of Switch. The fund will be utilized to pay off some debt in the UK business and on capex related to the Indian entity. AL sees Europe as an attractive market, but with some headwinds in the UK.

Reiterate Reduce; TP retained at INR 230: While industry truck volumes in FY24 were ~9% below FY19 volume peak, based on our calculations, industry tonnage was already ~14% ahead of FY19 peak (~3% CAGR in FY19-24), which we expect may increase further in FY26E. Historical cycles from peak to trough have been 40-60% lower.

We believe the risk-reward is unfavorable when we are at the peak of the cycle.We reiterate Reduce with TP unchanged at INR 230, on 11x March 2027E EBIDTA as we roll forward.

Please refer disclaimer at Report
SEBI Registration number is INH000000933