PL Stock Report - Ashok Leyland (AL IN) - Q2FY24 Result Update - Volume growth & margin expansion to continue - BUY

Ashok Leyland (AL IN) – Himanshu Singh – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs174 | TP: Rs210

Q2FY24 Result Update – Volume growth & margin expansion to continue

Quick Pointers:

§ Margin levers present for further margin expansion

§ AL expects growth for the industry to continue in FY25 as well

We increase our FY24/FY25/FY26 EPS estimates by 2%/10%/4% to factor in 2QFY24 results and management commentary on volume and margin sustainability. Ashok Leyland’s (AL) 2QFY24 EBITDA margin at 11.2% beat PLe (10.4%) on the back of lower COGS and employee expenses. AL aims to further build on the margins achieved in 1HFY24 and post higher margins in 2HFY24 thus giving us confidence in its medium term target of reaching mid-teen. Further, 2HFY24 volume should be better due to seasonality and draw further operating leverage given strong demand for the MHCV segment.

We believe AL is well placed to sustain its recent market share gains led by 1) strong demand for modular AVTR trucks, 2) network growth and 3) product launches. LCVs will benefit from filling of white space, growth in end markets and network growth. Price hike, benign input cost, operating leverage and cost control will lead to margin expansion (EBITDA margin +c390bps over FY23-26E). Maintain ‘BUY’ at TP of Rs 210 on Sep-25E EV/EBITDA of 11x (previous TP Rs. 220 at EV/EBITDA of 12x) (includes ~Rs 12 for HLF) we reduce the multiple to factor in entry into mid-cycle for the CV industry.

§ Revenue inline; beat on EBITDA margins: Revenue grew by 16.6% YoY, helped by volume growth of 10% and came largely in line of PLe and ~3% below Bloomberg consensus estimates (BBGe). EBITDA margins at 11.2% were above our (10.4%) and BBGe (10.9%) helped by improvement in COGS and staff costs. Other operating expenses were largely in line. Lower than expected depreciation and interest expenses and higher other income while partially offset by higher taxes, helped beat PAT vs PLe, but missed BBGe.

§ Key takeaways: (1) AL expects demand momentum to increase sequentially in 2HFY24 and has maintained its volume guidance of 8-10% for M&HCV and 4-5% for LCV. It noted continued growth trends for the industry in FY25 as well, however, will provide more precise numbers post 3QFY24. (2) AL’s domestic MHCV market share has increased by 70bps QoQ to 31.9%, driven by continued network expansions and higher demand for tractor, trailer and tippers (driven by core sectors performance) wherein AL has higher market share and new launches which AL expects to continue. (3) Industry has seen improved profitability driven by lower steel prices, higher price realizations and operating leverage. Benign commodity prices, revenue mix and cost control efforts, further helped by ~1% ASP increase QoQ on an average should further increase margins. (4) AL noted that, inventory has increased to cater to festive season demands, it is not a major concern. (5) AL maintained it will invest Rs. 12bn in Optair (holdings co. of Switch UK and India) in tranches over next 3-6 months. Switch Mobility has an orderbook of 1.1k e-buses and LOIs for 10k+ e-LCVs (deliveries expected to start by 4QFY24). (6) Aftermarket sales grew by 35% YoY to Rs. 6.55bn. and Power Solutions business grew by 15% YoY. AL aims to scale up non-auto revenues like defense and others in the coming quarters.

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