ICICI Securities downgrades Ashok Leyland to 'Sell', sees 20% downside

Ashok Leyland stock price news: Shares of Ashok Leyland fell 2.3 per cent to Rs 172 per share on the BSE in Thursday's intraday after ICICI Securities downgraded the stock to 'Sell' from' Hold'. The brokerage has set a target price of Rs 140 for the stock, which is 20.4 per cent lower than the stock's last closing price. 

At 2:17 PM, the stock price of Ashok Leyland was quoting 1.9 per cent lower at Rs 172.7 apiece as against an unchanged S&P BSE Sensex. 

"The target price of Ashok Leyland has been reduced to Rs 140 (from Rs 177), implying FY26E EV/Ebitda of ~12x. Going by the historical valuation band of Ashok Leyland, it trades at 9-10x on the lower side to 11-12x on the higher side at steady state. Thus, with limited scope for further re-rating, we downgrade Ashok Leyland to 'Sell' from 'Hold', mainly due to valuation rolling over to weaker FY26," it said in its April 17 report. 

One of the primary reasons for the downgrade, as per ICICI Securities, is peaking of the commercial vehicle (CV) growth cycle in the previous financial year of 2023-24 (FY24). 

According to the brokerage, the domestic CV cycle peaked out in FY24 and could undergo correction in FY26-27 as, on a tonnage adjusted basis, new truck supply is 20-25 per cent higher than the previous cycle peak in FY19. 

"As per our interactions with fleet owners, purchase of new trucks has been subdued since October, 2023, with incremental demand, if any, being met through the purchase of 3-4 years used trucks. Freight rates, too, are sticky in nature now and fleet owners are finding it tough to pass on the cost inflation drivers with ease in the system. We are subsequently building in 10 per cent industry level decline in FY26," the brokerage noted.

In FY24, CV industry growth stayed flat on the back of H2FY24 getting impacted by central and state elections other than elevated base due to Bharat Stage (BS)-6 phase 2 transition in FY23 end. The trend may remain flat in FY25 as well.

Besides, historical CV cycle data analysis suggests tonnage adjusted cycle to cycle peak being 20 per cent higher is spread across a period of 5-6 years. Thus, from FY19 peak levels, the brokerage expects incremental supply to peak in FY25E, with supply being ~20-25 per cent higher vs FY19 levels.

Operationally, keeping market share unchanged from current levels, ICICI Securities expects Ashok Leyland's goods medium and heavy commercial vehicle (M&HCV) volume to fall in sync with industry in FY26 and correspondingly impact its operating leverage. 

"Lower demand impacting pricing power of original equipment manufacturers (OEMs) would also impact EBITDAM during downcycle period. Historically, EBITDAM for Ashok Leyland across the cycle has ranged between 5-7 per cent on the lower side (barring outliers) and ~11-12 per cent on the higher side. Thus, we believe, there is scope of 400-500bps of margin erosion from present peak, spread across FY25-27. Thus, volume decline and margin erosion would result in Ebitda declining by approximately 30 per cent over FY24-26," it added. EBITDAM is earnings before interest, tax, depreciation, amortisation, and management fees. 

That said, there could be upside risks to Ashok Leyland's growth if a) growth in domestic goods MHCVs in FY25 and FY26 is driven by enhanced focus on capex cycle by the government post elections; b) Ashok Leyland executes its target mid-teen margin ahead from current ~11-12 per cent levels; and c) Ashok Leyland is able to sell stake in Switch Mobility down the line, thus helping it get back the Rs 1600 crore paid from its standalone cashflow.