Growth, valuations support Ashok Leyland as competition rises in industry

Most brokerages positive about commercial vehicle manufacturer but are concerned about demand

The stock of commercial vehicles (CV) company Ashok Leyland is up 46 per cent in three months, gaining despite worries about a slowdown in sales volume. Brokerages have a mixed view on the country’s second-largest medium and heavy commercial vehicles manufacturer.

The company reported steady March quarter results and its valuation, focus on growth and medium-term prospects are positive, but some brokerages are cautious given near-term demand concerns and the risk of competition increasing in the industry.

In the March quarter, the company improved realisations by 2 per cent sequentially on the back of lower discounts and a better product mix. Gross margin improved 380 basis points year-on-year (Y-o-Y) on improved price realisation, cost reduction, and lower raw material costs. Lower commodity prices, cost control, and better pricing should support margins going ahead.

Motilal Oswal Research is positive about the company. Brokerage analysts led by Aniket Mhatre believe the company has “favourable triggers”, including average fleet age of more than nine years – a record high. Commercial vehicle fleet operators’ profitability is sound due to healthy utilisation, allowing them to manage rising cost pressures. Motilal Oswal said Ashok Leyland’s valuations are attractive and it has a ‘buy’ call on the stock, premised on CV demand reviving by the second half of FY25 after near-term weakness.

Ashok Leyland strengthening its focus on electric vehicles (it has orders for 1,500 electric buses) and its range of products (light commercial vehicles to tractor trailers) is positive from the medium-term standpoint. The defence vertical, which has a strong pipeline and growth visibility, should incrementally add to the company’s revenues.

Emkay Research too has a buy rating Ashok Leyland. “Amid intact fleet operator profitability, the pricing power/margin expansion for CV makers will sustain. This drives a FY26 estimated earnings per share revision upwards by 19 per cent,” said the brokerage’s analysts led by Chirag Jain.

Emkay had in May said that Ashok Leyland is among the least expensive automakers with a net cash balance sheet and return ratios of more than 20 per cent.

Elara Capital has retained its ‘reduce’ rating for Ashok Leyland rating as it expects subdued demand for medium and heavy commercial vehicles for six months. Given that the company’s tonnage growth is greater than volume in the past 2-3 years, system capacity has increased. Brokerage analysts led by Jay Kale said that as unlike passenger vehicle and two-wheeler segments, a CV down cycle can be sharp (historical trough is 40-60 per cent below the peak). They expected a 4 per cent volume growth over FY24-26 for the medium and heavy commercial vehicles industry (MHCV).

JM Financial Research believes that the government’s infrastructure spending, vehicle scrappage policy and other demand drivers remain intact but there is risk of higher competition. Ashok Leyland, by expanding its network and addressing product gaps, aims to earn a 35 per cent share in the MHCV market and make gains in light commercial vehicles. “Benign” commodity costs and “astute cost control initiatives are expected to support profitability, said analysts Vivek Kumar and Ronak Mehta of the brokerage.