Steady outlook, margin expansion put Ashok Leyland in the fast lane

But some brokerages are cautious, saying M&HCV upcycle may be near its peak

The Ashok Leyland (ALL) stock has outperformed in the past three weeks with gains of over 9 per cent, against a less than 3 per cent rise in the leading indices, Sensex and Nifty, during this period. The outperformance follows the country’s second-largest medium and heavy commercial vehicle (M&HCV) maker posting better-than-expected numbers for the March (Q4FY23) quarter, healthy monthly sales numbers for May, and its meeting with analysts on Thursday that added to the optimism. Over the past two days, 15 of the 18 analysts polled by Bloomberg are bullish (“buy/add/outperform” rating) on the stock, two are neutral, and one has a “reduce” rating. Their average target price is Rs 180.

Analysts at JM Financial in a note said: “The management shared its medium-term aspiration, primarily centred around increasing the domestic market share (in both M&HCV and LCV segments) by addressing gaps in its product portfolio (including EVs and other alternative fuels) and network expansion in north and east India.” Ashok Leyland expanding in international markets (through network and products) also remains key to its aspiration of being among the top 10 CV players globally. The pricing environment has improved and the CV upcycle is expected to continue, they wrote.

Meanwhile, the operating profit margin at 11 per cent, which was up 210 basis points on both year-on-year (YoY) and sequential bases, aided the company’s overall performance in Q4. 

ALL has guided for a double-digit margin in FY24 and is targeting a mid-teen profitability over the medium term. The management is also positive on the outlook and expects the M&HCV sector to grow between 10 per cent and 12 per cent in FY24. Even as Q4 performance and guidance was robust, a few brokerages are bearish.

Kotak Institutional Equities has downgraded the stock to reduce as it has a cautious outlook for the sector. Its analysts Rishi Vora and Praveen Poreddy expect the M&HCV segment’s volume recovery to continue, albeit at a moderate pace due to higher interest rates and increased vehicle prices. Elevated compressed natural gas prices are likely to weigh on volume growth of the LCV segment in the near term.

Others, however, are positive about the company’s prospects, and have increased their estimates after the Q4 results. Prabhudas Lilladher Research, which has the highest price target of Rs 215 among brokerages, has revised its earnings for FY24 by 8 per cent to factor in Q4 results and management commentary on M&HCV volume and margin sustainability. 

Himanshu Singh of the brokerage believes that ALL is well placed to sustain its gains in market share -- 33 per cent in trucks and 27 per cent in buses -- in FY24, led by the government’s focus on infrastructure, replacement demand, scrappage policy, and healthy traction from core industries. In LCVs, new products, higher growth in user segments, and network expansion could add to its gains. The company’s market share rose to 32.3 per cent in the quarter due to a shift back to diesel powertrain (increase in CNG prices), new launches, market share gains in north and east, and improved volumes in the southern markets. 

In addition to growth and market share trajectory, ALL’s ability to maintain and improve margins would be a key factor. The company expanded its margins in Q4 due to better realisations on the back of prices and lower discounts, better product mix, lower commodity prices, and cost control measures. In addition to the volume outlook, Motilal Oswal Research believes that focus on improving average selling prices, stable raw material prices, and operating leverage should drive the operating profit margin expansion of 190 basis points YoY in FY24 and 50 basis points in FY25. 

Though there has been an improvement in profitability in Q4 and margins are expected to expand, Elara Capital has revised its rating from “buy” to “accumulate” and has cut its target multiple (enterprise value to operating profit) to 11 times, from 12 times. The brokerage believes that the sector is close to the peak of the M&HCV upcycle and expects growth to be depressed after FY25. 

At the current price, the stock is trading at about 21 times its FY25 earnings. Given the recent rally, awaiting a correction may prove more rewarding.