Ashok Leyland rallies 7% as management eyes solid growth post Q1 show

With healthy order wins in the buses segment in the recent past and stable growth trajectory, ICICI Securities said they are positive on the stock with long term investment horizon.

The shares of Ashok Leyland hit a new high of Rs 248.8, rallying 7 per cent on the BSE during Friday’s intraday trade amid heavy volumes.

The gains for the country’s second largest commercial vehicle (CV) maker were on the back of expectations of strong demand, slew of launches and brokerage upgrades.

The stock of the CV major, which was up 33 per cent over the last three months, ended the day at Rs 246.35, up 6 per cent.

On Thursday, UBS Securities upgraded Ashok Leyland from ‘neutral’ to ‘buy’ considering the resilience in MHCV demand, a strong pricing environment and favourable valuation, as it is trading in line with the past five-year mean while most automakers are trading around three standard deviations above mean.

 

The company continued to witness strong demand in its business units in Q1FY25. While the company achieved its highest ever first quarter CV volumes, the power solutions, aftermarket, defence business and the international operations also contributed to the top line. The efforts on product and network expansion helped the uptick in revenue and market share, the company said.

“With the expansion in revenues and efficient cost management we have seen our bottom line improving substantially. The non-CV businesses also have grown substantially. While we continue to expand our market penetration on the back of efficient products and network expansion, we shall remain acutely focused on achieving mid-teen earnings, before interest, tax, depreciation and amortisation (Ebitda) in the medium term,” Shenu Agarwal, managing director and chief executive officer, Ashok Leyland said while announcing the Q1FY25 results on Thursday.

Gross margins deteriorated marginally by 35 basis points (bps) quarter-on-quarter (Q-o-Q), while the rise in other expenses was the dampener, which was up 170 bps Q-o-Q.

"With healthy order wins in the buses segment in the recent past and stable growth trajectory, we are positive on the stock with a long term investment horizon," ICICI Securities said in a note.

Operating profit margin in the quarter came in at 10.6 per cent, up 60 basis points Y-o-Y (down 350 bps Q-o-Q), which was largely in line with Bloomberg’s consensus estimates.

In the medium term, the company is hoping to hit the mid-teens level on the operating profit margin front. A strong product portfolio and market share gains are expected to support its aim for higher margins. For the current year, the company’s launch plan includes six products of which two have been launched while the rest will be launched in the coming quarters.

Meanwhile, the allocation for capital spending in the Union Budget 2024-25 is expected to lead to infrastructure development in segments like roads, metros, railways. which would in turn drive volumes for the CV industry.

The increased focus on replacement of old vehicles and on green mobility also augurs well for the sector. Capex driven economic growth led by construction should aid growth in tippers.

Government regulations aimed at curbing pollution are likely to incentivise the adoption of cleaner fuel options like LNG for long haulage applications. The western and eastern dedicated freight corridors are expected to be fully operational in FY25.

Customers view long haul trucking could have an impact from DFC by FY26-FY27. For the LCV segment, growth is expected to be dragged by high base effect, slowdown in ecommerce and cannibalisation from e3Ws, Ashok Leyland said in the FY24 annual report.

A steady economic environment, declining rural inflation and interest rates should remain supportive of light commercial vehicle growth.

On the other hand, the downside risks for FY25 growth could emerge from interest rates staying higher on the back of persisting inflation, commodity costs rising on the back of escalating geo-political tensions and volatile financial market conditions, the company said.