Axis Securities has reiterated its ‘BUY’ rating on Indian commercial vehicles company Ashok Leyland (AL) following the company’s strong performance in the first quarter of fiscal year 2024 (Q1FY24). The report highlights that Ashok Leyland’s results for the quarter exceeded estimates, driven by robust gross margins and the positive industry outlook for the commercial vehicles (CV) sector. Based on its financial analysis, Axis Securities maintains a ‘BUY’ rating on Ashok Leyland with a revised target price of Rs 210 per share, implying an upside potential of 15% from the current market price.
Ashok Leyland Q1FY24 results: Expectations met
Commercial Vehicle industry outlook positive
Axis Securities maintains a cautiously positive outlook for the CV industry, with Ashok Leyland reiterating its guidance of 8%-10% YoY growth for Medium and Heavy Commercial Vehicles (MHCV) and 5%-6% YoY growth for Light Commercial Vehicles (LCV) in FY24E. The management expects similar growth momentum in FY25, driven by a favorable macroeconomic environment, strong replacement demand, and robust government capital expenditure.
The company has set a mid-teens EBITDA margin target over the medium term, and the brokerage anticipates improvement in EBITDA margins moving forward. Factors contributing to this improvement include slightly higher Average Selling Price (ASP) and lower discounts leading to higher net realizations, softening commodity costs, a favorable product mix, and growth in higher-margin contributing businesses such as the International business, Defence, Power Solutions, and Aftermarket.
Ashok Leyland: Growth drivers
Ashok Leyland’s focus on the Electric Vehicle (EV) business is noteworthy, with investments planned to infuse Rs 1,200 Crore in SWITCH Mobility over the next 12 months. The investment will primarily support the development of new products, including two new LCVs: Electric Dost and Bada Dost, along with low-floor 12/9-meter buses for the EU/Indian market respectively.
With an aim to grow its MHCV market share to ~35% and LCV to ~25% in the medium term, the company remains committed to leveraging the success of its AVTR range, launching new products, and expanding its network in the North and East regions. Additionally, operational efficiencies, material cost reduction programs, softening commodity costs, and pricing discipline are expected to drive the company’s bottom line and generate strong cash flows.