PL Stock Report - Ashok Leyland (AL IN) - Analyst Meet Update - Well laid out strategy; confident management - BUY

Ashok Leyland (AL IN) – Himanshu Singh – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs157 | TP: Rs215

Analyst Meet Update - Well laid out strategy; confident management

Quick Pointers:

♦ Targets for medium term - gain M&HCV market share of 35%; LCV market share of 25%; EBITDA margin of mid-teens

♦ Management confident on execution

We attended Ashok Leyland’s investor day, where management was confident of sustained recovery in volumes and margins over the medium term. AL has big market share aspirations in both M&HCV (35%) and LCV 2.0 to 3.5 ton (25%) in the mid-term, backed by zone wise strategy to defend, grow or penetrate. AL is aiming to increase addressable volume in the international market by 2x by FY25.

AL noted that the industry has realized that current discounting practices are detrimental for future and lowering discounts should continue for the industry. AL should see structural increase in margin due to lower discounting, cost engineering over the last few years, mix improvement and operating leverage and reach mid-teen margins in the mid-term (double digit in FY24). AL’s focus on international market, growing non-CV revenues are steps to reduce impact on financials in a CV down-cycle.

AL, in our view, is well placed to sustain its market share gains of c33% of trucks and c27% of busses in FY24. While, multiple white space in the LCV segment give opportunities to increase market share. Maintain ‘BUY’ at target price of Rs 215 on Mar-25E EV/EBITDA of 13x (includes ~Rs 11 for HLF).

1) Macro to support longish CV upcycle: AL noted current CV upcycle to be a longish one supported by fundamental drivers like capex investment by government, GDP growth, increase in infrastructure. M&HCV industry is expected to grow over 10% and LCV is expected to grow over 5% in FY24 with AL aiming to grow faster.

2) Market share gain: AL is aiming to grow market share to 35% in M&HCV and 25% in LCV (2.0 to 3.5 ton) by focusing on product launches, network expansion, differentiated aftermarket solutions and higher customer connect. AL has taken up zone-wise mandates to achieve targets to accelerate growth in North and East, grow in west and Defend and extend leadership in South. Also, focus on bus segment which is high market share for AL.

3) International business to increase addressable volumes: AL plans to increase the range of its product offerings in the international market to increase AL’s addressable market from 70k units currently to more than 250k by progressively entering more sophisticated markets with new products.

4) Driving growth in non CV businesses: AL is focusing on increasing share of non CV businesses like Defense Mobility, Aftermarket, power solution business. Some of these businesses are high margin and non-cyclical which should help the company de-risk its performance from severe CV down cycle. AL has defense tender win rate of >80% and sees Rs. 35bn execution over next 3 years. In the PSB segment stringent emission norms should help organized and bigger players outgrow the industry.

5) Mid-teen margins in mid-term: AL is targeting sharp improvement in margins over the medium term helped by mix improvement, lower discounts, cost engineering, modular platforms, and operating leverage, with aim to reach double digit in FY24. 6) Switch Mobility: EV business will see good growth and AL will continue to invest in the company. AL is planning to launch multiple products in the segment in FY24 and beyond.

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