PL Stock Report - Ashok Leyland (AL IN) - Q1FY24 Result Update - Strong 1Q provides confidence on annual targets - BUY

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

Rating: BUY | CMP: Rs182 | TP: Rs225

Q1FY24 Result Update - Strong 1Q provides confidence on annual targets

Quick pointers:

♦ Aims to maintain double-digit margins throughout FY24.

♦ Volumes should see sequential improvement; to aid margins

We increase our FY24/FY25 EPS estimates by 12%/5% to factor in 1QFY24 results and management commentary on volumes and margin sustainability. Ashok Leyland’s (AL) 1QFY24 EBITDA margin at 10% (-c100bps QoQ) beat PL estimates on the back of cost reduction efforts, lower discounting, higher non-CV mix and inventorisation. AL aims for double digit EBITDA margin in FY24 (has started on a strong note to achieve it), which gives us confidence in its medium term targets of reaching mid-teen. Further 1QFY24 volume performance was impacted from pre-buying in 4QFY23, but demand should improve from 2QFY24 given MHCV segment is benefiting from strong infrastructure development and growth in other end-user industries.

We believe AL is well placed to sustain its FY23 market share gains led by 1) strong demand for modular AVTR trucks, 2) network expansion and 3) new product launches. LCVs will benefit from filling of white space, growth in end markets and network growth. Also, price hike, benign commodity price, cost control and operating leverage will lead to margin expansion (EBITDA margin +c300bps over FY23-25E). Maintain ‘BUY’ at target price of Rs 225 (previous TP Rs. 215) on Mar-25E EV/EBITDA of 13x (includes ~Rs 12 for HLF).

♦ EBITDA margin at 10% expanded by c560bps YoY: Revenue at Rs 81.9bn (+13.4% YoY) was ahead of our and BBG consensus estimates (BBGe) by c3%. EBITDA margin at 10% down c100bps QoQ was higher than BBGe (9.1%) and PLe (7.3%). Margin contraction QoQ was driven by (1) inferior product mix and (2) operating de-leverage. AL reported an adj. PAT of Rs 4.0bn vs Rs 0.6bn YoY, above PLe (Rs. 2.5bn) and BBGe (Rs. 3.5bn).

♦ Key takeaways: (1) AL expects demand momentum to increase QoQ for remaining quarters in FY24 and has maintained its volume guidance of 8-10% M&HCV and 5-6% LCV growth in FY24. (2) AL’s domestic MHCV market share has inched upwards with Trucks market share improving from 31.1% to 31.7% YoY, driven by strong demand for AVTR range, network expansion particularly in the North and East. AL sees further scope for network expansion, which should help market share in these regions. (3) Non-CV revenue has shown strong growth during 1QFY24 outperforming CV segment with parts business growing beyond 30% YoY and other business like defense, power solution also showing healthy growth. (4) AL sees scope for further margin expansion led by benign commodity prices, cost control efforts, price increase (8-10% over last 4-5 quarters), operating leverage and lower discounting (10-12% lower per unit YoY). AL will focus more on cost reduction rather than price increase to improve margins; has taken a price increase of c2%. (5) More info on Sub-2-ton LCV product will be provided in FY24. (6) AL will invest Rs. 12bn in Switch Mobility in FY24. (7) AL has reduced inventory in 1Q; however, working capital has increased due to seasonality.

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