Heavy volumes lift Ashok Leyland 6%; investors pin hopes on better margins

Shares of Ashok Leyland moved higher by 6 per cent to Rs 166.35 on the BSE in Friday's intra-day trade on hopes of margin expansion. The stock of the flagship Hinduja Group and commercial vehicles (CV) company was trading close to its 52-week high level of Rs 169.40, touched on September 6, 2022.

Average trading volumes on the counter jumped nearly three-fold today with a combined 22.2 million shares changing hands on the NSE and BSE till 11:01 am. In comparison, the S&P BSE Sensex was up 0.4 per cent at 63,196.

The CV industry is buoyant due to favourable macroeconomic factors and a healthy demand from the end-user industries. This trend is expected to continue alongside growth in core sectors such as construction & mining, agriculture, increased capital outlay for infrastructure projects and pent-up replacement demand.

According to analysts, the industry-wide pricing discipline is aiding double digit margin trajectory, coupled with upswing in domestic CV space aided by greater infra spends by government.

The management expects margins to remain in double digits in FY24E on the back of pricing discipline, softening in commodity prices, and operating leverage gains. Further, the management continues to focus on attaining margin in mid-teens during the mid to long term.

Ashok Leyland’s management plans to improve earnings before interest, taxes, depreciation, and amortization (ebitda) margins to mid-teens by market share-driven revenue momentum, cost reduction, modular platform benefit in manufacturing efficiency and productivity improvement.

Management feels MHCV sales volume could grow in the next few years and the company is not yet at peak, as freight availability for trucks and bus/ tipper orders are strong. With the absorption of interest rate hike impact and new emission upgrade cost, it expects industry to recover to growth path from Jul-Sep 2023 quarter.

"It has won 80 per cent of land mobility order from defence forces in recent years, which it expects to deliver Rs 3,500 crore sales in next 2-years vs Rs 2,000 crore seen in last 3-years. It is helping government initiatives of import substitution of spare parts for existing machines," InCred Equities said in a analysts' meet takeaway.

Management reiterated that CV cycle is on multi-year rise and will recover post Q1 flattish trend, aided by Government of India infra build, easing interest rates and rising industrial output. The brokerage firm said it sees upside risk to their EPS estimate from Ebitda margin aggression of management (vs our 10 per cent Ebitda margin for FY25F). It reiterated ADD rating on the stock with a target price of Rs 181 per share.

Ashok Leyland is, according to Prabhudas Lilladher, well placed to sustain its market share gains of 33 per cent of trucks and 27 per cent of busses in FY24. Moreover, multiple white space in the LCV segment give opportunities to increase market share, they said.

"Ashok Leyland 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 midterm (double digit in FY24). The company’s focus on international market, growing non CV revenues are steps to reduce impact on financials in a CV down-cycle," the brokerage firm said. It maintains a ‘buy’ rating on the stock with a target price of Rs 215 per share.