Demand and margin gains to power M&CV company Ashok Leyland's stock

Ashok Leyland's strong Q4 led by 5% volume growth and margin gains; focus on exports, non-CV business and cost control to support performance in FY26

The country’s second-largest medium and heavy commercial vehicle (M&HCV) company, Ashok Leyland, posted a healthy operational performance in the March (Q4FY25) quarter. Higher volumes and a slight improvement in average selling prices helped drive gains on the top line.    The company expects growth in some of the key segments within the commercial vehicle market in FY26. This, coupled with an increase in the non-CV share of revenue and its net cash position, will help the company maintain a steady revenue trajectory while exploring new growth opportunities.    While the company has outperformed the Nifty Auto index over the past six months, its recent returns (one-month and three-month) have been lower than the peer index. However, the robust performance in the March quarter, prospects across segments, profitability targets and new growth avenues are expected to support the stock going forward.    Led by 5 per cent growth in volumes and a marginal uptick in selling prices, the company posted a 5.7 per cent year-on-year sales growth in the quarter. On a sequential basis, volumes were up 27 per cent. Its non-CV business, which now accounts for half its revenues, also performed strongly. Spare parts sales rose 15 per cent year-on-year, while engine volumes were higher by 9 per cent. 

   The growth trajectory in the M&HCV segment will be a key trigger for the stock. Similar to Tata Motors, Ashok Leyland has indicated single-digit growth for M&HCV in FY26. Nomura Research expects 5 per cent M&HCV growth in FY26 and FY27, backed by improved government capital expenditure, lower interest rates and lower fuel prices. Kapil Singh and Siddhartha Bera of the brokerage say there is potential for a pick-up in replacement demand, which will drive stronger volume growth.    For other businesses (spare parts, defence and power solutions), Kotak Research expects growth to be in healthy double digits year-on-year over the medium term. This will drive overall revenue growth and aid profitability, as these businesses are margin accretive in nature. The company is focusing on improving export vehicle sales (margin accretive) and expects high single-digit volume growth over FY2025–27, says Rishi Vora of the brokerage.    For the second consecutive quarter, operating profit margins beat estimates and hit an all-time high of 15 per cent. This was 90 basis points higher year-on-year and improved 230 basis points sequentially. On a sequential basis, raw material to sales was down 90 basis points, while other expenses and staff cost to sales were also down 40 basis points and 90 basis points, respectively.    Further, the company believes there is scope for additional margin expansion through an improving mix/vehicle premiumisation, operating leverage, sustained cost-reduction measures and higher non-vehicle revenues. “Margins should keep rising gradually as M&HCV players follow pricing discipline,” says Nomura Research, while raising its target price to ₹275 from ₹250 earlier.    Emkay Research has upgraded its earnings estimates for FY26 and FY27 by 6 per cent each to account for the improving demand outlook and strong margin performance. “Growth come-back in M&HCVs, following the two-year flattish industry volume growth, is likely to act as a catalyst for Ashok Leyland,” say analysts led by Chirag Jain of the brokerage. They raised the target price by 6 per cent to ₹280.    While HDFC Securities has maintained a ‘buy’ rating on the stock, what needs to be tracked, according to the brokerage, are concerns stemming from the higher pledging by the promoter group recently.