Muted industry volume outlook may cap further gains for Ashok Leyland

Ashok Leyland stock gained after Q1 results on stronger margins and GST cut hopes, but muted commercial vehicle demand and cyclicality may limit upside

The stock of the country's second largest listed commercial vehicles (CV) maker Ashok Leyland is up 9 per cent since August 14, when the company announced its results for the April-June quarter (Q1) of FY26.

 

A better-than-expected operating performance in the quarter coupled with expectation of lower goods and services tax (GST) led to an uptick in the stock price.

 

While some brokerages have raised their operating profit estimates post the Q1 show, others maintain a 'reduce' rating, given the muted growth prospects of the CV sector. 

 

The company posted a revenue growth of 1.5 per cent year-on-year (Y-o-Y) largely on the back of 0.8 per cent volume growth while realisation gains accounted for the rest.

 

Though the volume growth was marginal, the company managed to grow operating profit by 6.4 per cent while margins at the operating level were up 52 basis points (bps) Y-o-Y.

 

However, it was down sequentially as the March quarter is seasonally a stronger quarter. 

 

The margin performance was due to a favourable mix with higher non-commercial vehicle sales, increased sale of spare parts and a 29 per cent jump in power solutions business.

 

Within the CV segment, the mix improved with an increase in multi-axle vehicle (MAV) sales, while exports also recorded strong growth of 29 per cent. 

 

A trigger for the company and the CV sector are likely cuts in GST from 28 per cent to 18 per cent.

 

Rishi Vora and Apurva Desai of Kotak Research believe this will revive the CV cycle, as it might aid the replacement demand and drive the uptick in volumes. They expect the move to have a positive impact on Ashok Leyland. 

 

Motilal Oswal Research believes that a diversified revenue base will help the company overcome the cyclicality of the CV cycle.

 

Aniket Mhatre of the brokerage points out that the company has effectively reduced its business cyclicality by focusing on non-medium and heavy CV (non-M&HCV) segments.

 

Its continued emphasis on margin expansion is expected to support stronger returns in the long run. Further, a net cash position will enable the company to invest in growth avenues in the coming years, he adds.

 

The brokerage has a target price of ₹141, compared to Monday's closing price of ₹131 on the BSE.

 

While these are key tailwinds, some brokerages are bearish on the company, given the lack of growth triggers.

 

Analysts led by Raghunandhan NL of Nuvama Research forecast a subdued domestic M&HCV performance ahead of 1 per cent annual growth during FY25-28. This is due to reasonable utilisation levels of truck operators, increasing competitive intensity and a high base.

 

The muted outlook follows a robust 26 per cent annual volume growth for M&HCVs during FY21–25.

 

The brokerage has a 'reduce' rating with a target price of ₹115.

 

Elara Capital, too, believes that the CV cycle is adverse.

 

Analysts led by Jay Kale of the brokerage said, “While M&HCV industry volumes have not crossed FY19 peaks, tonnage already crossed FY19 peaks in FY24 and we remain concerned on the cyclicality of the M&HCV industry. Even if the downcycle is not as sharp as historical downcycles (peak to trough 40- 60 per cent lower), risk-reward is unfavorable at current levels.”

 

The brokerage expects the M&HCV industry to grow by 4 per cent Y-o-Y in FY26 and decline again by 3-4 per cent in FY27. This would help deliver a mere 1 per cent compound annual growth rate (CAGR) during FY25-28. Elara Capital also has a 'reduce' rating with a target price of ₹120.

 

According to Bloomberg, 26 of the 35 analysts polled after the company's Q1 are bullish, while three are bearish and the rest six are neutral on the stock.

 

However, their average one-year target price is ₹136.70, which indicates limited upside from current levels.