We upgrade Ashok Leyland to Buy (from REDUCE earlier) as the risk-reward is favourable after the recent correction. We believe a sustained recovery in economic activity resulting in higher fleet utilisation and improving freight operators’ profitability will result in an improved demand scenario over the coming quarters. Upcoming product launches in M&HCV and LCV segments will help the company improve its market share going forward. FV remains unchanged at Rs 140 on 17X March 2024e EPS (from 17X December 2023e EPS).
Improving profitability of fleet operators to support recovery in truck demand: We expect recovery in truck demand led by (i) a sustained recovery in economic activity (especially tipper segment) on account of better freight demand and (ii) higher freight income resulting in improvement of fleet operators’ profitability. Freight income (adjusted for diesel price) continues to improve led by better capacity utilisation over the popular routes despite sharp increase in diesel prices. Fleet utilisation level has improved to 75-77% currently and we believe once the utilisation level reaches 80% (on a sustainable basis), fleet operators will have to opt for fleet expansion or replacement of older fleets, which should lead to higher demand in upcoming quarters. Lack of financing availability for small fleet operators and disruption in economic recovery due to the Omicron variant remain a key risk for CV cycle recovery.
AL to launch products in CNG truck segment : The company has been losing market share in the M&HCV segment over the past few quarters due to (i) lack of product offerings in the CNG segment, (ii) decline in mix of bus segment and (iii) underperformance of Southern regions. Due to sharp increase in diesel prices, CNG mix in medium goods vehicle has increased to 37.5% in FYTD22 from 12.8% in FY2019. As a result, AL’s market share declined to 24% in H1FY22 from 33.8% in FY2019. However, the company will launch products in the CNG truck segment from Q4FY22 onwards to address gaps in its portfolio. Normalisation of demand in South India as well as uptick in demand for the bus segment will also help the company partly regain lost market share in the M&HCV segment.
Cut our FY2023-24e EPS estimates by 10-17%: We have cut our FY2023-24e estimates by 10-17% on lower volume assumptions as we bake in gradual recovery in the CV cycle as demand from small fleet operators still remains subdued. Upgrade to Buy on attractive valuations.