Commercial vehicle manufacturer Ashok Leyland’s strong Q3 performance was driven by a better mix, price hikes and commodity costs (healthy margins). The stable demand environment and improving pricing power should boost earnings. AL is the best play on the CV cycle recovery, along with market share recovery and the expansion of revenue/profit pools. We raise our FY23/FY24 EPS estimates by 17%/4% to account for better realisations and improving pricing power. Maintain Buy with a target price of `185.
The company expects to sustain strong demand momentum, led by a recovery in the macro environment, a pickup in construction and infra led activities such as mining, and growth in replacement demand. The industry is inching toward the historical peak. For AL, the focus will remain on gaining deeper penetration, growth in better margin products such as LCV/exports/aftermarket and operating leverage.
The demand has increased significantly in MAVs ( multi-axle vehicles)—Haulage, Tractor trailers and tippers. Demand has also been high for larger tonnage (40 and 49 tons), resulting in a better product mix for the industry. The ICV segment is also doing well, but its contribution is lower vs other sectors.
Valuation and view
We raise our FY23/FY24 EPS estimates by 17%/4% to account for better realisations and improving pricing power. Unlike the previous cycles, AL is on a strong footing (lean cost structure and reasonable debt) and is focused on adding new revenue/profit pools. The valuation at x19.6 FY24e EPS and 11.1x FY24e EV/Ebitda reflects the mid-cycle recovery. However, it does not fully reflect AL’s focus on adding new revenue streams and profit pools, as well as its EV business.
Key risks include: loss of road share for freight movement from the upcoming DFCC, and increasing competitive intensity, resulting in a loss of market share and margins.