Q4FY23 Review: Ashok Leyland: Strong Q4 but high growth phase is behind us

Ashok’s (AL) Q4 Ebitda beat our estimate by 7%, led by gross margin expansion. In Q4FY23, all CV OEMs benefited from lower input costs as well as better pricing discipline (lower discounts). As analysts of IIFL Capital Services were already building in higher margins in FY24/FY25, our EPS estimates are unchanged post these results. MHCV industry was in a high-growth phase in FY22 and FY23, with consecutive years of ~50% growth. They expect MHCV industry growth to taper down to 12% Cagr over FY24/FY25. Industry volumes in FY25 would end up 15-20% above previous peak (FY19), as seen in previous cycles. Analysts of IIFL Capital Services downgrade Ashok from BUY to ADD, as the high-growth phase is behind us.

Q4 Ebitda beat by 7%:

Q4 revenue grew 33% YoY on a 23% volume growth (MHCV+LCV). In Q4, CV industry grew 12%, while AL’s domestic volumes were up 27% due to mkt-share gains. Gross margin improved 70bps QoQ to 24.4% (100bps beat), a seven-quarter high. Ebitda margin improved 210bps QoQ to 11.0% (50bps beat). Absolute Ebitda beat by 7% and PBT by 12%. PAT beat was restricted to 9% due to higher taxes.

CV industry growth to moderate sharply: 

MHCV industry grew ~50% YoY in FY22 and FY23. From here, analysts of IIFL Capital Services expect growth to taper to 12% in FY24/FY25. Their FY25 volume forecast is 15-20% higher than the previous peak (FY19), post which there may be a downturn, as seen in previous cycles. FY23 MHCV Truck volumes were 9% lower than FY19 peak. However, sales were 4% higher than FY19 on a tonnage basis. Analysts of IIFL Capital Services expect LCV to be weaker than MHCV in FY24, with a forecast of 0% growth. Their overall CV industry growth forecast in FY24 is only 5%. Mgmt also expects sharp moderation, with their outlook slightly higher at 8-10%.

Margins on an upswing but already built in estimates: 

As seen in previous cycles, margins go close to peak in the latter part of the CV upcycle, as pricing discipline returns and operating leverage kicks in. This scenario is already built into our forecasts, which is the reason for 2.4x jump in EPS over FY23-25. The stock may look cheap at 15x FY25 PE; however, they note that FY25 would most likely be ‘peak of the cycle’ EPS.