Ashok Leyland: Focused on market-share & margin improvement

16 Jun 2023 , 11:30 AM

Recommendation: Add; Target Price: Rs 165

 

Analysts of IIFL Capital Services attended Ashok Leyland’s Analyst Meet. Mgmt.’s expectation of growth moderation in Indian CV industry in FY24 is largely in line with their estimates. However, mgmt is far more bullish on gaining further market-share in MHCV and LCV industries, with new product introductions and expansion of distribution networks in regions where AL’s market-share is currently low. AL is also targeting improving margins from 8.1% in FY23 to 10% in FY24 and mid-teens over the medium-term. At its recent Investor Day, Tata Motors also echoed similar goals – market-share gains and margin improvement. Analysts of IIFL Capital Services believe industry participants talking up margin targets is positive and would bring in pricing discipline (as they saw in H2FY23 results). However, if all large competitors eye aggressive market-share gains, it may dilute margin improvement target. In addition to the above, AL’s mgmt targets high growth in international operations, non-vehicle revenues and highlighted value-unlocking potential amongst subsidiaries. Analysts of IIFL Capital Services maintain ADD with TP of Rs165.

High market-share aspirations in domestic CVs: 

Relying on its strong pipeline of launches and plans to expand distribution network, AL aspires to improve its MHCV market-share from 32% in FY23 to 35% and LCV (2- 3.5T) market-share from 20% to 25% over medium-term. A roadmap has been laid down to scale up volumes in international markets, which have faced global headwinds in recent years. Non-CV revenue streams, namely Defence, Power solutions and Spare parts — is also a key focus area. The aftermarket business more than doubled in the last 5 years to ~Rs25bn; mgmt expects it to double again in the coming years.

Focus on margins: 

AL’s Ebitda margin stood at 11% in Q4FY23 (seasonal high) and 8.1% in FY23. AL aspires to clock double-digit Ebitda margin in FY24 and improve to mid-teens over the medium-term. This will be on the back of cost optimisation and operating leverage from volume growth. Commodity inflation and weak pricing discipline (in H1FY23) hurt the industry; it is improving and OEMs are aiming to sustain it.

Value unlocking of subsidiaries: 

Hinduja Leyland Finance (AL’s 60.4% subsidiary) will be listed in H2FY24. EV brand, “Switch Mobility” should see high growth. Switch has 650+ buses on road globally. It has a healthy order-book and a stream of new products lined up for launch.