Q1FY24 Review: Ashok Leyland: Pricing discipline drives margin surprise

25 Jul 2023 , 11:57 AM

Ashok’s Q1FY24 Ebitda beat analysts of IIFL Capital Services estimate by 20% due to better than expected pricing discipline in the trucks industry (lower discounts) and higher engine sales. MHCV demand was weak in Q1FY24 due to reversal of pre-buy impact (emissions-related) seen in Q4FY23. As per mgmt., MHCV demand is stabilising now and is expected to clock 8-10% volume growth in FY24 (we forecast 12%). Clearly, the high-growth phase in MHCV is behind us after 2 years of ~50% growth (FY22/FY23). The positive surprise in earnings is due to pricing discipline displayed by CV OEMs. However, if OEMs’ focus shifts to market-share (Tata Motors has lost share), pricing discipline may take a back-seat. Analysts of IIFL Capital Services upgrade EPS estimates by about 10%, entirely driven by higher margin assumptions. Retain ADD.

Q1 Ebitda 20% above estimate: 

Revenue grew 13% YoY on 4% volume growth (4% beat). The revenue beat was led by sharp rise in nonvehicle revenue, including a near-doubling of engine revenues. Gross margin improved 560bp YoY and 190bp QoQ, coming in 120bp above analysts of IIFL Capital Services est. This led to Ebitda margin of 10.0%, 130bp above our estimate. The margin surprise was primarily due to better pricing discipline in the industry, with OEMs cutting discounts and focusing on profitability.

Volume up-cycle in the last leg: 

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. Analysts of IIFL Capital Services FY25 volume forecast is 15-20% higher FY19 (previous peak). In past cycles, industry clocked 15-20% higher volumes vs. previous peak, before going into a down-cycle. Mgmt’s MHCV volume expectation of 8-10% is lower than their forecast of 12%. Coming to LCV, Mgmt. expects the industry to clock 5% growth in FY24, after 22% Cagr in FY21-23. We forecast 0% growth for LCV in FY24.

Margin surprise may sustain as long as focus doesn’t shift back to market-share: 

CV OEMs are walking the talk on pricing discipline. AL’s gross margin improved sequentially in each of the past 4 quarters, resulting in cumulative expansion of 560bp. This was led by a combination of price hikes, lower discounts, lower input costs and cost rationalisation. Over this same period, Tata has lost substantial share in MHCV (44.0% vs 49.4%). If focus shifts to market-share, this positive may be short-lived.