Q2FY24 Review: Ashok Leyland: High growth behind us, but near-term stable

13 Nov 2023 , 01:07 PM

Ashok’s (AL) Q2 results were largely in line with analysts of IIFL Capital Services estimates. Mgmt. mentioned that there is enough steam in demand and overall macro in the near-term, for the MHCV industry to grow 8- 10% this year. Margin outlook stays positive due to soft commodity prices and improvement in pricing. Analysts of IIFL Capital Services largely maintain their earnings estimates post these results. From a big picture perspective, the high growth phase of the MHCV industry is behind us. The industry clocked about 50% growth in FY22 and FY23, and is now tapering (they forecast 12% in FY24). Margins were low in FY22/FY23, but normalised in FY24 with price hikes and fall in input costs, driving high earnings growth this year (+110% YoY). Overall, analysts of IIFL Capital Services believe that high growth and margin improvement catalysts for the CV industry have already played out. Retain ADD with TP of Rs180. 

Q2 results largely in-line: 

Q2 rev grew 17% YoY driven by 10% increase in volumes and higher realization. Blended ASP improved 6% YoY supported by price hikes and mix. Gross margin (GM) improved marginally (20bps QoQ) to 26.5%, due to moderation in input costs. Ebitda margin improved 470bps YoY to 11.2% and 120bp QoQs to 11.2% (30bps beat). Ebitda beat was 2%. PAT missed by 5% on higher taxes. 

Analysts of IIFL Capital Services are in the late stage of MCHV up-cycle: 

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. Mgmt. guidance is slightly lower at 8-10% industry growth in FY24. In the past cycles, industry volumes peaked 15-20% higher vs. previous peak. Analysts of IIFL Capital Services FY25 MHCV volume forecast is 14% higher than FY19 (previous peak). However, rise in share of higher tonnage vehicles in this up-cycle leads to their FY25 tonnage forecast being 30% higher than FY19. 

FCF generation lower than expected: 

In H1FY24, AL generated negative FCF of about Rs6bn. The Board has approved investment of Rs12bn in Switch (AL’s EV sub) to fund expansion of product portfolio, R&D & operations. This investment would be made in H2FY24. analysts of IIFL Capital Services were already building part of the Switch investment in FY24. Analysts of IIFL Capital Services now expect FCF in FY24 to be lower at ~Rs7bn vs. their earlier expectation of ~Rs12bn.