Q3FY23 Review: Ashok Leyland: Demand strong; good visibility for 10% margins

6 Feb 2023 , 10:25 AM

Ashok’s (AL) Q3 Ebitda beat analysts of IIFL Capital Services estimate by 17%, due to sharp improvement in gross margin. Volume story in MHCV is strong for AL, driven by strong industry growth (+45% in FY23, +15% in FY24) and market-share gains. Q3 revenue grew 63% YoY on a 40% volume growth (MHCV+LCV). In Q3, MHCV industry grew 34%, while AL’s MHCV volumes were up 59% due to mkt-share gain. Gross margin improved 170bp QoQ to 23.7% (130bp beat), a six-quarter high. Ebitda margin improved 230bp QoQ to 8.8% (110bp beat). Absolute Ebitda beat by 17% and PBT by 23%. Higher tax rate restricted PAT beat to 4%.

Despite sharp recovery in MHCV industry, Ebitda margins were at mid-single digit till Sep-2022. In Q3FY23, both AL and Tata Motors have reported much higher margins of close to 9%. This is driven by price hikes, lower discounts, fall in commodity prices and operating leverage. The biggest change vs preceding quarters is better pricing discipline in the industry

AL is likely to close FY23 with a 32% mkt.-share in MHCV, much higher than 27% share in FY22. We believe LCV industry is likely to soften in FY24, after a strong 26-27% growth in FY23. Here again, the company is gaining share; this should ensure volume growth. The mix in MHCV is shifting towards higher tonnage vehicles; this is driving up ASP and profitability. Analysts at IIFL Capital Services expect further improvement in margins in Q4.

Analysts at IIFL Capital Services maintain BUY with Target Price of Rs180.