Q3FY24 Review: Ashok Leyland: Best of CV cycle behind us

7 Feb 2024 , 12:56 PM

AL’s Q3 Ebitda came in 6% above estimate on better than expected margins. The MHCV industry has benefited from low input costs and good pricing discipline, which have led to sharp margins uptick in recent quarters. However, the MHCV volume cycle is losing steam after two years of ~50% volume growth in FY22/FY23. Commentary from OEMs’ mgmt. has also turned soft recently, with expectations of weakness for two quarters. Analysts of IIFL Capital Services recently cut FY24 growth estimate from 10% to 6%. LCV industry has seen no growth last year. They cut FY25/FY26 EPS estimates by 6-7% on lower volumes. While analysts of IIFL Capital Services have maintained elevated margin assumptions for now, they are not sure of pricing discipline sustaining if industry slips into down-cycle and/or if there are big market-share swings. Downgrade from ADD to Reduce with TP of Rs160 (11% downside). Although there are no clear signs of a down-cycle yet, deep-cyclical sectors (with potential for sharp EPS cuts) are best exited when high-growth phase is done. 

Q3 Ebitda 6% above est. on higher margins: 

AL’s Q3 rev grew 3% YoY (in line). Gross margin (GM) expanded 400bp YoY and 130bps QoQ to 27.8%, due to moderation in input costs and better pricing. Ebitda margin improved 320bp YoY and 80bp QoQ to 12.0%, coming in 60bps above expectations. Ebitda beat was 6%. However, PAT beat was lower at 3% on higher interest costs and taxes. 

CV cycle losing steam after two strong years: 

MHCV industry grew ~50% YoY in FY22 and FY23. Analysts of IIFL Capital Services are now seeing growth tapering (6% in FY24), with expectations of single-digit growth in FY25. Their FY25 absolute volume forecast is 2% higher vs. preceding peak (FY19). However in tonnage terms, analysts of IIFL Capital Services FY25 total tonnage estimate is 20% higher than FY19. Average tonnage of trucks sold in FY24 is 18% higher than FY19. 

Will pricing discipline sustain if volumes / market-share come off? 

MHCV industry saw good pricing discipline in recent quarters, which combined with lower input costs, led to strong margins. The quest for better pricing (and possibly, other reasons) has led to dip in AL’s marketshare (retail, per Vahan). Analysts of IIFL Capital Services are not sure of pricing discipline sustaining if industry slips into a down-cycle and/or if market-share swings adversely for key players. Risk to margin assumptions is to the downside.