Buy Ashok Leyland; target of Rs 184: YES Securities

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26 Aug, 2025 12:21

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AL’s 3QFY23 operating performance was healthy as EBITDA beat our/street estimates by 22-23%. This was led by higher-than-expected expansion in gross margins at 23.7% (+170bp QoQ, +160bp YoY) due to decline in RM, operating leverage and favorable product mix. We believe, margins to continue expand even in 4Q led by 1) cumulative price hikes of 4-4.5% in past 3 quarters (including Jan’23), 2) RM decline, 3) moderating discounts and 4) cost controls. AL continues to gain market share with overall market share at 32.6% in 3QFY23 (v/s 32.3% in 2QFY23 31.1% in 1QFY23 and 25.3% YoY). Improving demand from higher tonnage segment bode well for margin trajectory of the company. We are building in volume CAGR of ~9% over FY23-25 with likely margins expansion to 12% by FY25 (v/s 8.8% in 3QFY23 and similar to FY19 peak). We believe AL’s derisking strategy to help as it reduces domestic MHCV exposure by adding new revenue pools such as LCVs (12-13%), exports (9-10% of sales) and spares (8-9% of sales). We believe, sustenance of MHCV market share gains in 3Q (~33%) is likely led by new launches and network expansion.

We raise FY24/25 EPS by ~6.6%/2.7% to build in better-than-expected gross margins and favorable mix. We re-iterate BUY with TP of Rs184 (v/s Rs179, unchanged at ~12x of Sep’24 EV/EBITDA) and ~Rs13 for NBFC. AL continues to be one of our top picks among OEMs. An announcement related to external funding for EV business (Switch) is value accretive.

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