CV cycle turning? Brokerages bullish on Tata Motors, Dipan Mehta prefers Ashok Leyland

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The Indian commercial vehicle (CV) market appears to be at an inflection point, with a potential cyclical recovery on the horizon, according to market experts. This sentiment is bolstered by strong November sales figures and positive outlooks from major brokerages, signalling renewed investor interest in the sector.

In a significant development, both BofA Securities and JP Morgan have initiated coverage on Tata Motors' CV business with "Buy" and "Overweight" ratings, respectively. Both firms have set a price target of ₹475, suggesting a potential upside of approximately 23% from current levels. BofA highlighted that Tata Motors' CV arm is a proxy play on the Indian and European Union truck cycles, which are believed to be bottoming out. The brokerage anticipates a 15% compound annual growth rate (CAGR) in earnings before interest, tax, depreciation, and amortisation (EBITDA) between FY26 and FY28. This optimism is based on the company's steady market share, margin discipline, and a robust return on capital employed (RoCE) of over 35% even through a down-cycle.

Similarly, JP Morgan's positive stance is driven by the expectation of a modest recovery in the CV business after three years of stagnant growth. The firm noted that pricing discipline among major players has supported margins and RoCE. It projects an EBITDA and earnings before interest and taxes (EBIT) CAGR of 13-16% over the next three years, which is expected to generate significant free cash flow. Both brokerages also view the company's Iveco acquisition and balance sheet deleveraging as key positives.

The bullish brokerage reports follow impressive sales data for November. Ashok Leyland's sales grew by 29%, surpassing estimates of 17% growth. Tata Motors also exceeded expectations, with its CV sales increasing by 29% against a forecast of mid-teens growth.

Speaking in an interview on CNBC TV18, Dipan Mehta -- Founder Director at Elixir Equities -- offered his perspective on playing this potential upcycle. While acknowledging the positive momentum for the entire industry, he expressed a preference for Ashok Leyland. "Our preference would be for Ashok Leyland which has been steadily able to increase market share and they have a great export potential as well," Mehta stated. He also pointed to the company's leadership in new launches and reasonable valuations as factors favouring the stock.

Mehta remains very positive on the CV industry as a whole, noting that its strength is a good indicator of broader industrial, manufacturing, and infrastructure activity. He believes the sector faces fewer threats from electrification and foreign competition compared to the passenger vehicle segment. Furthermore, he expects that lower financing costs will accelerate the replacement of older vehicles, providing an additional boost to the cycle. He advised that investors could be overweight on both Tata Motors CV and Ashok Leyland, but reiterated his preference for the latter based on its strong track record.