Ashok Leyland Q3 net zooms 56%: Street sees around 20% upside in stock

Demand is expected to stay healthy with the government’s capex push and healthy GDP growth.

Analysts see a significant upside in Ashok Leyland after the company's net profit for the third quarter surged 56 percent on the back of  healthy demand and better margins. Its operating profit and operating profit margin beat Street estimates.

Target prices too see an upside of anywhere between 18 percent and 22 percent over the next 12 months, according to brokerages.

Also read: Ashok Leyland's Q3FY23 results show 56% YoY rise in net sales

Better-than-expected average selling price and gross margin caused the company’s third-quarter EBITDA to rise 48 percent sequentially and beat Jefferies’ estimates by 16 percent, wrote analysts of the brokerage in a report.

“EBITDA per vehicle rose 41 percent QoQ to a 19-quarter high. Indian truck demand outlook remains strong, and AL's market share, after falling over FY18-22 has recovered in 9MFY23. Margin outlook has also improved as both AL and TTMT (CVs) now appear to be focusing on profitability, and delivered strong margin expansion in Q3. We raised the FY23-25 EPS by 1-9 percent, and retain 'buy',” they wrote. Jefferies has set the target price at Rs 185.

Gross margin improvement, led by a rising mix of higher tonnage trucks, price hikes, controlled discounting and falling raw-material basket cost, led to operating margin expansion, noted analysts at ICICI Securities. The company’s operating margin at 8.8 percent (up 230bps QoQ) was 100bps ahead of an estimate by ICICI Securities.

Gross margin will continue to rise in the next quarter too from “lag effect of 1.5 percent price hikes taken in mid Q3, continuity of favourable raw material costs and better operating leverage”, according to ICICI Securities.

According to analysts at Jefferies, both Ashok Leyland and Tata Motors are now focussing on profitability with strong demand and improving commodity prices. Their margins expanded by 2.3-3.4 percentage points (230-340 bps) in the third quarter.

Ashok Leyland’s margins had fallen from an average of 11 percent in FY16-19 to 3.5-4.6 percent in FY21-22, and now the brokerage expects the margins to improve significantly to 10 percent in FY24-25.

Demand is expected to stay healthy with the government’s capex push and healthy GDP growth. “We estimate the MHCV (medium and heavy commercial vehicles) industry to grow +45 percent/+10 percent/ 5 percent on-year in FY23/24/25. The CV cycle is likely to remain on its growth path until FY26 if GDP growth remains above 6 percent over FY24-26 and capex push by the government continues, according to analysts at Nomura. The foreign brokerage has a 'buy' call on the stock with a target price of Rs 184.

Nomura's analysts expect the company to gain market share and to benefit from improving industry margins, driven by Tata Motors’ focus on lowering discounts.

Also read: Reliance unveils first hydrogen-powered tech for heavy-duty trucks

The company has recovered its market share considerably over the first nine months of this fiscal. “AL's truck market share, after dropping from 34 percent in FY18 to 27 percent in FY22, has improved to 32 percent in 9MFY23. Its market share in heavy 16-tonne-plus trucks (73 percent of industry volumes) has recovered to 36 percent in 9MFY23 from 31 percent in FY21-22; FY18 was 37 percent.

In sub-16-tonne trucks (27 percent of industry), AL's 9MFY23 market share at 21 percent was much better than 18 percent in FY22 but still 6ppt below FY18. AL has attributed this revival in market share to new product launches and network expansion, according to Jefferies.

This should help it ride the ongoing up-cycle in the trucks segment. “After a sharp 56 percent fall over FY19-21, truck demand started to revive in FY22 with volumes rising 49 percent on-year. The Indian economy is growing well, and e-way bills, measure of road freight, have been on a rising trend, which should boost truck volumes. We expect truck industry volumes to grow 37 percent/15 percent/10 percent YoY in FY23/FY24/FY25; our FY25 volume estimate is 13 percent above FY19 peak, Jefferies noted in the report.