After an almost 30 percent jump in the last 3 months since June, brokerage house Axis Securities has picked Ashok Leyland as its top pick of the week. This is on the back of a strong electric vehicle (EV) business, target of higher EBITDA margins and new product launches with a focus on developing alternate fuel technology.
The brokerage has a ‘buy’ call on the stock with a target price of ₹205, indicating an upside of 10 percent from its current market price of ₹186, as on August 21.
Ashok Leyland (AL), flagship of the Hinduja Group, is the 2nd largest manufacturer of commercial vehicles (CV) in India, the 3rd largest manufacturer of buses in the world and the 10th largest manufacturer of trucks globally. It is headquartered in Chennai and has 9 manufacturing facilities, out of which, 7 are based out of India. The rest provide AL international exposure – a bus manufacturing facility in RAK, UAE and one at Leeds, United Kingdom. The Hinduja Group holds a 51 percent stake in the company through the holding company, Hinduja Automotive (UK).
The stock has jumped over 26 percent in the last 1 year and 31 percent in 2023 YTD, giving positive returns in 6 of the 8 months so far in this current calendar year.
Investment Rationale
Target of Mid-teens EBITDA Margins: The brokerage pointed out that AL has reported 10 percent EBITDA margins in Q1FY24 and has set a mid-teen EBITDA margins target over the medium term. It expects EBITDA margins to improve moving forward due to (1) Slightly higher ASP (average selling price) and lower discounts leading to higher net realizations; (2) Higher GMs (gross margins) on softening commodity costs and value engineering (3) Favourable product mix skewed towards higher tonnage vehicles; (4) Operating leverage driven by absolute volume growth; and (5) Growth in international business, Defence, Power Solutions, and Aftermarket which are higher-margin contributing businesses.
EV Business: According to Axis Securities, AL has given a short-term loan of ₹220 crore to SWITCH Mobility in Q1FY24 and reiterated its investment plans to infuse ₹1,200 crore in it over the next 12 months. The investment is predominantly towards meeting Capex requirements in developing new products – two new LCVs: Electric Dost and Bada Dost; low floor 12/9 meter buses for the EU/Indian market respectively. Switch Mobility will launch an e-LCV in H2FY24, it added.
CV Industry Outlook: The brokerage pointed out that AL has reiterated its earlier guidance of industry growth at 8-10 percent YoY for MHCV (medium and heavy commercial vehicle) and 5-6 percent YoY growth for LCV (Light commercial vehicle) in FY24E (over the high base of FY23). The management expects similar growth momentum in FY25, led by a favourable macroeconomic environment, strong replacement demand and robust government capex outlay, stated the brokerage.
Outlook & Valuation: AL remains well-positioned to benefit from a longish CV upcycle, said Axis Securities. It remains positive on the long-term growth trajectory of the company with better margins led by operational efficiencies, material cost reduction program, softening of commodity costs, and pricing discipline, and expects 8 percent CAGR volume growth over FY23-26E;
It forecasts the company to post Revenue, EBITDA and PAT growth of 11 percent, 22 percent, and 34 percent CAGR, respectively, over FY23-26E.
