Ashok Leyland stock rises, thanks to strong Q2. Should you buy?


Commercial vehicles manufacturer, Ashok Leyland extended its gains on Monday when broader markets were correcting. The Chennai-based auto firm gained by at least 4%. The shares closed near their day’s high on exchanges. The upbeat in Ashok Leyland shares comes after it posted strong Q2 earnings. Analysts are optimistic about Ashok Leyland going forward as they expect its profitability to improve on the back of robust demand. The shares which are currently trading a little over 150 levels — are seen to touch between 180 to 200 ahead.

On BSE, Ashok Leyland shares outperformed benchmark Sensex by gaining about 4%. The company’s shares closed at 152.80 apiece up by 3.5% on the exchange after touching an intraday high of 153.50 apiece. On the other hand, Sensex dipped by nearly 171 points to end at 61,624.15.

Ashok Leyland’s market cap is around 44,864.02 crore.

During the second quarter of FY23, Ashok Leyland posted a net profit of 199.31 crore compared to a net loss of 83.01 crore in Q2 of the previous fiscal. Its PAT rose by nearly 3-folds sequentially. The company’s top-line front also recorded robust growth with revenue from operations coming at 8,265.95 crore in Q2FY23 versus 4,457.85 crore inQ2FY22 and 7,222.85 crore in Q1FY23.

Ashok Leyland’s domestic MHCV volume at 25,475 units in Q2FY23 increased by 113% over the same period last year (11988 units) — which is more than double the industry growth. This helped Ashok Leyland achieve market share gains of 9.6 % in the quarter. Furthermore, in Q2FY23, the company’s domestic LCV volumes for Q2 FY123 at 17040 units is higher than Q2 FY’22 by 28% (13328 units), while export

volumes (MHCV & LCV) for Q2 FY123 at 2780 units is higher than Q2 FY122 by 25 % (2227 units).

The company’s Debt Equity improved by 0.37 times in Q2 FY23 as compared to 0.48 times in Q2FY22.

Should you buy Ashok Leyland shares?

In its report, JM Financial analysts said, “Management highlighted that outlook for CV demand remains healthy owing to improving fleet utilisation, steady freight rates and rise in replacement demand. AL expects its market share gain over the last 3 quarters (+10% YoY) to sustain owing to strong response for AVTR range of trucks. While discounts continue to remain at elevated levels, AL is taking judicious price hikes and remains hopeful of better price hike retention going ahead. Softening commodity costs and cost-cutting initiatives are expected to support profitability. Wholesale demand in 2H is expected to moderate on the transition to BS6 stage II. However, CV upcycle is expected to continue on expanding economy. Fund raising at Switch mobility is expected to close soon and the listing of Hinduja Leyland Finance (HLFL) is expected by 1QFY24.”

JM Financial’s note added, “We estimate revenue CAGR of 25% and strong growth in profitability during FY22-25E. We maintain BUY with Dec’23 TP of 190 (20x fwd. earnings). Slowdown in economy and increase in competitive intensity are the key risks.”

Meanwhile, ICICI Securities note said, “Price hikes of 1%/1.5% have been taken in Q2/Q3. Thus, combined with receding input commodity costs, exhaustion of high-cost raw material inventory and strong operating leverage in coming quarters, we expect EBITDAM to move towards ~10% levels gradually. Ex-Switch Mobility, capex in FY23 would be ~Rs6bn, dedicated towards R&D, EVs, and maintenance. Capex need for Switch Mobility remains at US$200-US$250mn for FY23-24 together and AL is looking forward to fund it through a strategic stake sale in Switch.”

“We estimate AL’s M&HCV volume to grow at a CAGR of ~35% in FY22-FY24E, with market shareholding at ~31%. Maintain BUY with a revised DCF-based TP of Rs180 (earlier: Rs183),” ICICI Securities note added. 

Also, Prabhudas Lilladher’s note said, “going ahead, we believe AL will continue to regain its lost share on the back model launches and revival in bus segment. Additionally, price retention due to demand and softening of commodity prices will lead to margin expansion (we build in EBITDA margin expansion of 300bps over FY23-25E). Our revenue estimates increase by 2.2/4.6% for FY24/25 as we factor in robust demand scenario and consistent price hikes. Maintain ‘BUY’ with a target price of 200 at 14x Sep-24E EV/EBITDA and ~ 12 for HLF.”


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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