Markets
Ashok Leyland sprints ahead, yet investors should tread carefully
Summary
- Ashok Leyland's shares have surged to a new 52-week high, despite lackluster Q1FY25 results. The stock's rally appears driven by positive management outlook and resilient Ebitda margins, but with mixed industry performance, investor enthusiasm may be overextended.
Shares of Ashok Leyland Ltd have surged over 10% in the past three days, reaching a new 52-week high of ₹258.85 on Monday. However, the gains seem somewhat overdone, as the company's June quarter (Q1FY25) results were not particularly outstanding, with Ebitda margin falling short of Street estimates.
Nevertheless, there are encouraging signs. The company has maintained a double-digit Ebitda margin, and management's commentary remains positive. They noted that the overall commercial vehicle (CV) industry will likely to do better than the initial grim projections for the year. During the earnings call, management highlighted that medium and heavy commercial vehicle (MHCV) volumes grew by 10% in Q1FY25, driven by strong performance in the bus segment, even as truck sales were weaker.
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Ashok Leyland's domestic MHCV market share stood at 30.7% in Q1, with an 8% volume growth. The standalone Ebitda margin expanded by 57 basis points year-on-year to 10.6%. However, margin expansion was limited by a significant rise in other expenses, attributed to a one-time cost for developing centres of excellence for battery packs, electric drive units, and software-defined vehicles. Additionally, overall price realization remained subdued.
On the other hand, a reduction in raw material costs as a percentage of revenue supported margin. The growth in defence as well as in spare parts, most of which are higher margin businesses, also contributed to better profitability, said the management. Ashok Leyland sold more than 1,000 defence vehicles last quarter, up from 250 in Q1FY24.
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The management is optimistic about FY25 Ebitda margin outlook. Recall that Ashok Leyland had clocked a double-digit margin of 12% for the full year in FY24 after a gap of four years. Further, the management has retained its medium-term aspiration of reaching mid-teens Ebitda margin.
Investors are sitting on handsome gains gains, with the Ashok Leyland stock up about 40% so far in 2024.
“(We) believe the recent runup in the stock price adequately captures all the positives thus we remain cautious and assign Accumulate rating with the target price of ₹268," wrote Varun Baxi, analyst from Nirmal Bang Institutional Equities in a report on 27 July.
Here, Ashok Leyland’s core business is valued at 13 times June 2026 EV/Ebitda and its stake in Hinduja Leyland Finance Ltd (HLFL) at ₹14 per share. However, the optionality of monetization its stake in HLFL through its listing can lead to further strengthening of Ashok Leyland’s balance sheet and potential value unlocking, added Baxi.
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On Monday, the stock closed at ₹256.35 on the National Stock Exchange. Slower-than-expected demand is a key risk ahead.
