Shares of Ashok Leyland have been on the fast lane of late. As analysts remained bullish on the company, post its Q1 financial performance, the stock hit an all-time high of ₹258.95.

In fact, from ₹184 on July 31, 2023, the stock rose to ₹257.10, up about 40 per cent in the last one year. The rise of 13 per cent was so sharp in the last six days, as analysts turned more bullish on the stock after its Q1 performance. “One of the reasons for the rally in stock price is that the company managed to maintain healthy EBITDA margin and the commentary from the management was positive. The outlook, according to them, is encouraging,” Bhavik Patel, Senior Research Analyst at Tradebulls Securities, told businessline.

The company reported a net profit of ₹526 crore for Q1 compared with ₹576 crore in the year-ago quarter. However, in Q1 FY24, under the new tax structure, the company restated the deferred tax liability from 35 per cent to 25 per cent, resulting in a one-time gain of ₹172 crore. Excluding that, Ashok Leyland’s Q1 profits for the current year would be about 30 per cent higher than last year Q1.

Experienced headwinds

Interestingly, the commercial vehicle (CV) segment, in general, experienced headwinds during the first quarter of FY25 due to the high base effect, general elections and high inventory. But analysts believe that there are no structural hindrances to the growth of the CV sector in H2-FY25. Besides, the Ashok Leyland management commentary has been positive on the future prospects.

“The company maintained its market share in the medium and heavy commercial vehicle or MHCV business and gained 1 per cent market share in light commercial vehicles or LCVs led by new launches,” said an InCred Research report, pointing out that the management has given guidance of ₹500-700 crore capex for FY25F, another positive.

The stock has also caught investors’ imagination on the back of the company’s prospects in the domestic market. “Demand momentum in the domestic market continues to remain healthy, led by pick-up in replacement demand,” said a note from advisory firm JM Financial. According to the report, medium-term demand drivers (higher infra spends, scrappage policy, etc.) remain intact and Ashok Leyland aims for higher share in the MHCV segment (to c.35 per cent) and LCV segment, led by network expansion and addressing product gaps. “Focus on higher net realisation and cost control initiatives are expected to support profitability,” it said, adding that it estimated 7 per cent/16 per cent revenue/EPS CAGR over FY24-27E. The firm maintained a BUY rating with a target price of ₹275 (20x forward EPS).

Capex boost

Growth in the CV segment for the industry and Ashok Leyland in particular is what analysts are bullish about. “We expect Ashok Leyland’s market share to reach about 35 per cent in FY2026E with new launches. With robust bus segment growth and capex cycle boost expected to support growth in the MHCVs in mid to long term, we expect Ashok Leyland to outperform the industry, post a slow growth expected to continue in Q2 and Q3,” LKP Securities said in its report, adding, “On the back of improving margin profile, we maintain BUY with a raised target price of ₹284 (valuing at 21X times FY 26E earnings).”

Axis Securities said that the company aims to expand its “addressable footprint from 50 per cent to 80 per cent of the domestic market. The company has launched two models in Q1FY25 and is expected to launch four more by March 2025.” Besides, it pointed out that Switch Mobility has started delivery of e-LCV in Q4-FY24 and will further launch new products/platforms over the next few quarters, which works well for the stock.

UBS Research in its report said, “We upgrade Ashok Leyland from Neutral to Buy considering the resilience in MHCV demand, a strong pricing environment and favourable valuation, as it is trading in line with the past five-year mean.” 

Advising caution

However, some analysts advise caution in equal measure. As Patel pointed out, “We do exercise caution as the stock seems overvalued and the results are not encouraging despite positive outlook from the management.” LKP Securities expected volume growth in MHCVs to remain subdued in mid term. For Axis Securities, the CV industry has grown at a CAGR of about 19 per cent over FY21-24.

“After a strong upcycle, we factor stability in tonnage capacity within the industry over the next few quarters because of a high base. Thus, we maintain our Hold rating on the stock with a limited upside potential.” However, it marginally revised its TP to ₹230 from ₹222 earlier.

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