Ashok Leyland - Demand Consolidation Phase Currently Prior To Downcycle: ICICI Securities

ICICI Securities Report

Post recovering ~120% in volume terms from the lows of FY21, domestic goods medium and heavy commercial vehicle market is currently up ~20- 25% above its tonnage-adjusted incremental supply level in the previous peak of FY19.

We are building in flat volume for domestic goods M&HCV industry in FY25E, followed by a year of ~10% decline in FY26E. In line with industry decline, we are building in goods M&HCV volume decline of 10% for Ashok Leyland in FY26E, post remaining flat in FY24-25E.

We are building in Ebitdam for Ashok Leyland in FY26E at 8% versus 10.5% in FY25E, on the back of adverse operating leverage and potential pressure on pricing.

We downgrade Ashok Leyland to Sell from Hold, with a revised discounted cash flow-based target price of Rs 140 (earlier Rs 177), implying 12 times FY26E enterprise value/Ebitda. Change in target price is primarily due to valuation rollover to a weaker FY26.

Upside risks

• Growth in domestic goods MHCVs in FY25 and FY26 driven by enhanced focus on capex cycle by the government post elections

• Ashok Leyland executing its target mid-teen margin ahead from current ~11-12% levels

• Ashok Leyland being able to sell stake in Switch Mobility down the line, thus helping it get back the Rs 16 billion paid from its standalone cashflow.

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