Table of Contents
Sector Outlook: Neutral
Robust margins drive profitability despite industry slowdown
Ashok Leyland’s Q2FY25 standalone revenue stood at Rs. 87,688 million, marking a 9% YoY decline and a 2% QoQ rise, missing market expectations. Revenue was impacted by weak demand from monsoons and delays in government capex. Gross margin improved to 28.8%, supported by favorable raw material costs. EBITDA was Rs. 10,173 million, slightly above estimates, with an 11.6% margin driven by better realization and operational efficiency. PAT surged to Rs. 7,701 million (up 37.3% YoY / 46.5% QoQ), aided by a one-time gain from a subsidiary investment, expanding PAT margin to 8.8%. The quarter saw an 8% volume decline, with both M&HCV and LCV underperforming, though exports grew 14% YoY. The company anticipates investment needs for subsidiary businesses in H2FY25.
Key Concall Highlights
Demand:
- Volume growth momentum was dampened during the quarter by seasonal factors, such as extreme weather conditions, uneven rainfall distribution, and slow takeoff in government CapEx spending, which resulted in a 12% drop in the MHCV industry’s volume.
- The company believes the demand slowdown was temporary and is optimistic about the industry’s prospects for H2 and the medium term.
- The company received orders for 180 electric trucks in the 19- and 55-ton categories. OHM received an order for 500 buses from Chennai MTC. Switch is actively fulfilling DTC’s order for 1200 buses, supplies of which will start later this year.
- The company expects the M&HCV industry to grow by 6% – 10% in H2FY25 (taking cues from the ICRA report, which projected growth of 0% to 3% for the year in MHCV trucks).
- The company expects a bounce back in replacement demand, which was low during the quarter due to seasonal effects.
Segment:
- The company expects its defence segment to grow in the years ahead, with a healthy pipeline of orders and future visibility of orders.
- Regarding its power solutions, volume growth has been negative in H1 (which was largely expected because of the higher base year due to many rebuys because of the emission norms). Still, the H2 outlook is strong and expects healthy performance by year-end.
- The Aftermarket segment continued to grow during the quarter, registering a growth of 15%. The company remains positive in this segment, with expected value unlocking going ahead. The company fared well in its international business, a margin-accretive business. The segment’s performance was good despite the geopolitical challenges. GCC Africa had done well, although the SAARC market was down. The company also expanded into Southeast Asia in an attempt to expand geographically.
Other Updates
- CapEx for the quarter was Rs. 1.5 billion, and Rs. 3.1 billion cumulatively for the year.
- Potential investments in the second half of the year include Rs. 2.0 – 2.5 billion in Hinduja Leyland Finance and, if necessary, up to Rs. 5.- 7.5 billion in other areas.
- The reverse merger of Hinduja Leyland Finance with NXTDigital is on track and expected to be concluded before the end of Q1 FY26, pending necessary approvals from RBI.
- The company will not discount its products to win market share, instead focusing on product superiority, cost leadership, excellence in service delivery, and expanding reach.
- The company expects Switch India to attain its EBITDA breakeven figures by the end of the financial year.
- The company declared a dividend of Rs. 2, which would be paid on or before December 07, 2024. Record date for the same is November 19, 2024
Valuation and Outlook
Ashok Leyland reported strong margin and PAT growth in the quarter, supported by improved realization, sourcing efficiency, and streamlined operations, despite a soft top-line. Margin gains were driven by robust income from spare parts and international business. While demand was subdued, the outlook for H2FY25 remains positive, with expected festive season boosts, increased infrastructure projects, and potential rate cuts spurring fleet purchases. The company’s overseas expansion and subsidiary performance, backed by a strong order book, provide revenue visibility. Its focus on cost control and strategic pricing should aid EBITDA/PAT targets. With Switch and OHM leading in electric public mobility under PM eDrive, Ashok Leyland is positioned for growth, with projected single-digit volume growth by FY-end.
