Ashok Leyland’s non-CV growth offsets cyclicality as commodity costs pressure Q2 margins

Investment View and Valuation

Elara Securities retained its Reduce rating on Ashok Leyland in its August 16, 2026 result update, despite stronger commercial-vehicle demand and the expansion of non-CV businesses. The broker raised its target price to Rs 166 from Rs 160 after rolling its valuation forward by one quarter, while retaining a 12x September 2028E EV/EBITDA multiple. With the stock at a CMP of Rs 172, the revised target remains below the prevailing market price.

Elara remains cautious because commodity inflation is expected to pressure margins in Q2 FY27. It also expects only 3-4 per cent MHCV industry CAGR over FY27-29E.

Q1 FY27 Financial Performance

Ashok Leyland reported standalone Q1 FY27 revenue of Rs 9,630 crore, up 10.4 per cent year on year, supported by broad-based growth in MHCV trucks, LCVs and non-CV businesses. EBITDA was broadly flat year on year at Rs 970 crore, while EBITDA margin declined by around 105 basis points year on year to 10.1 per cent. PAT increased 3 per cent year on year to around Rs 610 crore.

Gross margin remained relatively resilient at 28.6 per cent, declining only 10 basis points quarter on quarter. Lower-cost opening inventory, price increases, cost savings and a better business mix supported margins. However, material cost rose around 90 basis points year on year to 71.5 per cent of revenue because of higher commodity prices and supply-chain disruption.

Commodity Costs and Pricing Actions

Management expects commodity-cost pressure to peak in Q2 FY27, ease from Q3 FY27 and show a more meaningful improvement in Q4 FY27. Ashok Leyland implemented a roughly 1.2-1.25 per cent price increase in Q1 FY27, which management indicated offset about half the commodity impact. Cost savings and inventory benefits addressed the balance.

From July, the company implemented price increases of more than 1 per cent in CVs and more than 2 per cent in LCVs. This took cumulative FY27 increases to around 2.00-2.25 per cent for CVs and more than 3.5 per cent for LCVs. Further price increases and discount optimisation are under consideration.

Elara expects a richer high-horsepower truck mix, tighter overhead control and the Achieve 2K cost-saving programme to partly cushion raw-material inflation. Employee cost may nevertheless rise around 4-5 per cent quarter on quarter in Q2 following annual wage revisions.

Commercial-Vehicle Operating Momentum

Operating momentum remained strong in core vehicles. Domestic MHCV truck volume grew 15 per cent year on year to 22,998 units, ahead of industry growth of around 13 per cent. Ashok Leyland's overall MHCV market share was 29 per cent.

LCV volume increased 21 per cent year on year to a record Q1 level of 18,874 units, with Vahan market share rising 30 basis points year on year to 13.2 per cent. Bus volume declined because management avoided some unprofitable tenders. The company is focusing on medium-bus and private school and staff segments, where its share has risen from around 15 per cent to around 25 per cent over the past three to four years.

Management expects high single-digit MHCV industry growth in FY27, with LCV growth slightly better. The expected drivers are replacement demand from an ageing fleet, improved financing availability and infrastructure activity.

Non-CV Diversification and New-Energy Businesses

Non-CV businesses are becoming a diversification and margin-supporting factor. In Q1 FY27, aftermarket revenue grew 12.7 per cent year on year, Power Solutions grew 51 per cent and defence grew 64 per cent. The defence business has a healthy order book and tender pipeline.

Management stated that growth in non-MHCV businesses has reduced the monthly domestic MHCV volume needed to cover fixed costs to around 1,000-1,500 units from around 6,000-7,000 units earlier.

Switch Mobility won a fresh order for 650 eBuses, taking its order book to around 2,100 units. It delivered 225 eBuses and around 300 eLCVs in Q1 FY27. OHM Mobility's operating fleet exceeded 1,900 eBuses, with more than 500 additions during the quarter. Management expects OHM to reach PAT breakeven in the near term.

Exports, Investments and Capital Expenditure

Export volume fell 18 per cent year on year to 2,461 units because disruption at the Ras Al Khaimah plant affected GCC supplies. Management said GCC retail demand remains healthy and expects production to return to peak run-rate, enabling recovery of wholesale losses. SAARC and African Union markets grew around 40-60 per cent year on year.

Ashok Leyland invested around Rs 330 crore in Optare and Rs 500 crore in Hinduja Leyland Finance in Q1 FY27. Q1 capex was around Rs 150 crore. Annual capex, which has risen to around Rs 900-1,000 crore over the past two years, is expected to remain elevated and increase over the next two to three years for new products, future technologies, alternate powertrains and EVs.

Earnings Outlook

Elara revised FY27-29E earnings by around 1 per cent to reflect near-term commodity pressure. Its revised estimates project FY27E revenue of Rs 48,243 crore, EBITDA of Rs 5,934 crore and adjusted PAT of Rs 4,042 crore. EBITDA margin is forecast to expand from 12.3 per cent in FY27E to 13.5 per cent in FY29E.

Key Monitorables

• Commodity costs: Pressure is expected to peak in Q2 FY27 before easing from Q3 and improving more meaningfully in Q4.
• Pricing and discounts: Further price increases and discount optimisation could help offset raw-material inflation.
• MHCV growth: Elara expects only 3-4 per cent MHCV industry CAGR over FY27-29E, despite management's expectation of high single-digit industry growth in FY27.
• Non-CV execution: Aftermarket, Power Solutions, defence, Switch Mobility and OHM Mobility remain important diversification and margin-supporting businesses.
• Exports and capex: Recovery at the Ras Al Khaimah plant and elevated investment in new products, future technologies, alternate powertrains and EVs will remain key factors.