Ashok Leyland earnings beat as CV demand supports growth despite commodity cost pressure

Investment View and Valuation

Motilal Oswal Financial Services has reiterated its Buy view on Ashok Leyland following a stronger-than-expected Q1 FY27 earnings performance and an improving commercial-vehicle demand outlook. The broker believes the company has reduced business cyclicality by expanding its non-truck businesses. A focus on margin expansion, controlled capital expenditure and a net-cash balance should support returns and investment in future growth avenues.

The target price of Rs 198 is based on 13 times FY28E EV/EBITDA, along with around Rs 10 per share for the NBFC business.

Q1 FY27 Financial Performance

Ashok Leyland reported Q1 FY27 revenue of Rs 96,344 million, up 10 per cent year on year and broadly in line with Motilal Oswal's estimate. Growth was entirely volume-led, with total volume increasing 10 per cent year on year to 48,763 units while realisation remained broadly flat.

EBITDA was flat year on year as elevated commodity costs reduced the margin to 10.1 per cent. However, the EBITDA margin was 100 basis points ahead of the broker's estimate. Higher other income of Rs 851 million, compared with Motilal Oswal's estimate of Rs 650 million, helped adjusted PAT increase 3 per cent year on year to Rs 6,091 million, which was 12 per cent above estimate. The company's net cash balance stood at Rs 22,500 million, compared with Rs 8,200 million a year earlier.

Commercial-Vehicle Demand and Market Position

Management said domestic commercial-vehicle demand improved materially from June, remained favourable in July and early August, and that Q2 industry growth could exceed the roughly 13-14 per cent recorded in Q1. It expects high-single-digit M&HCV industry growth in FY27 and a stronger outlook for LCVs.

In Q1, domestic M&HCV industry volumes increased 13 per cent year on year and domestic LCV volumes increased 17 per cent, based on Vahan registrations. Ashok Leyland's M&HCV truck volume increased 15 per cent to 22,998 units, outperforming the industry. However, domestic M&HCV market share was around 29 per cent, compared with 30.2 per cent in FY26.

Commodity Costs and Margin Outlook

Raw-material cost inflation remains the near-term concern. Management noted that 20-25 per cent of Q1 requirements came from lower-cost opening inventory, limiting the immediate impact on the profit and loss account. Some commodity and overhead costs were also capitalised in closing inventory and will be recognised when vehicles are sold.

Management expects commodity pressure to peak in Q2, ease in Q3 and improve more visibly in Q4. Cumulative FY27 price increases were around 2-2.25 per cent in M&HCVs and above 3.5 per cent in LCVs. Further pricing and discount optimisation are being evaluated.

The company is prioritising higher-margin, higher-horsepower M&HCVs, defence, Power Solutions, LCVs and other non-core-truck businesses to counter cost pressure.

Earnings Estimates

Motilal Oswal forecasts Ashok Leyland volume growth of 6 per cent in FY27E and 10 per cent in FY28E. The broker expects FY26-28E revenue, EBITDA and PAT CAGR of 11 per cent, 15 per cent and 17 per cent, respectively. FY27E margins are expected to be affected by input costs by 40 basis points, followed by a recovery in FY28E.

Long-Term Growth Objectives and Capital Allocation

Key longer-term growth objectives include:

• Increasing LCV market share in the 2-3.5 tonne segment to 25 per cent from around 20 per cent currently.
• Doubling spares revenue again over the medium term.
• Delivering 20 per cent export volume CAGR over the next two to three years.
• Scaling the defence business.

Ashok Leyland is also evaluating an accelerated manufacturing facility in Saudi Arabia. Capital expenditure is expected to rise over the next two to three years for technology, new products and portfolio white spaces. The company plans to repay around GBP25 million of Optare-related debt in FY27 and another GBP25 million in the following year.