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Rough road ahead for Ashok Leyland


BENGALURU : For Ashok Leyland Ltd, this financial year is likely to be significant in terms of profitability. After four years, the commercial vehicle (CV) maker is on track to clock a double-digit Ebitda margin in FY24. In the first half of FY24, the share stood at 10.7% and the company expects the second half to benefit from the few tailwinds of better demand and softer commodity costs. Ebitda is short for earnings before interest, tax, depreciation and amortization. Hence, improved margin performance is one reason that has helped the 22% rise in Ashok Leyland shares so far in 2023.

But further significant benefits may prove difficult to achieve. Analysts believe that the best part of the current maximum CV cycle is over. Therefore, the growth of the industry is expected to be moderate. Ashok Leyland projects the medium and heavy CV industry to grow by 8-10% in FY24. In comparison, Kotak Institutional Equities expects volumes to see a compound annual growth rate of 7-8% over FY23-25. This indicates a decline in the growth rate in FY25. In addition, increased competition adds to the woes. “As demand trends begin to moderate, we expect the intensity of competition (discounts) to increase, which will weigh on the profitability of the industry,” Kotak analysts said in a November 10 report.

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In backup gear

However, the bright spot is that Ashok Leyland’s market share in the medium and heavy CV segment was up 70 basis points sequentially to 31.9% in Q2. To be sure, in the September quarter (Q2FY24), Ashok Leyland’s realization per vehicle fell sequentially after seven consecutive quarters of growth. This is because the company was unable to maintain the 3% price increase taken in Q1. As it aims to reach the mid-teens margin in the medium term, the margin trajectory needs to be monitored more closely.

Additionally, the need to support Switch Mobility would push Ashok Leyland’s return ratios much higher and thus impact the stock, said Aniket Mhatre, analyst at HDFC Securities. Switch is Ashok Leyland’s electric vehicle subsidiary. The company plans to invest 1,200 crore in Change in one or more tranches over the next three to six months. Meanwhile, the company’s focus on diversifying revenue streams could boost future earnings. But for now, maintaining consistent CV growth and double-digit margin is key to keeping investors’ minds intact.

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Updated: 19 November 2023, 09:01 IST

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