BENGALURU : For Ashok Leyland Ltd, this financial year is likely to be remarkable in terms of profitability. After four years, the commercial vehicle (CV) maker is on track to post a double-digit Ebitda margin in FY24. In the first half of FY24, the measure stood at 10.7% and the company expects the second half to benefit from the twin tailwinds of better demand and softer commodity costs. Ebitda is short for earnings before interest, tax, depreciation and amortization. As such, improving margin performance is one reason that has aided the 22% rise in Ashok Leyland shares so far in 2023.
But further significant benefits may be difficult. Analysts believe that the best of the current CV upcycle is over. Thus, industry growth is set to moderate. Ashok Leyland forecasts the medium and heavy CV industry to grow at 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 suggests a decline in the growth rate in FY25. In addition, rising competition adds to the problems. “As the demand trends begin to moderate, we expect the competitive intensity (discounts) to increase, which will weigh on the profitability of the industry,” Kotak analysts said in a report on 10 November.
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However, the bright spot is that Ashok Leyland’s market share in the medium and heavy CV segment increased by 70 basis points sequentially to 31.9% in Q2. Indeed, in the September quarter (Q2FY24), Ashok Leyland’s realization per vehicle fell consecutively after seven consecutive quarters of growth. This is because the company was unable to retain the 3% price increase taken in Q1. Given its goal of reaching a mid-teens margin in the medium term, the margin trajectory needs closer monitoring.
Further, the need to support Switch Mobility in the foreseeable future would weigh on Ashok Leyland’s return ratios thus impacting the stock, said Aniket Mhatre, analyst at HDFC Securities. Switch is the electric car subsidiary of Ashok Leyland. The company plans to invest ₹1,200 crore in Switch in one or more tranches over the next three to six months. Meanwhile, the company’s focus on diversifying revenue streams could add to earnings going forward. But for now, consistent growth in CV volume and sustaining a double-digit margin is crucial to keeping investor sentiment intact.
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Updated: 19 Nov 2023, 21:01 IST
(tagsTo Translate)Ashok Leyland