Analysts see nearly 14% upside in Ashok Leyland; here’s why

Ashok Leyland has gained nearly 10 percent this year while advancing nearly 17 percent since March 28 when the market began to rally. The Sensex and the Nifty have each gained 3.5 percent during the period and nearly 10 percent in the past three months

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Ashok Leyland is likely to be in focus on June 16 morning, a day after an investors’ meeting saw most analysts raise the target price for the stock as they remain bullish on the automotive company.

The stock has gained nearly 10 percent this year, while advancing nearly 17 percent since March 28 when the rally started in the market. Benchmark indices the Sensex and the Nifty have gained 3.5 percent during the period year and nearly 10 percent in the past three months.

Morgan Stanley has an “overweight” rating and a target price at Rs 178 a share, a 13 percent upside from the current market price. JP Morgan, too, has stuck with an “overweight” call, with a target price at Rs 175.

Motilal Oswal has a “buy” rating and expects the stock to rise up to 14 percent from the current market price to Rs 180 a share. JM Finance and Nuvama have the same call and target.

On June 15, the stock closed at 159.70 on the National Stock Exchange, up  1.49 percent.

In high gear

During its 2023 Investor Meet on June 15, Ashok Leyland said it wanted to achieve profitable growth in the domestic Medium and Heavy Commercial Vehicle (M&HCV) segment, accelerate the expansion of non-M&HCV revenue, and highlighted the upcoming potential for switch mobility (electric vehicles).

The Hinduja Group company plans to launch six platforms under switch mobility within the next two years. The management anticipates the positive momentum in the M&HCV sector to persist and aims to increase its market share by 3 percentage points to 35 percent.

The company is also looking to enhance its presence in the Light Commercial Vehicle (LCV) segment. It has set a target of achieving a double-digit EBITDA margin in FY24 and expects a mid-teens EBITDA margin in the medium term.

Here is what brokerages said after the meeting:

Motilal Oswal Securities

With a stable demand environment and favourable factors such as improving pricing power and steady raw material prices, Ashok Leyland is expected to witness robust earnings growth.

The company has strategically positioned itself to capitalise on the commercial vehicle (CV) growth cycle, making it an attractive investment choice. Though the valuations, at 17.3x FY25E P/E and 9.3x EV/EBITDA, indicate a mid-cycle recovery, they do not fully reflect Ashok Leyland’s focus on diversifying revenue streams and expanding profit pools.

The potential to tap into new revenue sources and increase profitability is not fully priced in by the market.

Nuvama Research

Ashok Leyland is expected to witness a growth in market share from 18.8 percent in FY23 to 19.3 percent in FY25E. This growth will be facilitated by the company’s expansion of its product portfolio in the small/intermediate CV segment and of its dealership network in regions outside of South India.

The research house expects a revenue compound annual growth rate (CAGR) of 10 percent between FY23 and FY25E, supported by a favourable industry upcycle, market share gains, and improved realisations.

The EBITDA CAGR is expected to be higher at 25 percent, benefiting from increased scale and improved net pricing. The company is anticipated to generate an average annual free cash flow (FCF) of over Rs 2,300 crore between FY24 and FY25E, enabling a reduction in net debt-to-equity ratio from 0.1x in FY23 to -0.1x by FY25E.

These projections indicate a positive outlook, highlighting the company’s potential for market share expansion, financial growth, and debt reduction.

JP Morgan

Ashok Leyland is working on developing its new energy portfolio, which is expected to be ready within the next 24 months. This signifies the company’s focus on transitioning to alternate energy vehicles, aligning with the industry’s growing demand for sustainable transportation solutions.

Its adoption of modular platforms will play a crucial role in accelerating the shift towards alternate energy vehicles. These platforms allow for greater flexibility and efficiency in manufacturing, contributing to the successful transition to electric and other alternative fuel vehicles.

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