Alternate Fuel Vehicles And International Expansion Will Strengthen Future Market Position

Key Takeaways

• Expansion in international markets and innovation in alternate fuel vehicles could drive revenue growth and enhance market share.
  
• Focus on high-margin non-core businesses and efficient cost management is expected to sustain profitability and improve financial stability.
  
• Geopolitical challenges and industry declines could hinder Ashok Leyland’s revenue and profitability, while delays in government spending threaten growth projections.

Catalysts

Manufactures and sells commercial vehicles in India and internationally.

• Ashok Leyland is expanding its international markets in SAARC, Middle East, Africa, and Asia with a focus on achieving high performance, which can drive revenue growth through increased export volumes.
  
• The company is working on product and process innovation, including the development of alternate fuel vehicles, which could enhance revenue from new, environmentally-friendly product lines and improve market share.
  
• A strategic focus on high-margin non-core businesses such as spare parts and power solutions is expected to contribute positively to net margins and profitability.
  
• The company’s disciplined approach to maintaining mid-teen EBITDA, along with reductions in material cost due to favorable steel prices and sourcing efficiency, is expected to sustain or slightly increase net margins.
  
• Ashok Leyland's strategy to lower its operating breakeven and improve financial stability reflected in its improved credit rating suggests resilience in earnings, even if market conditions are not favorable.

Ashok Leyland Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ashok Leyland's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 8.8% in 3 years time.
• Analysts expect earnings to reach ₹42.1 billion (and earnings per share of ₹14.37) by about December 2027, up from ₹26.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹46.7 billion in earnings, and the most bearish expecting ₹28.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.0x on those 2027 earnings, up from 25.8x today. This future PE is greater than the current PE for the IN Machinery industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.6%, as per the Simply Wall St company report.

Ashok Leyland Future Earnings Per Share Growth

Risks

• Seasonal factors like extreme weather conditions and uneven distribution of rainfall dampened the momentum in the MHCV industry, resulting in a 12% drop in industry volume, which could negatively impact revenue growth if such disruptions continue.
  
• The slow takeoff in government capital expenditure (CapEx) spending was mentioned as a cause for concern, as continued delays in infrastructure investments could affect revenue and market growth projections.
  
• While Ashok Leyland's MHCV truck and bus volumes showed mixed performance, the overall domestic MHCV volume decreased by 18%, and LCV volume was also lower year-on-year. Sustained declines could impact revenues and profitability if trends continue.
  
• The material cost, although reduced as a percentage of revenue due to benign steel prices, could increase again if input costs rise, potentially hurting EBITDA margins and overall profitability.
  
• The expanding international operations, while showing growth, face geopolitical challenges in certain markets like SAARC. Any significant disruptions here could impact their double-digit growth trajectory, affecting export revenues and overall business diversification efforts.

Valuation

• The analysts have a consensus price target of ₹251.03 for Ashok Leyland based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹325.0, and the most bearish reporting a price target of just ₹160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹480.7 billion, earnings will come to ₹42.1 billion, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 15.6%.
• Given the current share price of ₹231.18, the analyst's price target of ₹251.03 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.