SAATHI LCV And Switch EiV 12 Launches Will Strengthen Future Market Share In EV And LCV Segments

Key Takeaways

• Focus on product premiumization, service reach expansion, and cost leadership is likely to boost margins and support sustainable revenue growth.
  
• New product launches and robust export growth, coupled with a strong presence in key markets and strategic cost reductions, aim to enhance revenue and net margins.
  
• Slowing growth in Ashok Leyland's bus segment, uncertain EV market, and volatile exports could impact revenue stability and profitability.

Catalysts

Manufactures and sells commercial vehicles in India and internationally.

• The focus on product premiumization, cost leadership, and expansion of service reach is expected to improve margins and contribute to sustainable revenue growth.
  
• The launch of new products, such as the SAATHI LCV, and plans to expand market share in the LCV segment to 20% in the short term and 25% in the medium term, are expected to drive revenue growth.
  
• Robust growth in export volumes, driven by strong local presence in GCC, SAARC, and African markets, along with a strong export order book, is likely to contribute positively to revenues.
  
• Progress in the electric vehicle segment with new product launches like the Switch EiV 12 electric bus and a substantial order book, suggests potential future revenue growth and improved earnings from the EV segment.
  
• Strategic cost reduction efforts and improved production efficiencies as evidenced by decreased material costs and ambitious cost savings targets are expected to enhance net margins.

Ashok Leyland Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ashok Leyland's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 9.0% in 3 years time.
• Analysts expect earnings to reach ₹44.6 billion (and earnings per share of ₹15.23) by about March 2028, up from ₹28.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹29.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.7x on those 2028 earnings, up from 21.3x today. This future PE is lower than the current PE for the IN Machinery industry at 28.4x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.58%, as per the Simply Wall St company report.

Ashok Leyland Future Earnings Per Share Growth

Risks

• Despite the overall positive sentiment, there is concern about the slowing growth in Ashok Leyland's bus segment and its potential impact on revenue, especially since bus demand has softened in recent months.
  
• The uncertain EV market in the U.K. could continue to pose risks and might affect profitability due to the challenges Switch U.K. faces, impacting overall group earnings if the market doesn't improve.
  
• Ashok Leyland's reliance on medium-duty trucks, which are traditionally less cyclical, could still face challenges if the forecasted replacement demand does not materialize, potentially affecting future revenue growth expectations.
  
• Uncertainties in defense budget allocation, though not directly tied to mobility solutions, could affect the defense segment’s contribution to revenue if unforeseen adjustments in government spending occur.
  
• While focusing on international expansion, reliance on volatile export markets, which have shown fluctuations in demand, might impact revenue stability if anticipated growth targets are not met.

Valuation

• The analysts have a consensus price target of ₹254.605 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 ₹190.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹496.3 billion, earnings will come to ₹44.6 billion, and it would be trading on a PE ratio of 26.7x, assuming you use a discount rate of 16.6%.
• Given the current share price of ₹205.69, the analyst price target of ₹254.61 is 19.2% higher.
• 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.