Shares of Ashok Leyland Ltd closed nearly 8% higher on Wednesday, as investors cheered the company’s robust margin performance in the December quarter (Q3FY25).
While sales volumes were already anticipated, the key surprise came from the expansion of standalone gross margin to 28.5%, up from 27.8% a year ago. This margin improvement was primarily driven by a 3.7% year-on-year (YoY) rise in the average selling price (ASP) per vehicle to ₹20.3 lakh, outpacing the 2.6% increase in material costs to ₹14.6 lakh.
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The entire gross margin expansion flowed through to the Ebitda margin, which stood at 12.8%—its second-highest level in at least ten quarters. Ebitda grew 9% year-on-year, despite revenue rising just 2.2% to ₹9,479 crore, underscoring the company’s pricing power and cost efficiency.
Investor optimism remained strong, with the stock edging higher on Thursday as well, signalling confidence in the company’s sustained margin expansion.
Meanwhile, Ashok Leyland’s ASP increase in Q3 was more a function of a better sales mix, with higher-priced MHCV (medium and heavy commercial vehicle) sales volume growing by 2.5%. In comparison, LCV (light commercial vehicle) sales declined 7.9%. Within MHCV, bus sales volume climbed 11%, driven by a 23% jump in export volume, even as truck sales were flat.
The company’s strong margin performance gives hope that the management might succeed in achieving its medium-term target of a mid-teen Ebitda margin. In the near term, can gross and Ebitda margins rise further in Q4? The answer seems to be affirmative as the factors responsible for margin improvement have continued in Q4.
Sales of the MHCV bus segment were up 27% in January, with a 90% jump in exports, giving confidence that it could remain a significant growth driver in Q4, too. Robust demand from both government and private sectors continues to fuel bus sales. In the Q3 earnings call, Ashok Leyland’s management also indicated that February trends so far remain positive.
Ashok Leyland’s revenue cyclicality has also reduced significantly. The management noted, in the earnings call, that besides sales from spare parts, nearly 50% of sales volume now comes from non-cyclical sources—exports, domestic bus sales, and the LCV segment—all of which are less dependent on the capex cycle in the economy.
Even in the cyclical domestic MHCV truck segment, January sales showed year-on-year growth for the second consecutive month after the decline seen in October and November. This is likely an indication of better days ahead. The management expects fleet replacement demand to strengthen, given that the current fleet age of 10-11 years is well above the long-term average of 7-8 years.
Ashok Leyland has earmarked ₹800-1,000 crore in capital expenditure for FY25. In Q4, it plans to invest ₹200 crore in Hinduja Leyland Finance and ₹500 crore in Optare PLC, the holding company of its electric mobility arm, Switch Mobility. The capex will be allocated across Switch India and Switch UK—while the investment in Switch India is aimed at driving growth as it nears Ebitda breakeven in the next two to three quarters, funds for Switch UK may be used to reduce debt.
Meanwhile, FY26 capex plans are still being finalized, with management ruling out any investment in the electric three-wheeler segment for either cargo or passenger vehicles.
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Reduced revenue cyclicality may justify a higher valuation multiple, either on a price-to-earnings or EV/Ebitda basis, which is currently at 20x and 12x of FY26 Bloomberg consensus estimates, respectively. Also, the Street has a tendency to chase stocks if near-term growth momentum looks good, as is the case with Ashok Leyland’s Q4FY25, even when a stock might look fully priced.