Shares of Ashok Leyland Ltd. rose to their highest in two years after brokerages raised price targets on the medium and heavy commercial vehicle maker.
The stock gained as much as 6.4% to Rs 111.8 apiece, the highest since December 2018, according to Bloomberg data. It’s up for the sixth straight session—also the best run since August 2020.
“We expect M&HCV tonnage capacity to rise at a CAGR of 3.3% from 2.5% earlier, taking into account the 35,000 trucks per year demand lost due to the dedicated freight corridor,” Kapil Singh of Nomura said in a note. “Thus, industry volumes will reach their FY19 peak levels by FY24F.”
Nomura cites Ashok Leyland as a pure-play in the commercial vehicle cycle. “The company is likely to benefit from its higher share in the >16T segment, as usually, the mix shifts upwards during upcycles,” Singh said. The strong response to its new light commercial vehicle platform ‘Bada Dost’ will be an added upside in the upcycle, according to Nomura.
The research firm has maintained its ‘buy’ rating on the stock and has raised its price target to Rs 134 apiece from Rs 104 apiece earlier. It has raised its Ebitda margin estimates for the company to 3.7%, 7.5% and 9.8%, respectively, over FY21-23 from 2.9%, 5.7% and 8.7%.
Ashok Leyland, according to a Jan. 1 exchange filing, reported a 14% year-on-year rise in overall sales at 12,762 units in December 2020. The growth was led by 58% year-on-year rise in sales of M&HCV trucks at 6,235 units. The M&HCV bus division, however, continued to underperform, witnessing a decline of 79% to 649 units.
Jefferies, too, raised its price target on the truck maker to Rs 130 apiece from Rs 110. It expects volumes to grow 65% and 20% year-on-year in FY22 and FY23, respectively. “Free cash flow should also turn positive in FY22, easing balance sheet pressure,” the research firm said in a note.
Despite the recent outperformance of the stock, Jefferies said it still has a potential for strong returns as the truck cycle recovers.