Ashok Leyland Ltd did well in the March quarter (Q4FY25), but the moot question is whether it has reached its peak financial performance from a near-term perspective. There are twin challenges. One is on the sales front: April volume data (including exports) was disappointing, dropping 6% year-on-year—not an ideal start to FY26. The other is the cost increase, mainly due to the safeguard duty imposed on imports of steel, a key raw material. Since the safeguard duty has been imposed for 200 days starting from April, the impact of higher steel prices could last for about two quarters.
In Q4, standalone sales rose 5.7% year-on-year to ₹11,857 crore, led by volume growth of 5%. Average selling price rose marginally, with some part of the increase coming from sales mix tilting slightly more in favour of medium and heavy commercial vehicles (MHCV) from light commercial vehicles (LCV). MHCV sales increased by 7%, while LCV sales were almost flat. Gross margin per vehicle grew 5% to ₹5.84 lakh as material cost per vehicle fell by ₹18,000.
The material cost is likely to move up in tandem with higher steel prices. In the earnings call, the management highlighted that rubber prices have softened. But would the benefit from rubber price be enough to offset higher steel price? This is unlikely as the share of rubber in total raw material cost is much lower than steel.
Ebitda margin expanded by 90 basis points year-on-year to 15%, another high at least in the past eight quarters. Though Ebitda growth was 12%, net profit growth was much higher at 30% as the benefit of operating leverage played out with depreciation cost remaining steady.
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Ashok Leyland has become a net cash company. Cash balance at FY25-end stood at ₹4,000 crore versus a net debt of ₹88 crore a year earlier, even after incurring a capital expenditure (capex) of nearly ₹950 crore. The big favourable swing can be explained by a reduction in debtors and inventories on the asset side and higher trade payable on the liability side, with both sides contributing around ₹1,000 crore each. This is a remarkable improvement in working capital management. Capex in FY26 is likely to be at the FY25 level.
As far as subsidiaries are concerned, Switch India became Ebitda positive in FY25 in-line with the earlier guidance. It achieved a double-digit Ebitda margin in Q4. The next target is to make it profitable at the net profit level so that it is able to meet its own funding requirement of capex ahead, which would avoid the drain on standalone Ashok Leyland’s cash.
Switch UK is on track to cut its production cost by shifting the manufacturing operations out of the UK. Switch UK is incurring a monthly loss of about GBP 2-3 million, which should reduce with the restructuring of the company’s operations. Though there was an injection of capital by Ashok in its lending subsidiary Hinduja Leyland Finance (HLF) in the past, it was to take care of capital adequacy requirements by the Reserve Bank of India in view of its rapid growth. Going forward, it may not have any big capital requirement from Ashok. The work on listing HLF is in the final stages as most of the regulatory requirements have been complied with.
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Ashok Leyland stock trades at a price-to-earnings and EV/Ebitda multiple of 21x and 13x, respectively, as per Bloomberg consensus FY26 estimates. There are downside risks to earnings if sales volume ends up being lower than expected and material cost is higher than expected. If these play out and earnings estimates are indeed cut, then valuations could look pricier.
