Ashok Leyland Q2 Review: Margins Impress, But Valuations Leave Little Room For Upside, Says Jefferies

Jefferies on Thursday said Ashok Leyland Ltd. has delivered a good set of results, supported by healthy earnings growth, but noted that future stock upside may be limited given current valuations.

Despite the auto company's margins touched two-decade high Jefferies has maintained its 'Hold' rating on Ashok Leyland while raising the target price to Rs 135 from Rs 120.

Jefferies has also fine-tuned its fiscal year 2026–2028 earnings estimates, expecting Ashok Leyland to deliver 7% volume and 11% earnings per share CAGR.

Ashok Leyland’s September quarter earnings before interest, tax, depreciation and amortisation and recurring profit after tax came in slightly ahead of Jefferies’ estimates by 2–4%.

Operating cash flow, however, turned negative in the first half of fiscal year 2026 at Rs 1,400 crore, compared with a positive Rs 1,300 in the same period last year, which the company attributed mainly to seasonal working capital pressures.

Despite this, Ashok Leyland reported a net cash position of Rs 1,000 crore in the second quarter, up from Rs 800 crore in the previous quarter, though significantly lower than Rs 4,200 crore in the fourth quarter of financial year 2025.

The company’s truck market share, which had declined from 34% in fiscal year 2018 to 27% in financial year 2022, recovered to 31% in fiscal 2024 and has remained broadly stable since. Jefferies added that the truck demand has been largely flat but may see improvement following a recent GST rate cut that could support freight activity.

The contribution of trucks to Ashok Leyland’s total revenue has reduced from 55–60% earlier to around 50%, with buses, light commercial vehicles, spares, and exports now each contributing 8–13%.

Ashok Leyland plans to launch several new products and expand its distribution network beyond 2,000 touchpoints by the end of fiscal 2026, up from 1,976 currently.

Margins have improved significantly, rising from an average of 11% during fiscal 2016–2019 to just 3–5% in fiscal 2021–2022, before climbing to 12.7% in fiscal 2025 — a two-decade high. Both Ashok Leyland and Tata Motors have become more disciplined on pricing, supporting industry profitability.

The company has also reduced its break-even levels for truck volumes, which Jefferies said should help sustain margins even during downturns. Jefferies expects Ebitda margins to remain around 13% for FY26–28.

Ashok Leyland’s electric vehicle subsidiary, Switch Mobility India, turned profitable at the PAT level in the first half of fiscal year 2026 and is targeting positive free cash flow by financial year 2027.

While the brokerage remains positive on the company’s focus on profitability, it believes growth prospects are moderate and valuations appear full, with the stock trading at 5.6 times fiscal year 2027 estimated price-to-book, close to the last cycle’s peak of 5.8 times.