India’s second-largest commercial vehicle maker posted a quarter that beat expectations across the board, but with the stock’s upside hinges on whether the recovery has legs beyond the next two quarters
There are quarters that confirm a thesis, and then there are quarters that make you wonder if the market has already priced the thesis in. Ashok Leyland’s Q3FY26 was both.
Revenue grew 21.7% year-on-year to Rs 115.3 billion, comfortably ahead of consensus. EBITDA surged 26.7% to Rs 15.35 billion, beating both brokerage estimates and Street expectations. Margins expanded 53 basis points to 13.3%. Adjusted profit after tax jumped 45% to Rs 11.04 billion. Exports grew 20%. Defence revenue nearly doubled. The power solutions business grew 45%.
By any conventional measure, this was an excellent quarter. And the stock market knows it almost doubling to Rs 206 in the past one year. The easy money, it would appear, has already been made.
The harder question — and the one that matters for investors deciding whether to buy, hold, or take profits — is whether the commercial vehicle cycle has enough runway to justify pushing valuations higher from here.
The Freight Signal
HDFC Securities highlights that “management has guided for improved demand visibility over at least the next 2-3 quarters as freight movement as well as freight rates have been rising, and this is also leading to large fleet operators starting to come back to the CV market, which was earlier being driven largely by the retail customer.”
This is a significant shift. The initial recovery in commercial vehicle demand over the past year was largely retail-driven — small operators and first-time buyers picking up intermediate commercial vehicles and light commercial vehicles. Fleet operators, who buy in bulk and drive the heavy-duty segment, had remained on the sidelines. Their return signals that the cycle is broadening and deepening.
Nirmal Bang corroborates the view, noting that “while the initial post-GST recovery was retail-led, favouring ICV and LCV segments, bulk demand in heavy-duty, tipper, and tractor-trailer segments has picked up since January, signalling a broader recovery.” The brokerage adds that “healthy fleet utilisation, rising freight rates, and increased government spending are underpinning demand.”
The GST rate cut has been a catalyst. HDFC Securities notes that management believes “the GST rate cut has created a major fillip in domestic consumption and therefore freight demand, leading to improved sentiment for both retail and fleet buyers.” The company expects this momentum to carry into the first half of FY27, aided by a favourable base.
Beyond Trucks: The Diversification Story
What makes Ashok Leyland a more interesting story today than in previous CV cycles is the growing contribution from non-truck businesses. Defence revenue grew 84% year-on-year, power solutions grew 45%, and the aftermarket business expanded 10%.
Nirmal Bang sees this as a structural derisking, noting that “the company has significantly reduced business cyclicality by diversifying into higher-margin, less cyclical segments with nearly 45-50% of revenue now derived from non-truck businesses.” HDFC Securities flags the numbers: “Power solutions mix rose to 3.6% of revenue from 3.0% last year, and defence mix rose to 1.5% from 1.0%.”
These are still small numbers in absolute terms. But the growth rates and the direction of travel matter for valuation, because they argue for a higher multiple on a less cyclical earnings base — exactly the case Nirmal Bang makes in assigning a 17.5x EV/EBITDA to the core business.
The electric vehicle subsidiary, SWITCH India, adds another dimension. The company sold 850 electric buses and 1,200 electric LCVs in the first nine months, with a positive PAT and a current order book of 1,350 units. Management expects SWITCH to be free cash flow positive by FY27.
The Margin Path
EBITDA margins at 13.3% are heading in the right direction but remain below management’s medium-term target of mid-teens. Gross margins were pressured by product mix and a 50 basis point impact from higher non-ferrous commodity costs, though HDFC Securities notes the company “is countering that by reducing discounts.”
Nirmal Bang expects further margin gains from “new launches across segments and an improved mix from HCVs, exports, and non-CV businesses,” combined with “sustained cost optimisation” and “digital-led efficiencies.” The brokerage projects the margin expansion story has room to run as the revenue mix shifts towards higher-margin defence, aftermarket, and power solutions.
The Take
HDFC Securities maintains an Add rating — notably not a Buy — with a target of Rs 209, valuing the core business at 13.5x December 2027 EV/EBITDA and adding Rs 22 for Hinduja Leyland Finance. The brokerage acknowledges the positives but flags a specific concern: “We remain concerned by the higher pledging of the promoter group, and will closely watch out for any developments on that front.”
Nirmal Bang maintans a Buy at Rs 240, which implies 16% upside. The brokerage values the core business at a richer 17.5x EV/EBITDA, arguing that “rising other business contribution from defence, aftermarket, and power solutions, and lower breakeven levels” justify the premium. The brokerage also highlights Ashok Leyland’s target of a “20% export CAGR over the next three years” as an additional growth lever.
