ICICI Securities Retail Equity Research has maintained a HOLD rating on Ashok Leyland with a target price of Rs 165 for a 12-month horizon. The company's Q2 FY26 results showcased robust operational performance highlighted by volume growth and margin expansion. Yet, near-term volume uncertainty caps upside potential. Structural positives such as GST rationalization and improved freight demand underpin long-term optimism. The balance sheet remains strong with a net cash position facilitating sustained investment. Investors should monitor volume recovery and margin trajectory, with the stock currently offering a cautious but stable risk-reward profile.

Buy or Hold Call

ICICI Securities Retail Equity Research has advised a HOLD on Ashok Leyland with a target price of Rs 165 over the next twelve months. The recommendation reflects confidence in the company's long-term prospects amid structural demand drivers, balanced against some near-term execution and volume recovery risks. The target is based on an SOTP valuation using a 13x EV/EBITDA multiple and 2.5x price-to-book for long-term investments, which locks in expected earnings growth and margin improvement post FY27-FY28.

Q2 FY26 Performance Highlights

- Ashok Leyland reported standalone revenues of Rs 9,588 crore in Q2 FY26, a 9.3% increase year-over-year, driven by an 8% volume uplift to 49,000 units. - EBITDA reached Rs 1,162 crore with a margin expansion to 12.1%, improving 100 basis points on a QoQ basis. - Profit after tax was Rs 771 crore, flat YoY but supported by a 23% rise in profit before tax, excluding exceptional items. - The company sustained material cost control with raw materials around 71.2% of revenue, similar to the prior year. - LCV volumes stood at 17,697 units (up 6.4% YoY), with MHCV truck volumes at 21,647 units and bus volumes at 4,660 units.

Industry and Market Share Dynamics

Ashok Leyland continues to consolidate market share in key segments: - Domestic MHCV market share was at 31% in H1 FY26, gaining 50 basis points YoY despite uncertainty in defense and EDS businesses. - LCV Vahan segment share rose to 13.2%, up 0.9% YoY, reflecting demand-driven volume growth. - Export volumes surged 46% in Q2, bolstering international footprint in GCC, Africa, and SARC markets with increasing local production and supply chain investments.

Structural Tailwinds from GST Rationalization

- The government’s GST 2.0 reform has lowered GST rates for commercial vehicles from 28% to 18%, effectively reducing ownership costs. - This rate cut and similar reforms across commodity categories are expected to enhance freight demand, benefiting the commercial vehicle sector structurally. - The company anticipates these reforms to drive fleet replacement cycles and utilization, translating to improved demand and margin enhancement in the medium term.

Operational and Capacity Expansion

- Current LCV production capacity is 80,000 units, with scope to increase to 110,000-120,000 units through process efficiencies over the next 6-9 months without major expansions. - Bus production capacity is ramping up rapidly with the new Lucknow plant, targeting an increase from 12,000 units to 20,000 units annually. - R&D throughput acceleration is enabling faster product launches in higher horsepower trucks and diversified bus variants.

Financial Strength and Capital Allocation

- End-Q2 FY26, Ashok Leyland is in a net cash position of Rs 1,000 crore, a significant improvement from net debt of Rs 500 crore a year prior. - Capex for H1 FY26 was Rs 658 crore, with full year guidance maintained at Rs 800-1,000 crore. - Investments include center-of-excellence initiatives, new engine development, and potential capital infusion of up to Rs 500 crore into subsidiaries like Switch Mobility [Switch Mobility India Limited](pplx://entity_chip/5b205878). - The balance sheet’s robustness supports sustainable double-digit EBITDA margins and healthy returns on equity (RoE) and capital employed (RoCE).

Switch Mobility EV Business Outlook

- Switch Mobility demonstrated positive EBITDA and PAT in H1 FY26, with 600 electric buses and ELCVs sold. - The order book stood at 1,650 electric buses at H1-end, with operational fleet availability at 98%. - The company aims for free cash flow positivity by FY27, with ambitious expansion plans targeting 2,500 buses within 12 months, underpinning a strong growth corridor in the EV segment.

Outlook and Forward Guidance

- Management signals constructive demand outlook for H2 FY26, buoyed by GST 2.0 pricing benefits, improving freight demand, and government capex pickup. - Industry growth estimates for October indicate 7% YoY growth in MHCV and 15% in LCV segments. - Margins are expected to reach mid-teens in the medium term, supported by commodity cost tailwinds, product premiumization, and increased exports. - Export volume targets are set at 18,000 units for FY26, aiming for 25,000 units over three years with 20% CAGR.

Key Risks

- Volume recovery is crucial; higher-than-expected dips in commercial vehicle volumes could pressure earnings and valuation. - Margin sustainability could be challenged by commodity price volatility, particularly raw materials. - Competitive pressures within the domestic CV industry and global macroeconomic uncertainties remain a concern. - Execution risks associated with Switch Mobility scaling and new capacity utilization require close monitoring.

Investment Levels and Targets

The stock currently trades near Rs 148. Based on ICICI Direct’s valuation and risk outlook, investors should consider the following levels:

Bottomline for Investors

Ashok Leyland exhibits a dynamically improving operational profile, anchored by market share gains, favorable GST reforms, and international expansion. While the balance sheet’s strength and EV ambitions through Switch Mobility provide a solid foundation for long-term growth, near-term volume recovery risks temper immediate upside. A HOLD rating with a Rs 165 target reflects balanced optimism, offering investors measured exposure to the evolving commercial vehicle sector. Prudent monitoring of volume trends and margin trajectory will be key to capitalizing on optimistic valuation levels ahead. This stock suits investors with a medium-term view, willing to navigate cyclical fluctuations for sustained returns.