Brokerage firm Nomura has increased its target price for Ashok Leyland to Rs 194, citing a positive outlook for the heavy vehicle sector. While revenue grew in the first quarter, investors are watching how the company handles pressure on profit margins caused by higher raw material costs and recent impairment losses in its finance arm.
Nomura has revised its target price for Ashok Leyland to Rs 194 from its previous level, reflecting confidence in the company's growth within the Medium and Heavy Commercial Vehicle sector. This update follows the company's first-quarter financial results for the 2026-27 fiscal year, where the truck maker reported strong volume growth but faced profitability challenges.
The company achieved a revenue of Rs 9,634 crore in the first quarter, marking a 10% increase compared to the same period last year. Despite this growth in sales, net profit saw a modest rise of approximately 3%, reaching Rs 609-616 crore. This gap between sales growth and profit growth highlights the pressure on profit margins, which dipped by 105 basis points to 10.1%. The primary reason for this decline has been rising commodity and material costs, which have made it more expensive to produce vehicles.
To manage these costs, the company has implemented price hikes across its product range, including a 2.25% increase for heavy commercial vehicles and over 3.5% for light commercial vehicles. Whether these price adjustments are enough to fully offset cost pressures remains a central point for investors. Additionally, the company's financial services division reported a 47.8% rise in impairment losses, which has further impacted segment margins.
The export market also presents a complex picture. While there is optimism surrounding growth in the SAARC region, exports saw an 18% decline during the first quarter. Furthermore, investors are looking closely at how the demand for commercial vehicles holds up in the second half of the fiscal year, as volatility in this segment could affect future earnings.
Currently, the stock is trading at approximately 11.6 times its projected FY28 Enterprise Value to EBITDA. Nomura’s updated target reflects a valuation of 12 times this metric, aligning with the company's historical trading range. The company continues to invest in its electric vehicle arm, 'Switch', and its bus operations under 'OHM', which are seen as important avenues for non-truck revenue growth.
Moving forward, the key factor for shareholders will be the company's ability to protect its margins while navigating rising material costs. Investors will also track the demand trend for heavy vehicles in the coming quarters and whether the company can reduce the impairment losses reported in its financial services business.