Axis Securities has chosen Ashok Leyland as its 'Pick of the Week' with a target price of Rs 97 per share in the next six to nine months. The revised target price has an upside of 12 percent from Friday's closing price of 86.5 per share. At 10.22 am, Ashok Leyland shares quoted at 86.80 per share on BSE, up 0.35 percent.

"We reiterate a Buy on Ashok Leyland with a TP of Rs 97," analysts at Axis Securities wrote in a report on Monday. The brokerage expects Ashok Leyland's recent rally to continue on the back of arrest in commercial vehicle industry decline.

Ashok Leyland share price has given a little over four percent return to investors in the last one year amid a wider auto slowdown, underperforming BSE Sensex by almost 11 percent. But, the four percent return too has come largely on the back of a smart over 20 percent recovery in the stock in the last 6 months.

In the last three years, Ashok Leyland shares have fallen over seven percent, under-performing Sensex by over 40 percent. The 10-year-return on Ashok Leyland is almost 250 percent.

"Ashok Leyland (AL) has seen a good rally post seeing its lows of sub-60 levels on back of arrest in CV industry decline and AL seeing 3 months of meaningful sequential growth in volumes. We expect this momentum to continue with pre-BS6 buying coming in to play in the next two months driving further sequential growth and then slow ramp up of production of BSVI vehicles," the report said.

A healthier balance-sheet and improved working capital will further help the heavy vehicles manufacturer when demand picks up.

"AL during this lean year has focused on cutting all the flab in their costs and

has managed to save Rs 230 crore in H1FY20 and plans to save up to Rs 500 crore in FY20. While this has not reflected in EBITDA margin improvement this year due to negative operating leverage, it will certainly show up when

demand picks up and capacity utilisation becomes better," Axis Securities said in its report.

Ashok Leyland covers about 50 percent of the entire LCV segment opportunity and has around 22 percent share in the market. The company will further improve its market share and exports with more product offerings in the pipeline, it said.

Most importantly, the government's scrappage policy which likely will be launched in July this year will ramp up demand for Ashok Leyland as nearly 10 million vehicles will be under the radar for scrapping for FY20 and 25 million by FY25.

Other brokerages too are largely positive with Nirmal Bang setting a target price of Rs 92 per share on Ashok Leyland.

"Ashok Leyland has saved costs of nearly Rs 2,000-2,300 million in H1FY20 and expects to save costs totaling to Rs 5,000 million for the current year. Green shoots like good monsoon, stable freight rate, improved financing, government measures to revive the economy & potential pre-buy before BSVI transition could drive the volume in Q4FY20," it said in a research note in late December.

Motilal Oswal also said that the company is on "a very strong footing and focused on adding new revenue/profit pools."

It also raised the weight of Ashok Leyland among its auto picks as Motilal Oswal believes the worst is over for the CV industry, although volumes will remain volatile due to the upcoming BSVI transition.

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