Ashok Leyland - Avendus Report

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<ul><li><p>8/2/2019 Ashok Leyland - Avendus Report</p><p> 1/17</p><p>Pleaserefertothedisclaimertowardstheendofthedocument.</p><p>IndiaEquityResearch</p><p>Automobiles</p><p>February23,2012</p><p>B U Y AshokLeylandTargetPrice(INR) 41 AplayonrevivalofMHCVgrowth</p><p>INITIATINGCOVERAGE AL is likely to be the biggest beneficiary of any positive development in</p><p>domesticMHCVsasitderivesalargeportionofitstotalincomefromthis</p><p>segment. FY12f may end with an estimated 3% fall in sales volumes of</p><p>domestic MHCVs for AL. FY13f is likely to enjoy a recovery with double</p><p>digitgrowthdrivenbythefall in interestratesandrevival in investment</p><p>activity leading to rise in freight volumes. The companys focus on</p><p>increasingtouchpointsandloandisbursementsarealsolikelytoaidsales</p><p>volume growth. AL is also increasing its exposure to LCVs and other</p><p>businesses to derisk itself from the cyclicality of domestic MHCVs. We</p><p>arriveataMar13targetpriceofINR41,byapplyingthemeanEV/EBITDA</p><p>multiple</p><p>of</p><p>the</p><p>previous</p><p>CV</p><p>cycle.</p><p>The</p><p>potential</p><p>upside</p><p>stands</p><p>at</p><p>46%,</p><p>assumingvaluationsreverttothemean.InitiatewithBuy.Riskfactorsare</p><p>thehighexposuretoMHCVsandhighercommodityandfuelprices.</p><p>DomesticMHCVdemandlikelytorevivebyFY13f</p><p>ALisaplayonthedomesticMHCVsegment,asthissegmentislikelytocontribute</p><p>over75%oftotalincomeforthecompanyoverFY12fFY14f.DomesticMHCVsales</p><p>volumegrowthislikelytorecoverto10%byFY13fafteranestimatedfallof3%in</p><p>FY12f,onaccountofapickupininvestmentactivityandfreightavailabilitydueto</p><p>thelikelyreversalintheinterestratecycle.Inaddition,higherloandisbursements</p><p>andtouchpointsarealsolikelytoaidsalesvolumegrowth.</p><p>Strengtheningexistingoperationsandenteringnewbusinesses</p><p>To</p><p>strengthen</p><p>its</p><p>technological</p><p>capabilities,</p><p>AL</p><p>has</p><p>invested</p><p>in</p><p>companies</p><p>that</p><p>manufacture and supply EuroV emission compliant vehicles to developed</p><p>countries.TopenetratethehighgrowingLCVsegment,thecompanyhaslaunched</p><p>acargoLCVinJVwithNissanMotorCo(7201JP;NR)inSep11.WeestimatethisJV</p><p>tobreakevenbyFY14f.Tocontinuethediversification,ALhasalsoinvestedinnew</p><p>businesses;mostofthesebusinessesreportedlossesinFY11.Thecompanysshare</p><p>ofearningsfromthesebusinessesislikelytobreakeveninFY14f.</p><p>TotalincomegrowthtosettleataCAGRof13%overFY12fFY14f</p><p>We estimate a CAGR of 13% in total income over FY12fFY14f due to a revival in</p><p>domesticMHCVsalesvolumes,increasingcontributionoftheDostLCVandrobust</p><p>exports.Exportvolumegrowthislikelytobestrong,ataCAGRof19%overFY12f</p><p>FY14f,duetothegrowingacceptanceof IndianCVs indevelopingcountries.Rising</p><p>sales</p><p>promotion</p><p>costs,</p><p>and</p><p>the</p><p>increasing</p><p>contribution</p><p>of</p><p>lowmargin</p><p>LCVs</p><p>in</p><p>the</p><p>overallproductmix,islikelytoreduceEBITDAmarginsfrom11.0%inFY11to9.8%in</p><p>FY14f.WeestimateEBITDAandPATtogrowataCAGRof9%overFY12fFY14f.</p><p>InitiatewithaBuyratingandaMar13TPofINR41;upsideof46%</p><p>We apply an EV/EBITDA multiple of 8.6x to ALs core business to arrive at a fair</p><p>value of INR39/share. This multiple is based on the mean valuations of the</p><p>previousCVcycle.The likelyearningsrebound inALoverFY13fFY14fonaccount</p><p>of the recovery in domestic MHCV sales volume growth provides a buying</p><p>opportunity. We have valued ALs investment in IndusInd Bank (IIB IN, Buy) at</p><p>INR2/share. Our SOTPbased Mar13 TP for ALstands at INR41, whichprovides a</p><p>46%upside.InitiatewithBuy.RiskfactorsarethehighexposuretoMHCVs.</p><p>LastPrice(INR)Bloomberg code</p><p>Reuterscode</p><p>Avg.Vol.(3m)(mn)</p><p>Avg.Val.(3m)(INRmn)</p><p>52wkH/L(INR)</p><p>Sensex</p><p>MCAP(INRbn/USDbn)</p><p>Shareholding(%) 9/11 12/11Promoters</p><p>MFs,FIs,Banks</p><p>FIIs</p><p>Public</p><p>Others</p><p>StockChart(RelativetoSensex)</p><p>StockPerfm.(%) 1m 3m 1yrAbsolute</p><p>Rel.toSensex</p><p>Financials(INRmn) 03/11 03/12f 03/13f Sales</p><p>YoY(%)</p><p>EBITDA(%)</p><p>A.PAT</p><p>Sho/s(diluted)</p><p>A.EPS(INR)</p><p>YoY(%)</p><p>D/E(x)</p><p>P/E(x)</p><p>EV/E(x)</p><p>RoCE(%)</p><p>RoE(%)</p><p>QuarterlyTrends 03/11 06/11 09/11 12/11Sales(INRmn)</p><p>PAT(INRmn)</p><p>28</p><p>111,177</p><p>15.4</p><p>13.9</p><p>16.2</p><p>10.5</p><p>19.3</p><p>146,064125,995</p><p>15.8</p><p>38.6 38.6</p><p>18,145</p><p>74.77/1.52</p><p>15.6</p><p>10.6</p><p>19.4</p><p>2.6</p><p>19</p><p>10.7</p><p>14.7</p><p>669</p><p>2,661</p><p>2.2</p><p>1,541</p><p>28,798</p><p>2,661</p><p>5.4</p><p>3.0</p><p>13.1</p><p>0.1</p><p>16</p><p>30,946</p><p>7.88.9</p><p>10</p><p>14</p><p>0.8</p><p>7</p><p>0.9</p><p>11</p><p>12.8</p><p>16</p><p>10.0</p><p>5,840</p><p>13</p><p>9.9</p><p>6,966</p><p>53</p><p>11.0</p><p>6,313</p><p>0.7</p><p>2,661</p><p>2.4</p><p>48</p><p>ALIN</p><p>ASOK.BO</p><p>6.60</p><p>30.6/20.0</p><p>171</p><p>2,982</p><p>38,285</p><p>11.8</p><p>8.5</p><p>11</p><p>17</p><p>863</p><p>24,955</p><p>20</p><p>24</p><p>28</p><p>32</p><p>Feb11 Jun11 Oct11 Feb12</p><p>Ashok Leyland Sensex Rebased</p><p>SriRaghunandhan NL,+9102266842863</p><p>raghunandhan.nl@avendus.com</p></li><li><p>8/2/2019 Ashok Leyland - Avendus Report</p><p> 2/17</p><p>India Equity Research AshokLeyland</p><p>Automobiles 2</p><p>TableofContents</p><p>InvestmentSummary ........................................................................................................................ 3DomesticMHCVdemandlikelytorecoverto10%byFY13f .................................................................3Strengtheningexistingoperationsandenteringnewbusinesses .........................................................3TotalincomegrowthtosettleataCAGRof13%overFY12fFY14f ......................................................3InitiatewithaBuyratingandaMar13TPofINR41 ..............................................................................3</p><p>DomesticMHCVdemandlikelytorecoverto10%byFY13f ............................................................. 5DomesticMHCVsalesvolumestowitnessafallof3%inFY12f............................................................5Demandtoreviveonpickupininvestmentactivity .............................................................................5</p><p>Strengtheningexistingoperationsandenteringnewbusinesses ..................................................... 7Strengtheningfinancingandtechnologicalcapabilities ........................................................................7PartneringNissantoenterthehighgrowthcargoLCVsegment ..........................................................7Diversifyingintonewbusinesses...........................................................................................................8</p><p>TotalincomegrowthtosettleataCAGRof13%overFY12fFY14f .................................................. 9ExportstooutpacedomesticsalesvolumegrowthoverFY12fFY14f ..................................................9EBITDAgrowthlikelytolagtotalincomegrowth..................................................................................9FreecashflowlikelytoturnpositivebyFY13f ....................................................................................10</p><p>InitiatewithaBuyratingandaMar13TPofINR41 ........................................................................ 11Valuingcorebusinessat8.6xEV/EBITDA ............................................................................................11SOTPtargetofINR41;initiatecoveragewithaBuyrating..................................................................11Riskfactors ..........................................................................................................................................12</p><p>Financialsandvaluations................................................................................................................. 13</p></li><li><p>8/2/2019 Ashok Leyland - Avendus Report</p><p> 3/17</p><p>India Equity Research AshokLeyland</p><p>Automobiles 3</p><p>InvestmentSummary</p><p>AL is a play on domestic MHCVs as it derives a significant portion of its revenues from this segment. We estimate</p><p>domesticMHCV</p><p>sales</p><p>volumes</p><p>to</p><p>fall</p><p>by</p><p>3%</p><p>in</p><p>FY12f</p><p>due</p><p>to</p><p>postponing</p><p>of</p><p>purchases</p><p>by</p><p>freight</p><p>operatorson</p><p>account</p><p>of lower freight availability. However, domestic MHCV sales volume growth is likely to recover to 10% in FY13f on</p><p>accountofapickupininvestmentactivityandfreightavailabilityduetothelikelyreversalintheinterestratecycle.</p><p>Therehasalsobeenarevival inLCVsalesvolumegrowth(TTM);this isusuallya lead indicator forarevival inMHCV</p><p>salesvolumegrowth.ALsfocusonincreasingtouchpointsandloandisbursementsarealsolikelytoaidsalesvolume</p><p>growth.Thecompanyisalsofocusingonstrengtheningitsexistingoperationsandincreasingitspenetrationinthehigh</p><p>growing LCV segment. EBITDA margins are likely to decline from 11.0% inFY11 to 9.8% by FY14f due to rising sales</p><p>promotioncostsandtheincreasingshareofthelowmargin DostLCVintheoverallproductmix.WevalueALscore</p><p>businessatanEV/EBITDAof8.6x,whichisbasedonmeanvaluationsofthepreviousCVcycle.Afterincludingthevalue</p><p>of ALs investment in IndusInd Bank, our SOTPbased Mar13 target stands at INR41, which provides a 46% upside.</p><p>InitiatewithBuy.RiskfactorsarethehighexposuretoMHCVsandhighercommoditypricesandfuelprices.</p><p>DomesticMHCV</p><p>demand</p><p>likely</p><p>to</p><p>recover</p><p>to</p><p>10%</p><p>by</p><p>FY13f</p><p>Weestimateafallof3%indomesticmediumandheavycommercialvehicle(MHCV)salesvolumesin</p><p>FY12fduetopostponingofpurchasesbyfreightoperatorsonaccountoflowerroadfreightavailability.</p><p>Inaddition,expiryoftheJawaharlalNehruNationalUrbanRenewalMission(JNNURM)schemeisalso</p><p>likelytoimpactsalesvolumes.WeestimatedomesticMHCVsalesvolumegrowthtorecoverto10%by</p><p>FY13f,onaccountofapickupininvestmentactivityandfreightavailabilityduetothelikelyreversalin</p><p>theinterestratecycle.Therehasalsobeenarevivalinsalesvolumegrowth(TTM)forlightcommercial</p><p>vehicles(LCVs);thisisusuallyaleadindicatorofarevivalinMHCVsalesvolumegrowth.AshokLeyland</p><p>(AL)isalsoincreasingitstouchpointsandrampingupdisbursementsfromitscaptivefinancedivision</p><p>toaidgrowth.</p><p>Strengthening</p><p>existing</p><p>operations</p><p>and</p><p>entering</p><p>new</p><p>businesses</p><p>AL has been investing with three main objectives: 1) to strengthen financing and technological</p><p>capabilitiesincommercialvehicles(CVs);2)toincreasethepenetrationinLCVs;and3)todiversifyinto</p><p>otherbusinesses.Toaccesstechnology,ALhas increased itsstaketo75.1%inOptare(OPELN;NR),a</p><p>European CV manufacturer in Dec11. This was ALs second investment to access technology, post</p><p>acquisitionofAviaAshokLeylandMotors(Avia)inOct06.ToincreaseitspresenceintheLCVsegment,</p><p>thecompany launchedacargoLCV Dost in JVwithNissanMotorCo(7201JP;NR) inSep11.We</p><p>estimatethisJVtobreakevenbyFY14f.Finally,toderiskitselffromthecyclicalityofthedomesticCV</p><p>business,thecompanyhasventuredintobusinessessuchasmanufacturingofconstructionequipment</p><p>andautomotive infotronics;mostofthese businessesreported losses inFY11.ALsshareofearnings</p><p>fromthesebusinessesislikelytobreakeveninFY14f.</p><p>Total</p><p>income</p><p>growth</p><p>to</p><p>settle</p><p>at</p><p>a</p><p>CAGR</p><p>of</p><p>13%</p><p>over</p><p>FY12f</p><p>FY14f</p><p>TherecoveryindomesticMHCVsalesvolumesandrobustexportgrowtharelikelytoresultinaCAGR</p><p>of13%intotalincomeoverFY12fFY14f.Exportvolumesarelikelytobestrong,ataCAGRof19%over</p><p>FY12fFY14f, due to the growing acceptance of Indian CVs in developing countries. We estimate the</p><p>contributionofexportstooverallsalesvolumesto increasefrom11% inFY11to12%inFY14f.Rising</p><p>sales promotion costs and the increasing contribution of the lowmargin Dost LCV to overall sales</p><p>volumesarelikelytoreduceEBITDAmarginsfrom11.0%inFY11to9.8%inFY14f.EBITDAandPATare</p><p>likelytogrowataCAGRof9%overFY12fFY14f.</p><p>InitiatewithaBuyratingandaMar13TPofINR41</p><p>WearriveatMar13SOTPbasedtargetpriceofINR41,whichprovidesanupsideof46%.Weapplyan</p><p>EV/EBITDAmultipleof8.6xtoALscorebusinesstoarriveatafairvalueofINR39/share.Thismultipleis</p><p>basedonthemeanvaluationsofthepreviousCVcycle.The likelyearningsreboundinALoverFY13f</p><p>Weestimatedomestic</p><p>MHCVsalesvolume</p><p>growthtorecoverto10%</p><p>byFY13f.</p><p>Toincreaseitspresencein</p><p>theLCVsegment,the</p><p>companylaunchedacargo</p><p>LCVinJVwithNissan.</p><p>Exportvolumesarelikely</p><p>tobestrong,ataCAGRof</p><p>19%overFY12fFY14f,due</p><p>tothegrowingacceptance</p><p>ofIndianCVsin</p><p>developingcountries.</p><p>Initiatecoveragewitha</p><p>BuyratingandaMar13TP</p><p>ofINR41.</p></li><li><p>8/2/2019 Ashok Leyland - Avendus Report</p><p> 4/17</p><p>India Equity Research AshokLeyland</p><p>Automobiles 4</p><p>FY14f on account of the recovery in domestic MHCV sales volume growth provides a buying</p><p>opportunity. We also value ALs investment in IndusInd Bank (IIB IN, Buy) at INR2/share. Initiate</p><p>coveragewithaBuyrating.RiskfactorsarethehighexposuretoMHCVsandhighercommodityprices</p><p>andfuel</p><p>prices.</p><p>Exhibit1:OneyearforwardrollingEV/EBITDAandEV/EBITDAattargetprice</p><p>5</p><p>10</p><p>15</p><p>20</p><p>Apr07 Feb08 Dec08 Oct09 Sep10 Jul11 May12 Mar13</p><p>1yrFwdEV/EBITDA TargetEV/EBITDA Avera geEV/EBITDA</p><p>Source:Bloomberg,AvendusResearch</p><p>Exhibit2:Valuationsummary(INRmn) Totalincome EBITDA NetProfit EPS(INR) P/E(x) EV/EBITDA(x) EV/Sales(x) P/B(x)</p><p>Mar10 72,447 7,628 4,269 1.6 17.5 12.6 1.3 2.0</p><p>Mar11 111,177 12,176 6,313 2.4 11.8 8.5 0.9 1.9</p><p>Mar12f 125,995 12,653 5,840 2.2 12.8 8.9 0.9 1.8</p><p>Mar13f 146,064 14,405 6,966 2.6 10.7 7.8 0.8 1.6</p><p>Mar14f 161,394 15,864 8,160 3.1 9.2 6.8 0.7 1.5</p><p>Source:</p><p>Company,</p><p>Avendus</p><p>Research</p></li><li><p>8/2/2019 Ashok Leyland - Avendus Report</p><p> 5/17</p><p>India Equity Research AshokLeyland</p><p>Automobiles 5</p><p>DomesticMHCVdemandlikelytorecoverto10%byFY13f</p><p>Weestimateafallof3%indomesticMHCVsalesvolumesinFY12fduetopostponingofpurchasesbyfreightoperators</p><p>onaccount</p><p>of</p><p>lower</p><p>road</p><p>freight</p><p>availability.</p><p>In</p><p>addition,</p><p>expiry</p><p>of</p><p>the</p><p>JNNURM</p><p>scheme</p><p>is</p><p>also</p><p>likely</p><p>to</p><p>impact</p><p>sales</p><p>volumes. We estimate domesticMHCVsales volume growth to recover to 10% byFY13f,on accountofapick up in</p><p>investment activityand freightavailabilitydue to the likely reversal in the interest rate cycle. Therehas also beena</p><p>revivalinsalesvolumegrowth(TTM)forLCVs;thisisusuallyaleadindicatorofarevivalinMHCVsalesvolumegrowth.</p><p>ALisalsoincreasingitstouchpointsandrampingupdisbursementsfromitscaptivefinancedivisiontoaidgrowth.</p><p>DomesticMHCVsalesvolumestowitnessafallof3%inFY12f</p><p>AL is a play on domestic MHCVsthis segment contributed c77% of total income in FY11. Any</p><p>moderation in MHCV growth is likely to affect the company more than peers, as ALs exposure to</p><p>MHCVs is higher than that for Eicher Motors (EIM IN, Add); c66% of total income in 2011) and Tata</p><p>Motors(TTMTIN,Buy);c18%oftotalincomeinFY11).</p><p>Exhibit3:Totalincomebreakup(FY10)</p><p>LCVs</p><p>1%</p><p>Engines</p><p>5%</p><p>MHCVs</p><p>75%</p><p>Exports</p><p>8%</p><p>Defense&amp;Spares11%</p><p>Source:Company</p><p>Exhibit4:Totalincomebreakup(FY11)</p><p>LCVs</p><p>1%</p><p>Engines</p><p>3%</p><p>MHCVs</p><p>77%</p><p>Exports</p><p>10%</p><p>Defense&amp;Spares9%</p><p>Source:Company</p><p>Weestimateafallof3%indomesticMHCVsalesvolumesforAL inFY12f,ledbyfallof5%and2%in</p><p>passengerandcargoMHCVs,respectively.PassengerMHCVdemandislikelytobeimpactedduetothe</p><p>expiry of the JNNURM scheme in Dec11. A slowdown in passenger MHCVs sales volumes affects AL</p><p>morethanpeers,asALhasahigherproportionofpassengerMHCVsindomesticMHCVsalesvolumes</p><p>thanpeers(passengerMHCVscontributed25%,8%and11%ofdomesticMHCVsalesvolumesforAL,</p><p>EIMandTTMT,respectively,inFY11).CargoMHCVdemandislikelytobeimpactedduetopostponing</p><p>ofpurchasesbyfreightoperatorsonaccountoflowerroadfreightavailability.Inaddition,atemporary</p><p>slowdowninthesouthernregion(whichcontributesc50%ofMHCVsalesvolumesforAL)isalsolikely</p><p>toimpactsalesvolumes.</p><p>Demandto</p><p>revive</p><p>on</p><p>pick</p><p>up</p><p>in</p><p>investment</p><p>activity</p><p>WeestimateALsMHCVsalesvolumegrowth torecoverto10%byFY13fonaccountofapickup in</p><p>investmentactivityandfreightavailabilityduetothelikelyreversalintheinterestratecycle.Therehas</p><p>alsobeenarevivalinsalesvolumegrowth(TTM)forLCVs;thisisusuallyaleadindicatorofarevivalin</p><p>MHCV sales volume growth. As per our observation, a revival in LCV sales volume growth is usually</p><p>followed by a revival in MHCV sales volume growth with a lag of 46 months. In line with this</p><p>hypothesis, after LCV sales volumes saw a revival in Jun11, MHCV sales volume growth (TTM)</p><p>recoveredinOct11.Thecompanyisalsoincreasingitstouchpoints(salesandservicenetwork)andis</p><p>ramping up disbursements from its financing division HindujaLeyland Finance (HLF) in order to</p><p>revivesalesvolumegrowth.</p><p>ALisaplayondomestic</p><p>MHCVsthissegment</p><p>contributedc77%oftotal</p><p>incomeinFY11.</p><p>Pass...</p></li></ul>