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  • 8/2/2019 Ashok Leyland - Avendus Report

    1/17

    Pleaserefertothedisclaimertowardstheendofthedocument.

    IndiaEquityResearch

    Automobiles

    February23,2012

    B U Y AshokLeylandTargetPrice(INR) 41 AplayonrevivalofMHCVgrowth

    INITIATINGCOVERAGE AL is likely to be the biggest beneficiary of any positive development in

    domesticMHCVsasitderivesalargeportionofitstotalincomefromthis

    segment. FY12f may end with an estimated 3% fall in sales volumes of

    domestic MHCVs for AL. FY13f is likely to enjoy a recovery with double

    digitgrowthdrivenbythefall in interestratesandrevival in investment

    activity leading to rise in freight volumes. The companys focus on

    increasingtouchpointsandloandisbursementsarealsolikelytoaidsales

    volume growth. AL is also increasing its exposure to LCVs and other

    businesses to derisk itself from the cyclicality of domestic MHCVs. We

    arriveataMar13targetpriceofINR41,byapplyingthemeanEV/EBITDA

    multiple

    of

    the

    previous

    CV

    cycle.

    The

    potential

    upside

    stands

    at

    46%,

    assumingvaluationsreverttothemean.InitiatewithBuy.Riskfactorsare

    thehighexposuretoMHCVsandhighercommodityandfuelprices.

    DomesticMHCVdemandlikelytorevivebyFY13f

    ALisaplayonthedomesticMHCVsegment,asthissegmentislikelytocontribute

    over75%oftotalincomeforthecompanyoverFY12fFY14f.DomesticMHCVsales

    volumegrowthislikelytorecoverto10%byFY13fafteranestimatedfallof3%in

    FY12f,onaccountofapickupininvestmentactivityandfreightavailabilitydueto

    thelikelyreversalintheinterestratecycle.Inaddition,higherloandisbursements

    andtouchpointsarealsolikelytoaidsalesvolumegrowth.

    Strengtheningexistingoperationsandenteringnewbusinesses

    To

    strengthen

    its

    technological

    capabilities,

    AL

    has

    invested

    in

    companies

    that

    manufacture and supply EuroV emission compliant vehicles to developed

    countries.TopenetratethehighgrowingLCVsegment,thecompanyhaslaunched

    acargoLCVinJVwithNissanMotorCo(7201JP;NR)inSep11.WeestimatethisJV

    tobreakevenbyFY14f.Tocontinuethediversification,ALhasalsoinvestedinnew

    businesses;mostofthesebusinessesreportedlossesinFY11.Thecompanysshare

    ofearningsfromthesebusinessesislikelytobreakeveninFY14f.

    TotalincomegrowthtosettleataCAGRof13%overFY12fFY14f

    We estimate a CAGR of 13% in total income over FY12fFY14f due to a revival in

    domesticMHCVsalesvolumes,increasingcontributionoftheDostLCVandrobust

    exports.Exportvolumegrowthislikelytobestrong,ataCAGRof19%overFY12f

    FY14f,duetothegrowingacceptanceof IndianCVs indevelopingcountries.Rising

    sales

    promotion

    costs,

    and

    the

    increasing

    contribution

    of

    lowmargin

    LCVs

    in

    the

    overallproductmix,islikelytoreduceEBITDAmarginsfrom11.0%inFY11to9.8%in

    FY14f.WeestimateEBITDAandPATtogrowataCAGRof9%overFY12fFY14f.

    InitiatewithaBuyratingandaMar13TPofINR41;upsideof46%

    We apply an EV/EBITDA multiple of 8.6x to ALs core business to arrive at a fair

    value of INR39/share. This multiple is based on the mean valuations of the

    previousCVcycle.The likelyearningsrebound inALoverFY13fFY14fonaccount

    of the recovery in domestic MHCV sales volume growth provides a buying

    opportunity. We have valued ALs investment in IndusInd Bank (IIB IN, Buy) at

    INR2/share. Our SOTPbased Mar13 TP for ALstands at INR41, whichprovides a

    46%upside.InitiatewithBuy.RiskfactorsarethehighexposuretoMHCVs.

    LastPrice(INR)Bloomberg code

    Reuterscode

    Avg.Vol.(3m)(mn)

    Avg.Val.(3m)(INRmn)

    52wkH/L(INR)

    Sensex

    MCAP(INRbn/USDbn)

    Shareholding(%) 9/11 12/11Promoters

    MFs,FIs,Banks

    FIIs

    Public

    Others

    StockChart(RelativetoSensex)

    StockPerfm.(%) 1m 3m 1yrAbsolute

    Rel.toSensex

    Financials(INRmn) 03/11 03/12f 03/13f Sales

    YoY(%)

    EBITDA(%)

    A.PAT

    Sho/s(diluted)

    A.EPS(INR)

    YoY(%)

    D/E(x)

    P/E(x)

    EV/E(x)

    RoCE(%)

    RoE(%)

    QuarterlyTrends 03/11 06/11 09/11 12/11Sales(INRmn)

    PAT(INRmn)

    28

    111,177

    15.4

    13.9

    16.2

    10.5

    19.3

    146,064125,995

    15.8

    38.6 38.6

    18,145

    74.77/1.52

    15.6

    10.6

    19.4

    2.6

    19

    10.7

    14.7

    669

    2,661

    2.2

    1,541

    28,798

    2,661

    5.4

    3.0

    13.1

    0.1

    16

    30,946

    7.88.9

    10

    14

    0.8

    7

    0.9

    11

    12.8

    16

    10.0

    5,840

    13

    9.9

    6,966

    53

    11.0

    6,313

    0.7

    2,661

    2.4

    48

    ALIN

    ASOK.BO

    6.60

    30.6/20.0

    171

    2,982

    38,285

    11.8

    8.5

    11

    17

    863

    24,955

    20

    24

    28

    32

    Feb11 Jun11 Oct11 Feb12

    Ashok Leyland Sensex Rebased

    SriRaghunandhan NL,+9102266842863

    raghunandhan.nl@avendus.com

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    India Equity Research AshokLeyland

    Automobiles 2

    TableofContents

    InvestmentSummary ........................................................................................................................ 3DomesticMHCVdemandlikelytorecoverto10%byFY13f .................................................................3Strengtheningexistingoperationsandenteringnewbusinesses .........................................................3TotalincomegrowthtosettleataCAGRof13%overFY12fFY14f ......................................................3InitiatewithaBuyratingandaMar13TPofINR41 ..............................................................................3

    DomesticMHCVdemandlikelytorecoverto10%byFY13f ............................................................. 5DomesticMHCVsalesvolumestowitnessafallof3%inFY12f............................................................5Demandtoreviveonpickupininvestmentactivity .............................................................................5

    Strengtheningexistingoperationsandenteringnewbusinesses ..................................................... 7Strengtheningfinancingandtechnologicalcapabilities ........................................................................7PartneringNissantoenterthehighgrowthcargoLCVsegment ..........................................................7Diversifyingintonewbusinesses...........................................................................................................8

    TotalincomegrowthtosettleataCAGRof13%overFY12fFY14f .................................................. 9ExportstooutpacedomesticsalesvolumegrowthoverFY12fFY14f ..................................................9EBITDAgrowthlikelytolagtotalincomegrowth..................................................................................9FreecashflowlikelytoturnpositivebyFY13f ....................................................................................10

    InitiatewithaBuyratingandaMar13TPofINR41 ........................................................................ 11Valuingcorebusinessat8.6xEV/EBITDA ............................................................................................11SOTPtargetofINR41;initiatecoveragewithaBuyrating..................................................................11Riskfactors ..........................................................................................................................................12

    Financialsandvaluations................................................................................................................. 13

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    India Equity Research AshokLeyland

    Automobiles 3

    InvestmentSummary

    AL is a play on domestic MHCVs as it derives a significant portion of its revenues from this segment. We estimate

    domesticMHCV

    sales

    volumes

    to

    fall

    by

    3%

    in

    FY12f

    due

    to

    postponing

    of

    purchases

    by

    freight

    operatorson

    account

    of lower freight availability. However, domestic MHCV sales volume growth is likely to recover to 10% in FY13f on

    accountofapickupininvestmentactivityandfreightavailabilityduetothelikelyreversalintheinterestratecycle.

    Therehasalsobeenarevival inLCVsalesvolumegrowth(TTM);this isusuallya lead indicator forarevival inMHCV

    salesvolumegrowth.ALsfocusonincreasingtouchpointsandloandisbursementsarealsolikelytoaidsalesvolume

    growth.Thecompanyisalsofocusingonstrengtheningitsexistingoperationsandincreasingitspenetrationinthehigh

    growing LCV segment. EBITDA margins are likely to decline from 11.0% inFY11 to 9.8% by FY14f due to rising sales

    promotioncostsandtheincreasingshareofthelowmargin DostLCVintheoverallproductmix.WevalueALscore

    businessatanEV/EBITDAof8.6x,whichisbasedonmeanvaluationsofthepreviousCVcycle.Afterincludingthevalue

    of ALs investment in IndusInd Bank, our SOTPbased Mar13 target stands at INR41, which provides a 46% upside.

    InitiatewithBuy.RiskfactorsarethehighexposuretoMHCVsandhighercommoditypricesandfuelprices.

    DomesticMHCV

    demand

    likely

    to

    recover

    to

    10%

    by

    FY13f

    Weestimateafallof3%indomesticmediumandheavycommercialvehicle(MHCV)salesvolumesin

    FY12fduetopostponingofpurchasesbyfreightoperatorsonaccountoflowerroadfreightavailability.

    Inaddition,expiryoftheJawaharlalNehruNationalUrbanRenewalMission(JNNURM)schemeisalso

    likelytoimpactsalesvolumes.WeestimatedomesticMHCVsalesvolumegrowt