march 26, 2012 ashok leyland (ashley) - icici leyland...ashok leyland (all) is one of the ... p/bv...

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  • ICICI Securities Ltd | Retail Equity Research

    Pure CV play; re-rating in sight!!! Ashok Leyland (ALL) is one of the few pure play major commercial vehicle manufacturers in India. ALL is the second largest player across various segments with an overall market share of ~23% YTD. It has remained highly cyclical in terms of revenues/earnings (MHCV led) as it remains highly dependent on macros like GDP growth/interest rates. However, the foray into various segments including LCV segment is expected to provide lot of sustainable revenue streams. We believe ALL would witness volume growth at ~19% CAGR (FY12E-14E) as both MHCV/LCV witness higher than historical growth rates as the investment cycle starts to take precedence over consumption. On financials, we find ALLs earnings potential on a free cash basis pretty attractive as large capex is over. On earnings, we expect revenue & profit to grow at ~14% & 28% CAGR over FY12E-14E to ~| 16,732 crore & ~| 800 crore, respectively. On valuations, we assign a higher up-cycle multiple of ~11x and initiate coverage on the stock with BUY rating. Volume growth to surprise ALL is expected to be one of the strongest beneficiaries of the return of the up-cycle in industrial segment. In FY12E, CV demand has remained highly resilient surprising mostly bearish analysts as underlying fundamentals of freight rates, financier loans and operator profitability remained strong. We believe this is a reflection of strong inherent economic activity leading to higher road freight. Thus, we have modelled volume growth at ~19% CAGR (FY14-12E) at ~1,44,700 units as both LCV segment ramp-up and MHCV segment are expected to rebound post a sedate FY12E. Lone cyclical pure play in CV business; scarcity premium attached ALL remains one of the few pure plays in the CV segment unlike Tata Motors (luxury play) and Eicher Motors (two wheelers). We believe our change of bias is justified in terms of multiples as we believe the interest rate cut scenario would lead to a re-rating in expectations of better earnings growth in the coming periods.

    Valuation We have analysed the business with both macro and stock specific features in mind. We believe that though competition has strengthened from EIM/AMW, ALL would be able to maintain a significant market share. At the CMP of | 29, the stock is trad ing at 9.6x FY14E PE. We believe the interest rate cycle is ripe for reversal and could trigger a strong multiple re-rating for ALL in earnings expectations. Thus, we have arrived at a target price of | 36. We initiate coverage on the stock with a BUY rating.

    Exhibit 1: Key Financials (Year-end March) FY10 FY11 FY12E FY13E FY14ENet Sales (| crore) 7,237.1 11,107.4 12,771.9 14,539.3 16,732.2 EBITDA (| crore) 762.9 1,217.6 1,179.0 1,332.6 1,575.4 Net Profit (| crore) 423.7 631.3 489.9 601.1 800.0 EPS (|) 1.6 2.4 1.8 2.3 3.0 P/E (x) 17.9 12.0 15.5 12.6 9.5 Price / Book (x) 2.1 1.9 1.9 1.9 1.8 EV/EBITDA (x) 11.7 7.1 7.8 6.8 5.5 RoCE (%) 9.5 14.5 11.1 12.6 15.4 RoE (%) 11.5 15.9 12.3 15.1 19.3

    Source: Company, Research

    Ashok Leyland (ASHLEY) | 29

    Initiating Coverage

    Rating Matrix Rating : Buy

    Target : | 36

    Target Period : 12 months

    Potential Upside : 24%

    YoY Growth (%)

    FY11 FY12E FY13E FY14ENet Sales 84.9 15.0 13.8 15.1 EBITDA 159.4 (3.2) 13.0 18.2 Net Profit 232.3 (22.4) 22.7 33.1 EPS (Rs) 232.3 (22.4) 22.7 33.1

    Current & Target Multiple (x)

    FY11 FY12E FY13E FY14EP/E 12.2 15.7 12.8 9.6 Target P/E 15.0 19.4 15.8 11.9 EV / EBITDA 7.3 8.0 6.9 5.6 P/BV 1.9 1.9 1.9 1.9 RoNW 15.9 12.3 15.1 19.3 RoCE 14.5 11.1 12.6 15.4

    Stock Data Bloomberg/Reuters Code AL IN / ASOK.NSSensex 17,036.6 Average volumes 6,970,000 Market Cap (| crore) 7,742.6

    52 week H/L 30 / 21Equity Capital (|crore) 266.1 Promoter's Stake (%) 38.6 FII Holding (%) 15.6 DII Holding (%) 15.8

    Comparable return matrix (%)

    Return % 1M 3M 6M 12MAshok Leyland 3.7 23.0 11.7 8.9 Eicher Motors 10.8 32.0 19.2 56.0 Tata Motors 1.6 47.4 85.7 19.9

    Price movement















    Price (R.H.S) Nifty (L.H.S)

    Analysts name

    Karan Mittal Nishant Vass Aman Daga

    March 26, 2012

  • ICICI Securities Ltd | Retail Equity Research Page 2

    Company Background Founded in 1948 by Raghunandan Saran as Ashok Motors, the Hinduja Group's flagship company came to be known as Ashok Leyland after entering into an agreement with Leyland Motors, UK in 1955. Headquartered in Chennai, Ashok Leyland (ALL) is the second largest manufacturer of medium and heavy commercial vehicles (M&HCV) and diesel engines in India with a market share of 28.4% YTD. The company has production facilities in India (seven manufacturing units) with two facilities in Prague (Czech Republic) and Ras-Al-Khaimah (UAE). ALL has witnessed ~50% growth in its network over the last two years with total customer touch points increasing to more than 500 spread across India. Over the past six decades, ALL has been one of the technological pioneers in India's commercial vehicle industry, moulding the country's commercial vehicle profile by introducing technologies and product ideas that went on to become industry norms. The company manufactures a wide array of products ranging from commercial vehicles (CVs) such as trucks and buses to emergency and military vehicles. ALL also builds spare parts and engines for industrial and marine applications. Passenger transportation offerings range from 19 to 80 seater double-decker buses while product offerings in the truck segment cover the entire range starting from 7.5 tonne to 49 tonne haulage vehicles. The company is the market leader in the bus segment and carries over 70 million passengers per day. Moreover, the joint venture with Nissan Motors has improved its presence in the light commercial vehicle (LCV) segment (

  • ICICI Securities Ltd | Retail Equity Research Page 3

    Exhibit 3: Joint venture details

    Year - 2007 Ratio - 50:50 Year - 2008 Ratio - 50:50 Year - 2007 Ratio - 50:50 Year - 2007 Ratio - 50:50

    Ashok Leyland joined hands with NissanMotor Company, Japan, to develop andmanufacture LCVs, under both the AshokLeyland and Nissan brands, in the 2.5 to 7.5tonne segment. The JV resides in threeseparate companies for vehiclemanufacturing, power train manufacturingand technology development

    The JV with John Deere, US, aims to seizethe opportunities of the robustly growingconstruction equipment sector withproducts like backhoe loaders, four-wheel-drive loaders, skid steers and excavatorsunder both the Ashok Leyland and JohnDeere brands

    The purpose of the JV with Continental AG,Germany is to design, develop and adaptinfotronics products and services forautomotive customers and meet therequirements of ALL vehicles and, at thesame time, avail of opportunities with othervehicle manufactures in India and overseas

    Ashley Alteams is a JV with the AlteamsGroup, Finland, and is in the business ofproducing High Pressure Die Casting(HPDC) aluminum componentspredominantly for telecommunications andautomotive sectors

    Joint Ventures

    Source: Company, Research

    Exhibit 4: Management team

    Name Designation Remarks

    DG Hinduja ChairmanHe was appointed as the company's Chairman in October 2010. He obtained an MBA degree in 1994 from Imperial College, London

    R Seshasayee Executive Vice ChairmanPrior to current role, he has served as MD of the company since 1998 and has been with the company for over three decades. He possesses a BCom, ACA degree

    Vinod K Dasari Managing DirectorHe joined Ashok Leyland as Chief Operating Officer (COO) in April 2005. He was elected as a member of the Board of Directors in May 2008. He completed his MBA in 1992

    K Sridharan Chief Financial OfficerK Siridharan, B Com, ACA, Grad CWA has been Executive Director of Finance of Ashok Leyland Ltd since April 2004 and also serves as its CFO

    Source: Company, Research

    Exhibit 5: Segmental revenue break-up in FY10





    M&HCV LCV Exports Engines Defence& Spares