valuation of ashok leyland fiev report

International Management Institute Kolkata 1

Ashok Leyland

August 31

2015 Prepared by:

Sayantan Mukherjee Bikash Majumdar Sheersh Srivastava Vivek Murarka Submitted to: Prof. Surendra Poddar, Faculty, IMI K Disclaimer: The information, analysis and estimates contained herein are based on our assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents our opinion and is meant for general information only. The authors shall not in any way be responsible for the contents stated herein. This document is not to be considered as an offer to sell, or a solicitation to buy any securities.

PGDM (2014-16)


EXECUTIVE SUMMARY

Demographically and economically, India’s automotive industry is well-positioned for growth, servicing both domestic demand and, increasingly, export opportunities. A predicted increase in India’s working-age population is likely to help stimulate the burgeoning market for private vehicles. Rising prosperity, easier access to finance and increasing affordability is expected to see four-wheelers gaining volumes, although two wheelers will remain the primary choice for the majority of purchasers, buoyed by greater appetite from rural areas, the youth market and women. Domestically, some consolidation or alliances might be expected, driven by the need for access to better technology, manufacturing facilities, service and distribution networks. The components sector is in a strong position to cash-in on India’s cost-effectiveness, profitability and globally-recognized engineering capabilities. As the benefits of collaborations become more apparent, super-specialists may emerge in which the automobile is treated as a system, with each specialist focusing on a sub-system, akin to the IT industry. Though this approach is radical, it could prove an important step in reducing complexity and investment requirements, while promoting standardization and meeting customer demands. Manufacturers are already planning for the future: early advocates of technological and distribution alliances have yielded generally positive results, enabling domestic OEMs to access global technology and experience, and permitting them to grow their ranges with fewer financial risks.


Indian Auto Sector

India is home to a vibrant automobile of more than 40 million vehicles. It has been one of the few worldwide which saw growing passenger car sales during the recession of the past two years. In fact, in 2009-10 it has recorded its highest volumes ever. It is believed this upward trend will be sustained in the foreseeable future due to a strong domestic market and increased thrust on exports. The Indian economy has grown at an average rate of around 9 percent over the past five years and is expected to continue this growth in the medium term. This is predicted to drive an increase in the percentage of the Indian population able to afford vehicles. India’s car per capita ratio (expressed in cars per 1,000 population) is currently among the lowest in the world’s top 10 auto markets. The twin phenomena of low car penetration and rising incomes, when combined with increasing affordability of cars, are expected to contribute to an increase in India’s automobile demand.

Indian auto Industry: Among the top 10 in World

Two Wheelers 2nd

Small Cars 3rd


Commercial Vehicles 5th

Automobile Industry – A Global Hub


• 15 manufacturers of passenger cars and multi-utility vehicles,

• 9 manufacturers of commercial vehicles, • 16 manufacturers two/ three wheelers, • 14 manufacturers tractors, • 5 manufacturers of engines.

Growth Forecasts for Indian Auto Industry

• The Passenger Vehicle market of India will even cross Japan by se 5 million Vehicles by 2017-18.

• India’s share in global auto exports may also triple by 2016. • India’s passenger vehicle production projections :

In 2010 – 2.6 million Vehicles

By 2015 – 5.1 million Vehicles

By 2020 – 9.7 million Vehicles


Share in GDP

Demand and Supply

0%

2%

4%

6%

8%

10%

12%

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

1 2 3 4

year GDP

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Passenger Vehicles 446,145 444,326 508,783 559,414 596,142 622,470

Commercial Vehicles 45,009 74,043 92,258 80,027 77,050 85,782

Three Wheelers 173,214 269,968 361,753 303,088 353,392 407,957

Two Wheelers 1,140,058 1,531,619 1,975,111 1,956,378 2,084,000 2,457,597

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

AUTOMOBILE EXPORTS TRENDS


Export performance of the Indian Automobile Industry has also exhibited steady growth for the period 2004-2005 to 2014-2015.

Exports of commercial vehicles and three wheelers have declined the exports during the period 2012-2013. The Government has decided to implement the National Automobile Testing and Research and Development infrastructure project to improve the export potential.

Category-wise sales of automobiles in India (No. of Vehicles)

Type of Vehicle 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

2013-14 2014-15

Passenger 1,061,572 1,143,076 1,379,979 1,549,882 1,551,880 1,951,333 2,501,542 2,618,072 2,686,429 2,503,685

Vehicles

Commercial 318,430 351,041 467,765 490,494 384,122 532,721 684,905 809,532 793,150 632,738

Vehicles

Three Wheelers 307,862 359,920 403,910 364,781 349,719 440,392 526,024 513,251 538,291 479,634

Two Wheelers 6,209,765 7,052,391 7,872,334 7,249,278 7,437,670 9,370,951 11,768,910 13,435,769 13,797,748 14,805,481

Total 7,897,629 8,906,428 10,123,988 9,654,435 9,723,391 12,295,397 15,481,381 17,376,624 17,815,618 18,421,538

It Depicts that overall sales of automobile has been increased. The sale of passenger vehicle has been increased 1,061,572 vehicles to 2,503,685 vehicles for the year 2005-2006 to 2014-2015.

There is an enormous sale of passenger vehicle and two wheelers in the said period. The sale of passenger vehicles almost increased from the year 2005-2006 to 2014-2015.


Category-Wise Production of Automobiles in India (No. of Vehicles)

Automobile Production Trends

Category 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Passenger Vehicles 2,357,411 2,982,772 3,146,069 3,231,058 3,087,973 3,220,172


Three Wheelers 619,194 799,553 879,289 839,748 830,108 949,021

Two Wheelers 10,512,903 13,349,349 15,427,532 15,744,156 16,883,049 18,499,970

Grand Total 14,057,064 17,892,409 20,382,026 20,647,611 21,500,165 23,366,246

During 2009-2010 14,057,064vehicles were produced in the automobile industry. The production has increased almost 23,366,246 vehicles. In recent years India had an upgrade market potential for automobiles due to a rise in demand. As a result there is an increased production to tap the growing demand both at home and in the foreign markets.


There is an enormous production of passenger vehicle and two wheeler in the said period. The production of passenger vehicles almost increased from the year 2009 - 2010 to 2014 2015. Overall, the production of automobile industry has increased quite significantly during this period.

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Passenger Vehicles 2,357,411 2,982,772 3,146,069 3,231,058 3,087,973 3,220,172


Three Wheelers 619,194 799,553 879,289 839,748 830,108 949,021

Two Wheelers 10,512,903 13,349,349 15,427,532 15,744,156 16,883,049 18,499,970

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

PRODUCTION TREND


Automobile Manufacturers

11

Ashok Leyland

Force Motors

8 VE-CVs Eicher

7

7

7

Ashok Leyland

Swaraj Mazda

JCBL

Hindustan Motors Ashok Leyland Ashok Leyland

Force Motors

Premier Automobiles Force Motors Force Motors Hindustan Motors Hindustan Motors

Tata Motors Hindustan Motors Hindustan Motors Premier Automobiles Premier Automobiles

M&M Premier Automobiles Premier Automobiles Tata Motors Tata Motors

2 General Motors India Tata Motors Tata Motors M&M M&M

Standard M&M M&M

Standard Maruti Suzuki India

1 Fiat India

General Motors India

Fiat India

Standard Standard

Sipani

Sipani

Fiat India

1900 1920 1940 1950 1960 1970 1980

API Royal Enfield Ideal Java LML India Kinetic Motor Company

1 Bajaj Auto Mopeds Indias Ideal Java LML India

API TVS Suzuki Mopeds Indias Ideal Java

Escorts Group

TVS Suzuki

Mopeds India

3

Royal Enfield

Escorts Group

Hero Honda Motors

Bajaj Auto Royal Enfield TVS Suzuki

API Bajaj Auto Escorts Group

API

Royal Enfield

7

Bajaj Auto

Atul Auto

API

Scooters India

10 Atul Auto

Scooters India


Domestic Vehicle Volumes (Annual) vs. Year-on-Year Growth Rates

The Indian automobile industry has seen interesting dynamics in recent

times with the effect of the global downturn, followed by recovery in

domestic demand. The future of the industry in the medium term

based on current trends, is analyzed here along two broad themes in

the global automobile industry.


Growth Factors

Fuel economy and demand for greater fuel efficiency is a major

factor that affects consumer decision.

Increased affordability, heightened demand in the small car

segment and the surging income of the Indian population

The Government technology modernization fund is concentrating

on establishing India as an auto-manufacturing hub.

Availability of inexpensive skilled workers.

Market segmentation and product innovation.

Industry is perusing to elevate sales by knocking on doors of

women, youth, rural and luxury segments.

Growth in India’s emerging and middle class segments.

Growth Drivers

• Passenger vehicle are to increase at a CAGR of 16% between

2013-20.

• Two Wheelers & three wheelers are projected to expand at a

CAGR of 9% between 2013-20.

• A growing working population & an expanding middle class are

expected to remain key demand drivers. GDP per capita has

grown from USD 1432.25 in 2010 to USD 1500.76 in 2012, & is

expected to reach USD 1869.34 by 2018.


• India has the world’s 12th largest number of high net worth

individuals, with a growth of 20.8%, the highest among the top 12

countries.

• Increase disposable incomes in the rural agri-sector.

• The presence of a large pool of skilled & semi-skilled workers& a

strong educational system.

• A large number of products are available to consumers across

various segments. With the entry of a number of foreign players &

reduced overall product lifecycle, quicker product launches have

become the order of the day.

• The availability of a variety of vehicle models meet diverse needs

& preferences.

• Easy finance schemes, owing to which the finance industry has

grown at the rate of 13% between 2008-13. Car finance

penetration has increased from 68% to 70% between 2008-10 &

between 70% to 72% in 2014-15.

• Favourable government polieces like lower excise duties

automotive mission plans, the constitution of NATRiP etc.

Risk

The regulatory regime in India increased reporting requirements

making it easier to uncover travel products, and hence product

recalls.


Demand is linked to economic growth and rise in income levels.

Per Capita penetration is around 9 cars per 1000 people.

Many foreign players have entered the Indian market especially in

passenger cars segment.

The industry performance is highly affected by increase is loan

rates.

Supply bottlenecks offer a major hurdle in path of growth.

Fuel price hike has direct impact on the sale margin of the

industry.

India is home to around 1.2 billion people and the standard of living is increasing day by day. This is in response to the increase in the disposable income of the citizens and improved financial structure in the industry.


As there is a stabilized Central government in power which pitches for sustainable growth than anything else, it is only fair to fancy the chances of the automobile industry in India. The transportation infrastructure has got a big boost from the government which has further brighten the prospects of the industry.

Most of the companies in India has managed to create economies of scale in their production line, thus reducing the overall cost and increasing their bottom line. The margins have improved significantly over the years in midst of intense competition. This is the most exciting period of this industry and something very commendable.

India has pioneered the production of small cars / hatchbacks, both in terms of cost of production and technology involved. Indian companies are no more dependent on foreign companies for capital and most importantly technological know-how. Indian government is stressing on retaining knowledge and talent in India and thus prevent brain drain. This way the companies have the best of talents to their exposure, some of the benefit could be passed to the customers in terms of quality product and cost advantage.

SWOT

STRENGTH

Investment by foreign car manufacturers

Increase in the export level

Low cost and cheap labor


Rise in the working and middle class income

Expert skills in producing small cars- good for environment

Large pool of skilled, educated potential employees

OPPORTUNITIES

Growing population in the country

Focus from the govt. in developing the road infrastructure

Rising living standards

Increase in income level

Rising rural demand

The car is a status symbol

Women drivers have increased

Finance system available for buying cars

WEAKNESS

Low quality compared to other automotive countries

High interest rate and overhead level

Production cost is generally higher than some other Asian countries

like China

Low investment in R&D area

Local demand is still towards low cost vehicles

THREATS

Lack of technologies for Indian companies

Increase in the import tariff and the technology cost

Increased congestion in the urban areas

Industry is highly driven by macro-economic variables


Cut throat competition

High interest rates

PORTER’S 5 Forces


Ashok Leyland

About Company

2nd largest commercial vehicle manufacturer in India, 4th largest

manufacturer of buses in the world and 16th largest manufacturer

of trucks globally.

Ashok Leyland also makes spare parts and engines for industrial

and marine applications.

The company claims to carry more than 60 million passengers a

day, more people than the entire Indian rail network.

With a joint venture with Nissan Motors of Japan the company

made its presence in the Light Commercial Vehicle (LCV) segment

(<7.5 tons).

Price: Rs. 92.30 Recommendation: Not to Buy

Target Price: Rs. 73


In the journey towards global standards of quality, Ashok Leyland

reached a major milestone in 1993 when it became the first in

India's automobile history to obtain the ISO 9002 certification.

In 2006, Ashok Leyland became the first automobile company in

India to receive the TS16949 Corporate Certification.

Hinduja Group flagship company Ashok Leyland has been awarded

the first overseas order worth $6 million for its vestibule buses

from Bangladesh Road Transport Corporation (BRTC).

Recent price-Rs.92.15 Source-Money Control


DCF VALUATION

Discounted cash flow (DCF) analysis is a method of valuing a project,

company, or asset using the concepts of the time value of money. All

future cash flows are estimated and discounted by using cost of capital

to give their present values (PVs). The sum of all future cash flows, both

incoming and outgoing, is the net present value (NPV), which is taken

as the value or price of the cash flows. Cost of Equity

Ashok Leyland is having a beta of 0.8 with a Risk Premium of 5.50%. The

Risk free rate is 7.80%. Hence cost of equity is calculated to be 12.20%

for the current year. We believe free cash flow to equity (FCFE) is the

best way to capture value as the company’s capital structure is quite

stable.

Risk Free Rate 7.80%

Risk Premium 5.50%

Beta 0.8

Cost of Equity 12.20%

https://en.wikipedia.org/wiki/Financial_asset

https://en.wikipedia.org/wiki/Time_value_of_money

https://en.wikipedia.org/wiki/Cash_flow

https://en.wikipedia.org/wiki/Discounting

https://en.wikipedia.org/wiki/Present_value

https://en.wikipedia.org/wiki/Net_present_value


FCFE Calculation

Years 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Growth Rate 7% 8% 8% 8% 8% 8% 6% 6% 5% 5% 4% Net Sales 16642.01 17973 19411 20964 22641 24453 25920 27475 28849 30291 31503 Net Income 16307 17611 19020 20542 22185 23960 25397 26921 28267 29681 30868 CapEx 228 246 266 287 310 335 355 376 395 414 Depr 580 626 676 731 789 852 903 957 1005 1056 Working Capital Change 1853 2001 2161 2334 2521 2723 2886 3059 3212 3373 3508 Net Borrowings 6020 6502 7022 7584 8191 8846 9377 9939 10436 10958 FCFE 8785 9488 10247 11067 11952 12909 13683 14504 15229 15991 27360 Terminal value 333660 Present Value 8456 8140 7835 7542 7260 6858 6479 6064 124079

Value of Equity 182714 No. of Shares

2493 millions

Value per Share 73

Based on FCFE valuations, we expect the share price of Ashok Leyland

to be Rs.73 per share.


Ashok Leyland Share Value

Current price: 92.30

Value per share using FCFE: 73

Therefore Ashok Leyland shares are Overvalued by:

(92.30 - 73)/73=26.4%

Sensitivity Analysis

COST OF EQUITY

73 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5%

8.0% 129 149 176 213 270 365 554 1124

7.5% 117 133 154 182 221 280 378 575

7.0% 107 121 137 159 188 229 290 392

6.5% 100 111 125 142 165 194 237 300

6.0% 93 103 115 129 147 170 201 245

5.5% 88 96 106 118 133 152 176 208

5.0% 83 91 99 110 122 138 157 182

4.5% 79 86 93 103 113 126 142 163

4.0% 75 82 88 96 106 117 131 147

3.5% 72 78 84 91 100 109 121 135

3.0% 70 75 80 87 94 103 113 125

The above table shows the sensitivity analysis of varied stable growth rates and their effect on

the share prices.


Relative Valuation

In Relative Valuation, the worth of a share of a company is found out

from comparing it against a benchmark or its peers. It can be also done

with respect to time. We derive the buy price from a few sources: we

can compare the price against what was sold previously adjusted for

inflation; we can also compare the price against the houses with similar

characteristics and features, lastly, we can compare it against prices in

the neighborhood.

Relative Valuation is different from Cash flow valuation where the value

of an asset is the sum of the future cash flows that is generated from the

asset discounted to the present. In the example of the house buying, the

buy price using the cash flow method could be calculated as the sum of

all the monthly rental income that could be derived discounted back to

the present.

Here we will be concentrating on Price to earnings ratio and price to book

value ratio of Ashok Leyland and its peer companies, because these are

suitable for most type of companies and especially industrial companies

which are asset heavy and brand heavy.


To get a more comprehensive insight into the share’s situation, we will

be comparing the competitors with Ashok Leyland in two matrices one

of which is a relation between P/BV, EV/EBIT , and ROCE.

First, a look at the P/E ratios of Ashok Leyland and its peers for the last 5 years from April 2009

to March 2015

From the graph, we can see that the P/E ratio of Ashok Leyland have

been highest in 2013. At the same time, the share’s P/E is moving

(increasing/decreasing) in tandem with the industry. So historically, has

highest P/E ratio with respect to the industry average as well as its peers.

-200.00

-100.00

0.00

100.00

200.00

300.00

400.00

500.00

600.00

P/E

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15


The P/BV ratio of Ashok Leyland has been historically highest compared

to its peers and industry average. Only in 2013, this ratio became high

accounting to an sudden increase in price of the share.

The latest P/BV ratio comparison (of the year 2014) reveals that the P/BV

of Ashok Leyland is the second highest.

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TUBEINV.

2009-10 98.23 100.26 19.63 33.50 228.80 46.10 243.82 319.08 10.35 2.69 2.63 63.13

2010-11 110.16 55.27 20.08 56.94 257.00 117.42 152.04 255.51 4.13 2.43 1.86 37.29

2011-12 271.38 81.89 33.69 35.56 176.66 80.79 659.06 293.78 4.44 0.57 3.33 61.80

2012-13 295.39 86.64 44.29 1983.03 165.30 139.96 386.66 242.99 12.48 1.62 2.39 46.33

2013-14 211.98 144.84 89.78 3067.09 221.22 428.12 1111.86 279.05 10.19 3.91 5.50 105.23

2014-15 198.55 175.15 0.00 2485.23 161.56 315.88 1811.28 270.82 0.00 0.00 5.53 107.67

0.00500.00

1000.001500.002000.002500.003000.003500.00

Axi

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Price/Book Value


ROCE of Ashok Leyland is low with respect to its peer group.

So, by looking at the E/V and EBIT ratios, we get an idea that the stock

could be overvalued as it has both the ratios lower than the industry

average and most of its peers.

-100

1020304050607080

ROCE

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

EV/EBIT

2015 2014 2013 2012 2011 2010


FINANCIAL INSIGHTS

Operating Profit gives an indication of the current operational profitability of the business and allows a comparison of profitability between different companies after removing out expenses that can obscure how the company is really performing. Interest cost depends on the management's choice of financing, tax can vary widely depending on acquisitions and losses in prior years, and depreciation and amortization policies may differ from company to company.


EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. PBT stands for Profit Before Tax, and PAT stands for Profit After Tax. The graph visually shows how the net profit of the company stand reduced due to the impact of Interest, Depreciation, and Tax.


It can be seen Ashok Leyland Net Sales is increasing moderately.


Total Assets is the sum of all assets, current and fixed. The asset

turnover ratio measures the ability of a company to use its assets to

efficiently generate sales. The higher the ratio indicates that the

company is utilizing all its assets efficiently to generate sales.

Companies with low profit margins tend to have high asset turnover.

Future Perspectives

Automobile industry expert predicts that by 2050 every 6th car in

the world will be for Indians.

India's light vehicle market will grow to 5.4 million units by 2020,

close to doubling in a little more than five years

India have already taken over Germany and Japan in sales volume

and by 2020, is expected to take over other major European and

Asian markets.

It is said that for every Re. 1 spent, the auto sector returns Rs. 3.04

to the Indian economy.


CONCLUSION

From the relative valuation we came to understand that the share of Ashok Leyland is relatively overvalued with respect to its peers and the industry. So our opinion would be a Not to BUY on Ashok Leyland.

The Indian Automotive Industry is expected to be among the top three globally sometime after 2020; it is expected to provide significant opportunities to industry participants, provided they are able to manage the challenges this industry poses. While India provides unique opportunities to industry participants, it calls for a tailored approach to doing business here. Companies will have to adapt existing product portfolio/design products ground-up to make them relevant for Indian customers. Companies need to commit themselves fully to the Indian market and be prepared to be here for the long haul. In the short term, global players will have to closely integrate India operations with their overall global operations to derive maximum advantage. Thrust needs to be given to original research that will yield breakthrough results.

valuation of ashok leyland fiev report

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