We recommend ?BUY? on ASHOK LEYLAND LTD for a target of INR 171 – valuing the company at P/E 24x of FY19E Earning.
Investment Rationale:
- Focus on profitability & emerging technology commendable.
- De-risking in cyclical business to yield positive outcome.
- Return ratio improvement reflects overall improvement in financials.
- Heightened competitive pressures kept discounts at elevated level.
- Commercial vehicle industry structurally well positioned for growth.
- Overloading ban on trucks drove volume growth for higher tonnage vehicles in recent months.
- Expect strong pre-purchases because of migration to BS-VI emission norms.
- Recent government directives to give a leg-up to volume growth.
- ALL has recouped well from previous year? systemic shocks.
- Improvement in macros remains a structural growth driver for CV industry over FY19/FY20.
- Earnings expected to post double-digit growth.
Valuations And View:
Ashok Leyland is the 2nd largest manufacturer of commercial vehicles in India, the 4th largest manufacturer of buses in the world and the 12th largest manufacturer of trucks globally. It offers power solutions for electric power generation, agricultural harvester combines, earth moving and construction equipment and marine and other non-automotive applications. We value the business at 24x FY19E EPS and recommend a BUY rating on the stock with a target price of INR 171 per share.
Risk & Concerns
- Commodity price risk and hedging activities: The Company being a sizable user of commodities, exposes it to the price risk on account of procurement of commodities. The Company uses foreign currency forward contracts to hedge its risks associated with foreign currency fluctuations relating to firm commitments and highly probable forecast transactions.
- Market risk: Market risk is the risk that changes in market prices, liquidity and other factors that could have an adverse effect on realizable fair values or future cash flows to the Company.
- Foreign currency risk: The Company?s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates as future specific market changes cannot be normally predicted with reasonable accuracy.
Company Background
Ashok Leyland Ltd (ASL) is a holding company. The company is engaged in commercial vehicles and related components. Through its subsidiaries, it is engaged in manufacturing and trading in Medium and Heavy Commercial Vehicle (MHCV), Light Commercial Vehicles (LCV), Passenger Vehicles (PV), automotive aggregates, vehicle financing and engineering design services. It offers a range of 18 to 80 seater buses under categories such as city application and electric buses. It offers a range of trucks, which includes long haul trucks, mining and construction trucks, and distribution trucks. It designs, develops and manufactures defence vehicles for armed forces. It offers Light Vehicles, which include DOST, PARTNER, STiLE and MiTR. It offers power solutions for electric power generation, agricultural harvester combines, earth moving and construction equipment and marine and other non-automotive applications. It has operations in India, Sri Lanka, Bangladesh, Mauritius, the Middle East and Africa.
Ashok Leyland is the 2nd largest manufacturer of commercial vehicles in India, the 4th largest manufacturer of buses in the world and the 12th largest manufacturer of trucks globally. With a turnover in excess of US $ 3.3 billion (2016-17) and a footprint that extends across 50 countries, it is one of the most fully-integrated manufacturing companies this side of the globe. Over 70 million passengers use their buses to get to their destinations every day while over 700,000 trucks keep the wheels of economies moving. With the largest fleet of logistics vehicles deployed in the Indian Army and significant partnerships with armed forces across the globe, it help keep borders secure. Headquartered in Chennai, India, its manufacturing footprint spreads across the globe with 9 plants; including one each at Great Britain and Ras Al Khaimah (UAE). Its Joint Venture partners include John Deere (USA) for Construction Equipment, Continental AG (Germany) for Automotive Infotronics and the Alteams Group for the manufacture of high-press die-casting extruded aluminum components for the automotive and telecommunications sectors.
Industry Overview
The Indian commercial vehicle (CV) industry registered volume growth of 4.5 percent in the financial year 2017 over the previous year. CV Industry growth was driven by favorable economic condition and positive business sentiments. The Industry registered double-digit growth in FY 2016. We expect that commercial vehicle to grow by 5 -6% in FY 18 due to normal Monsoon and GST bill. The sales growth should be visible after July 2017 after implementation of GST. It could reduce vehicle price by 3 to 4 percent. Sale of commercial vehicles (CV) in India is expected to grow at a CAGR of 15% over the next five years ? from 0.8 million in 2011-12 to 1.6 million units by 2016?17.
