CV sector - Big Boys Dancing
In our view, MHCV volumes should witness 20% CAGR over FY10-12E. We see the CV industry benefiting from multiple factors including, strong IIP growth trend, acceleration in investment cycle and regulatory thrust driving shorter replacement cycles. Improvement in road infrastructure has facilitated usage of the hub and spoke model for freight movement. Consequently incremental volumes would tend to get polarized between the higher tonnage vehicles and the small commercial vehicles.
As a default beneficiary of the strong demand upturn in the CV sector, we expect Tata Motor’s MHCV volumes to show 17% CAGR between FY10-12E. Further, we expect JLR’s profitability to remain robust on the back of increase in ASP and headroom to further reduce operating expenses. With significant free cashflow generation in the domestic as well as the JLR business, we expect the company’s leverage to decline from 3.1x in FY10 to 0.8x in FY12E. Based on SOTP valuation, we arrive at a target price of Rs1,350.
Ashok Leyland (AL IN, BUY, TP-Rs90) — Playing the ‘U’pturn
With a strong presence in the higher tonnage segment and availability of sufficient capacity, we expect Ashok Leyland’s MHCV segment to show 26% CAGR between FY10-12E. With tax incentives from the Pantnagar facility and higher operating leverage benefits, we forecast a 90bps expansion in operating margins, over the next two years. We expect 39% CAGR in earnings between FY10-12E and improvement in balance sheet characteristics, despite significant investments in capex and its JVs. Our target price of Rs 90 is based on core business valuation at 87 per share based on 14x FY12E EPS and value of investments in JV’s at Rs 3 based on 1x FY12 BV.
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