Ashok Leyland -Preferred play on CV growth : UBS

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UBS Investment Research
Ashok Leyland
Preferred play on CV growth 
􀂄 Pure play on domestic medium and heavy commercial vehicles (MHCV)
We initiate coverage of Ashok Leyland (Leyland), India’s second-largest MHCV
manufacturer with a 27% market share. We expect Leyland’s commercial vehicle
(CV) volume to grow 51%/22% YoY in FY11/12 due to continued strong growth
in the domestic MHCV space as well as rising exports over FY11-13.
􀂄 Margin outlook remains strong—pricing power, FY12 Pantnagar ramp-up
MHCV manufacturers continue to demonstrate strong pricing power and have
regularly passed on input cost hikes to their customers. Leyland’s management
expects a benefit of Rs35,000/unit from production at its new excise duty-exempt
facility at Pantnagar. This could improve our FY12 EBITDA margin forecast by
70bp from FY11 (we estimate a 20bp improvement in FY12).
􀂄 High operating leverage and earnings growth, attractive valuation
We forecast a 28% EPS CAGR over FY11-13, driven by strong volume growth
and improving margins. We believe its valuation remains attractive at 11x FY12E
earnings, a significant discount to its peers. We are 15%/22%/19% ahead of
consensus FY11/12/13 earnings.
􀂄 Valuation: initiate coverage with a Buy rating and a Rs105.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a 12% WACC.
We add Rs3.40 on account of Leyland’s stake in IndusInd Bank.