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ASHOK LEYLAND: BUY, TP-Rs76 (29% upside)
Sector: Auto
CMP: Rs59; Mcap: Rs79bn
Bloomberg: AL IN; Reuters: ASOK.BO
What’s the theme?
The commercial vehicle (CV) segment took a hiatus for a couple of months to absorb pre-buying due to new
emission norms, effective October 1, 2010. Following this, the domestic truck segment again picked up momentum
from December 2010 with economic growth being strong. In addition, increased production at Ashok Leyland's
Uttarakhand facility is expected to boost margins.
What will move the stock?
1) Although management guided to volumes of 100k units in FY11, we expect Ashok Leyland to fall short
of this target with volumes of 89k units. In FY12, we expect the company to record volume growth of 10%
to 97k units. 2) Due to fiscal benefits available at the Pantnagar unit, we expect the company to realize
significant savings per vehicle produced at the facility. Production is expected to be ramped up to 10k
units in Q4FY11 as against the YTD number of 5K units. We estimate margin expansion of 100bps in
FY12 due to increased contribution from this facility. 3) Ashok Leyland entered into a JV with Nissan, to
capture high growth in the LCV segment. The JV is likely to commence production by H2 CY11.
Our FY11 and FY12 earnings estimates are Rs4.3 and Rs5.5 respectively. Our FY12E earnings are 10%
lower than consensus estimate of Rs6.1. We have a 'BUY' recommendation on the stock with a target
price of Rs76, which discounts FY12E earnings by 14x.
What will challenge our target price?
1) Increase in prices of raw materials such as steel and rubber affecting profitability; 2) Increase in excise
duty hampering industry growth; and 3) Significant rise in interest rates increasing cost of ownership.
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