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Ashok Leyland
Slow growth ahead
Event
We transfer coverage of Ashok Leyland to Amit Mishra. We downgrade AL to
Neutral from Outperform as we see a slower volume growth for the company
over the next two years. We are forecasting a sales volume growth of 10% for
AL in FY12E, significantly lower than the management guidance of 15%
growth. We recommend a switch from Ashok Leyland to Tata Motors.
Impact
Volume growth to miss guidance. Ashok Leyland missed FY11 sales
guidance of 95,000 units. We believe the growth will be challenging going
forward in light of rising interest rates, potential diesel price hikes and rising
raw material costs forcing OEMs to raise prices. We are forecasting Ashok
Leyland to achieve sales volume growth of 10% in FY12E, which would be a
significant miss over management’s guidance of 15% growth.
Growth to lag the industry average. We expect the bus segment will see a
slower growth in FY12E in the absence of JNNURM orders. This segment had
grown ~25% for AL in FY11. AL has a higher exposure to higher tonnage
trucks (>16T), with ~63% of domestic truck sales from this segment compared
to ~50% for the industry. As this segment is likely to see a faster decline, we
believe AL’s sales will lag the industry growth rates.
LCV foray positive, but challenging. We believe AL’s latest foray into light
commercial vehicles is positive as it is one of the faster growing segments in
the commercial vehicle space. However, the segment will be challenging for
the company as the segment is getting very competitive and the company had
limited success in this segment in the past. We expect AL to sell 4,600 units
and 7,500 units in FY12E and FY13E, respectively.
Production ramp-up at new plant to improve margins. The company’s new
plant at Pantnagar enjoys the excise duty exemption. Management estimates
this tax exemption to result in savings of Rs35,000/unit from production at the
Pantnagar plant. The savings should increase to Rs50,000/unit when the
localisation of components increases at the new facility.
Earnings and target price revision
Earnings downgrades likely. Our FY12E earnings estimate for AL is 16%
lower than the consensus. We expect the street to cut earnings on the back of
lower than expected sales volume numbers.
Price catalyst
12-month price target: Rs58.00 based on a EV/EBITDA methodology.
Catalyst: Sales volume numbers, diesel price hike, interest rates changes.
Action and recommendation
We value AL at a mid-cycle multiple of 8x FY12E EV/EBITDA. Our TP of
Rs58/share (previously Rs91) offers 5% upside potential;. We recommend a
switch to Tata Motors (TTMT IN, Rs1,249, Outperform, TP:Rs1,465).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland
Slow growth ahead
Event
We transfer coverage of Ashok Leyland to Amit Mishra. We downgrade AL to
Neutral from Outperform as we see a slower volume growth for the company
over the next two years. We are forecasting a sales volume growth of 10% for
AL in FY12E, significantly lower than the management guidance of 15%
growth. We recommend a switch from Ashok Leyland to Tata Motors.
Impact
Volume growth to miss guidance. Ashok Leyland missed FY11 sales
guidance of 95,000 units. We believe the growth will be challenging going
forward in light of rising interest rates, potential diesel price hikes and rising
raw material costs forcing OEMs to raise prices. We are forecasting Ashok
Leyland to achieve sales volume growth of 10% in FY12E, which would be a
significant miss over management’s guidance of 15% growth.
Growth to lag the industry average. We expect the bus segment will see a
slower growth in FY12E in the absence of JNNURM orders. This segment had
grown ~25% for AL in FY11. AL has a higher exposure to higher tonnage
trucks (>16T), with ~63% of domestic truck sales from this segment compared
to ~50% for the industry. As this segment is likely to see a faster decline, we
believe AL’s sales will lag the industry growth rates.
LCV foray positive, but challenging. We believe AL’s latest foray into light
commercial vehicles is positive as it is one of the faster growing segments in
the commercial vehicle space. However, the segment will be challenging for
the company as the segment is getting very competitive and the company had
limited success in this segment in the past. We expect AL to sell 4,600 units
and 7,500 units in FY12E and FY13E, respectively.
Production ramp-up at new plant to improve margins. The company’s new
plant at Pantnagar enjoys the excise duty exemption. Management estimates
this tax exemption to result in savings of Rs35,000/unit from production at the
Pantnagar plant. The savings should increase to Rs50,000/unit when the
localisation of components increases at the new facility.
Earnings and target price revision
Earnings downgrades likely. Our FY12E earnings estimate for AL is 16%
lower than the consensus. We expect the street to cut earnings on the back of
lower than expected sales volume numbers.
Price catalyst
12-month price target: Rs58.00 based on a EV/EBITDA methodology.
Catalyst: Sales volume numbers, diesel price hike, interest rates changes.
Action and recommendation
We value AL at a mid-cycle multiple of 8x FY12E EV/EBITDA. Our TP of
Rs58/share (previously Rs91) offers 5% upside potential;. We recommend a
switch to Tata Motors (TTMT IN, Rs1,249, Outperform, TP:Rs1,465).
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