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UBS Investment Research
Ashok Leyland
Muted growth, downgrade to Neutral
Cut to Neutral on high leverage to volume growth
We downgrade ASOK to a Neutral as we cut our domestic MHCV growth outlook
for FY12 from 20% to 11%YoY. Given high operating and financial leverage the
earnings are significantly levered to volume growth. The stock valuation is now at
mid-cycle levels and offers limited upside potential given the uncertain macro
environment.
Remain cautious on near term MHCV growth outlook
We believe near term growth outlook for MHCV’s remains challenging due to
weak IIP growth and high base in Q2FY11. While our discussion with various
MHCV mfrs indicates that both freight rates and fleet utilization for truckers
remains good, we also note that overloading seems to be fairly rampant given lax
implementation of norms. We believe rising fuel prices, interest rates and
continued increases in MHCV prices are likely to further increase the incentive for
overloading.
Reducing estimates on slower volume growth
We reduce our MHCV YoY vol. growth forecasts for FY12/13 from 22%/16% to
11%/11% respectively. We reduce our EBITDA margin for FY11/12E from
11.2%/11.4% to 10.7%/10.4 due to higher cost and reduced operating leverage
benefit. We also raise interest expense given rising rates. We therefore reduce
FY11/12/13 EPS estimates from Rs.5.17/7.03/8.49 to Rs.4.74/5.04/5.31
respectively.
Valuation: Downgrade to Neutral, Reduce PT to Rs. 65 (from Rs.105)
We derive our price target from a DCF-based methodology using UBS’s VCAM
tool with a 12.5% WACC (raised from 12% due to the increase in interest rates).
We add Rs3.0 for Leyland’s stake in IndusInd Bank.
Downgrade to Neutral
We downgrade Ashok Leyland to Neutral as we cut our domestic MHCV
growth outlook for FY12 from 20% to 11%YoY. Given high operating and
financial leverage the earnings are significantly levered to volume growth. The
stock valuation is now at mid-cycle levels and in our view offers limited upside
given the uncertain macro environment.
We are 11%/20% below consensus earnings for FY12/13 respectively.
Reduce MHCV industry growth estimates
According to UBS economist, Philip Wyatt, LEI is likely to bottom in March.
Given, the lead in of LEI to normal IIP growth, Philip expects a modest
industrial recovery cycle to begin from Jun-qtr. (South Asian Focus “India: IP
recovery ahead?-dated 23rd March ’11).
Philip however, has reduced his industrial growth forecast for FY12 to 7.5%
from 8%. Given high sensitivity of MHCV demand growth to industrial
production growth and benign near term outlook for IIP, we reduce our YoY
MHCV volume growth estimates for the industry from 33%/20%/16% to
30%/11%/12% for FY11/12/13 respectively.
We believe the near term growth outlook for MHCV’s remains challenging
given sluggish near term IIP growth and the high base in terms of MHCV
demand for Q2FY12 due to pre-buying ahead of emission norms change in
Q2FY11. While our discussion with MHCV mfrs indicates that both freight
rates and fleet utilization for truckers remains good, we also note that
overloading seems to be fairly rampant given lax implementation of norms.
We believe the govt. is likely to raise diesel prices post elections in a few states
in May’11. Also, due to high commodity prices and emission norms change
have resulted in 12%YoY increase in MHCV prices. We believe rising fuel
prices, interest rates and continued increase in MHCV prices are likely to further
increase the incentive for overloading.
Ashok Leyland
Ashok Leyland is the second-largest player in the medium and heavy
commercial vehicle (MHCV) segment in India. The company had a 23% market
share in MHCVs in FY10. It has formed a joint venture with Nissan Motors for
light commercial vehicles and a joint venture with John Deere for construction
equipment. The majority shareholder is the Hinduja Group, with a 51% stake.
Statement of Risk
The domestic MHCV market remains highly leveraged to industrial production
growth. Consequently, any slowdown in the economy, could lead to an abrupt
slowdown in MHCV demand. This remains the key risk for Ashok Leyland,
along with loss of market share with increasing competitive pressure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Ashok Leyland
Muted growth, downgrade to Neutral
Cut to Neutral on high leverage to volume growth
We downgrade ASOK to a Neutral as we cut our domestic MHCV growth outlook
for FY12 from 20% to 11%YoY. Given high operating and financial leverage the
earnings are significantly levered to volume growth. The stock valuation is now at
mid-cycle levels and offers limited upside potential given the uncertain macro
environment.
Remain cautious on near term MHCV growth outlook
We believe near term growth outlook for MHCV’s remains challenging due to
weak IIP growth and high base in Q2FY11. While our discussion with various
MHCV mfrs indicates that both freight rates and fleet utilization for truckers
remains good, we also note that overloading seems to be fairly rampant given lax
implementation of norms. We believe rising fuel prices, interest rates and
continued increases in MHCV prices are likely to further increase the incentive for
overloading.
Reducing estimates on slower volume growth
We reduce our MHCV YoY vol. growth forecasts for FY12/13 from 22%/16% to
11%/11% respectively. We reduce our EBITDA margin for FY11/12E from
11.2%/11.4% to 10.7%/10.4 due to higher cost and reduced operating leverage
benefit. We also raise interest expense given rising rates. We therefore reduce
FY11/12/13 EPS estimates from Rs.5.17/7.03/8.49 to Rs.4.74/5.04/5.31
respectively.
Valuation: Downgrade to Neutral, Reduce PT to Rs. 65 (from Rs.105)
We derive our price target from a DCF-based methodology using UBS’s VCAM
tool with a 12.5% WACC (raised from 12% due to the increase in interest rates).
We add Rs3.0 for Leyland’s stake in IndusInd Bank.
Downgrade to Neutral
We downgrade Ashok Leyland to Neutral as we cut our domestic MHCV
growth outlook for FY12 from 20% to 11%YoY. Given high operating and
financial leverage the earnings are significantly levered to volume growth. The
stock valuation is now at mid-cycle levels and in our view offers limited upside
given the uncertain macro environment.
We are 11%/20% below consensus earnings for FY12/13 respectively.
Reduce MHCV industry growth estimates
According to UBS economist, Philip Wyatt, LEI is likely to bottom in March.
Given, the lead in of LEI to normal IIP growth, Philip expects a modest
industrial recovery cycle to begin from Jun-qtr. (South Asian Focus “India: IP
recovery ahead?-dated 23rd March ’11).
Philip however, has reduced his industrial growth forecast for FY12 to 7.5%
from 8%. Given high sensitivity of MHCV demand growth to industrial
production growth and benign near term outlook for IIP, we reduce our YoY
MHCV volume growth estimates for the industry from 33%/20%/16% to
30%/11%/12% for FY11/12/13 respectively.
We believe the near term growth outlook for MHCV’s remains challenging
given sluggish near term IIP growth and the high base in terms of MHCV
demand for Q2FY12 due to pre-buying ahead of emission norms change in
Q2FY11. While our discussion with MHCV mfrs indicates that both freight
rates and fleet utilization for truckers remains good, we also note that
overloading seems to be fairly rampant given lax implementation of norms.
We believe the govt. is likely to raise diesel prices post elections in a few states
in May’11. Also, due to high commodity prices and emission norms change
have resulted in 12%YoY increase in MHCV prices. We believe rising fuel
prices, interest rates and continued increase in MHCV prices are likely to further
increase the incentive for overloading.
Ashok Leyland
Ashok Leyland is the second-largest player in the medium and heavy
commercial vehicle (MHCV) segment in India. The company had a 23% market
share in MHCVs in FY10. It has formed a joint venture with Nissan Motors for
light commercial vehicles and a joint venture with John Deere for construction
equipment. The majority shareholder is the Hinduja Group, with a 51% stake.
Statement of Risk
The domestic MHCV market remains highly leveraged to industrial production
growth. Consequently, any slowdown in the economy, could lead to an abrupt
slowdown in MHCV demand. This remains the key risk for Ashok Leyland,
along with loss of market share with increasing competitive pressure.
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