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ASHOK LEYLAND
PRICE: RS.51 RECOMMENDATION: REDUCE
TARGET PRICE: RS.46 FY12E P/E: 12.2X
Cyclical ‘U’-turn
Ashok Leyland (ALL) is the second largest medium and heavy commercial
vehicle (M&HCV) manufacturer in India. Favorable factors helped the
company post strong 47% jump in volumes in FY11. However, given various
headwinds for the M&HCV, we anticipate industry sales to drastically
slowdown in FY12. Slower GDP growth rate, rising interest cost and
increase in diesel prices will make it a difficult year for the CV industry. We
expect ALL's volumes in FY12 to remain flat over FY11. Firm input costs and
industry wide slowdown will impact margins of the company. Even though
the stock price has corrected significantly from its 52 week high, we believe
there could be some more downside as interest rates have yet not peaked
out. The stock is quoting at 12.2x FY12E earnings. We initiate coverage on
the stock with REDUCE rating and a price target of Rs.46.
Key Investment Rationale
q Macro headwinds cast cloud over M&HCV growth in FY12. Over the past
couple of years M&HCV industry witnessed significant demand that was driven
by a host of factors including economic recovery, lower cost of financing and favorable
measures from the government. However now having grown at a CAGR
of 33% between FY09-FY11, we foresee significant slowdown in FY12. Slowing
economy, mounting interest cost and rise in fuel prices will put pressure on the
CV volumes in FY12, we opine. For ALL we have factored in an overall flat FY12
volume growth broadly in line with our industry volume growth expectations.
q Rising costs to keep margins under stress despite benefits from ramp-up
at the Pantnagar plant. Firm commodity prices and employee cost are expected
to keep the company's EBIDTA margins under stress in FY12. In an environment
of slowing volumes, passing on the cost to the end consumers will be a
difficult proposition. However the benefits arising from the Pantnagar unit on
account of enhanced volumes in FY12 will to a certain extent help the company
mitigate the impact. Pantnagar plant enjoys tax sops due to state policies. Volumes
from the plant are expected to grow from ~13,000 units in FY11 to 36,000
units in FY12. We have factored in a 100 bps drop in margin for ALL in FY12 to
10% over FY11 levels.
q Net profits to fall in FY12 on back of pressure on volumes and margins.
We expect ALL to report net profit of Rs.5,574 mn in FY12, a reduction of 12%
over FY11 reported net profit of Rs.6,313mn. Drop in net profits is expected on
account of 1) expected flat volumes for FY12 and 2)100bps drop in margins factored
on account of rising input cost. Furthermore interest outgo too is expected
to rise on account of 1). Increase in debt levels on account of capex and investments
in JV's and 2) Increase in cost of funds.
q Valuation and Outlook. At the CMP of Rs.51, the stock trades at a PE multiple
of 12.2x and 9.7x its expected FY12 and FY13 earnings respectively. On EV/
EBITDA, the stock trades at 8.2x for FY12 and 6.9x for FY13. ALL's historical 1
year forward average PE band has been 11x-14x but during downturn the stock
have traded below historical average PE band. We value the company at 11x its
expected FY12 EPS of Rs.4.2 and arrive at a price target of Rs.46. We initiate
coverage on the stock with a REDUCE rating.
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