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Ashok Leyland (AL)
Automobiles
Upgrade to ADD. We upgrade the stock to ADD (from SELL earlier) due to significant
underperformance of the stock on expectations of softness in commercial vehicle
demand. We believe concerns are overplayed due to stable truck freight rates and
expectations of improvement in freight demand. We expect heavy truck demand to
remain weak in the near term, which could provide a good buying opportunity, in our
view. We retain our target price of Rs26.
We expect truck volumes to increase by 8% yoy in FY2013E
We believe domestic truck volumes will grow at 7-8% yoy in FY2013E and concerns of
flat/negative growth in truck volumes is overplayed, in our view. We believe steady truck freight
rates (except for decline seen in East India routes), overloading ban in some states, improvement in
freight availability in FY2013E and strong replacement demand for tippers are likely to result in a
7-8% yoy growth in FY2013E for trucks.
We expect Ashok Leyland’s market share in trucks to remain at ~20% in FY2013. Market share of
Ashok Leyland has declined by 300 bps over Apr-Nov 2011 due to a 32% yoy drop in multi-activity
vehicle volumes in South India and 21% yoy decline in tractor trailer volumes in West India. Ashok
Leyland’s market share in the domestic truck segment has declined to a seven-year low and we do
not expect it to decline further from current levels.
We also expect export volumes to remain buoyant driven by strong growth in Sri Lanka and
recovery in the Middle East.
EBITDA margins are likely to remain steady, in our view
We expect EBITDA margins to remain at 10-10.5% in FY2013 as we expect discounts to increase
as volume growth softens which could offset the benefit due to lower commodity costs and
increase in production from the Pantnagar plant..
We upgrade the stock to ADD (from SELL)
We upgrade the stock to ADD (from SELL) as we believe AL could potentially deliver 23% yoy
earnings growth in FY2013— driven by 8% yoy truck volume growth and 50 bps improvement in
EBITDA margins (stable pricing environment and increase in production from the excise-free
Pantnagar plant). We believe the stock is trading at inexpensive valuations at 9X multiple on
FY2013E EPS (at a 20% discount to the past 10-year average). We have revised our earnings
downwards by 3-7% over FY2012-13E and retain our target price of Rs26. Our target price is
based on 11X multiple on our FY2013E EPS based on the past 10-year average.
Update on the key joint ventures and subsidiaries
50:50 JV with Nissan for LCVs
�� First LCV product called ’Dost‘ was launched in July 2011 with a payload capacity of 1.25
tons.
�� Sales of Dost within Tamil Nadu will be booked in the joint venture company and sales
outside Tamil Nadu will be booked in Ashok Leyland.
�� Total sales till Oct 2011 of Dost were 787 units.
�� LCVs will be marketed through a separate dealer network. The company has added 20
dealers so far and plans to sell 12,000 vehicles in FY2012E. Our channel checks suggest
that the vehicle has been very well-received and is on waiting period.
�� New products in <4 ton range will be launched over the next few years.
�� The company will invest Rs5 bn in the joint venture. Rs2.9 bn has already been invested
till date.
50:50 JV with John Deere for construction equipment
�� The company launched the 435 backhoe loader in November 2011. The company will be
launching wheeler loader in CY2013E from its Gummidipoondi facility.
�� The facility has a production capacity of 10,000 units and the company will be investing
Rs4 bn in the joint venture. The joint venture has received an investment of Rs1.4 bn till
date of which Ashok Leyland has invested Rs510 mn.
�� The company will also supply engines for the backhoe loader.
�� The company targets to sell 500 backhoe loaders in FY2012E and scale up volumes to
>8,500 over the next few years.
JV with Alteams for casings and housings
�� The joint venture was established to manufacture gear box casings, case oil coolers and
connection housings to Ashok Leyland’s trucks and telecom gensets.
�� The company will also manufacture cylinder heads and inlet manifold in future from this
joint venture.
�� The total project cost is Rs1.6 bn of which Ashok Leyland will invest Rs350 mn.
Hinduja Leyland finance
�� Hinduja Leyland Finance has disbursed ~Rs9.5 bn till Sep 2011 and has financed 2,150
vehicles in 1HFY12.
�� Equity capital in the company is Rs3.25 bn of which Ashok Leyland has invested Rs1.29
bn and the rest has been invested by group companies of the Hinduja group.
�� Operations have been spread to 394 locations with manpower strength of over 850.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland (AL)
Automobiles
Upgrade to ADD. We upgrade the stock to ADD (from SELL earlier) due to significant
underperformance of the stock on expectations of softness in commercial vehicle
demand. We believe concerns are overplayed due to stable truck freight rates and
expectations of improvement in freight demand. We expect heavy truck demand to
remain weak in the near term, which could provide a good buying opportunity, in our
view. We retain our target price of Rs26.
We expect truck volumes to increase by 8% yoy in FY2013E
We believe domestic truck volumes will grow at 7-8% yoy in FY2013E and concerns of
flat/negative growth in truck volumes is overplayed, in our view. We believe steady truck freight
rates (except for decline seen in East India routes), overloading ban in some states, improvement in
freight availability in FY2013E and strong replacement demand for tippers are likely to result in a
7-8% yoy growth in FY2013E for trucks.
We expect Ashok Leyland’s market share in trucks to remain at ~20% in FY2013. Market share of
Ashok Leyland has declined by 300 bps over Apr-Nov 2011 due to a 32% yoy drop in multi-activity
vehicle volumes in South India and 21% yoy decline in tractor trailer volumes in West India. Ashok
Leyland’s market share in the domestic truck segment has declined to a seven-year low and we do
not expect it to decline further from current levels.
We also expect export volumes to remain buoyant driven by strong growth in Sri Lanka and
recovery in the Middle East.
EBITDA margins are likely to remain steady, in our view
We expect EBITDA margins to remain at 10-10.5% in FY2013 as we expect discounts to increase
as volume growth softens which could offset the benefit due to lower commodity costs and
increase in production from the Pantnagar plant..
We upgrade the stock to ADD (from SELL)
We upgrade the stock to ADD (from SELL) as we believe AL could potentially deliver 23% yoy
earnings growth in FY2013— driven by 8% yoy truck volume growth and 50 bps improvement in
EBITDA margins (stable pricing environment and increase in production from the excise-free
Pantnagar plant). We believe the stock is trading at inexpensive valuations at 9X multiple on
FY2013E EPS (at a 20% discount to the past 10-year average). We have revised our earnings
downwards by 3-7% over FY2012-13E and retain our target price of Rs26. Our target price is
based on 11X multiple on our FY2013E EPS based on the past 10-year average.
Update on the key joint ventures and subsidiaries
50:50 JV with Nissan for LCVs
�� First LCV product called ’Dost‘ was launched in July 2011 with a payload capacity of 1.25
tons.
�� Sales of Dost within Tamil Nadu will be booked in the joint venture company and sales
outside Tamil Nadu will be booked in Ashok Leyland.
�� Total sales till Oct 2011 of Dost were 787 units.
�� LCVs will be marketed through a separate dealer network. The company has added 20
dealers so far and plans to sell 12,000 vehicles in FY2012E. Our channel checks suggest
that the vehicle has been very well-received and is on waiting period.
�� New products in <4 ton range will be launched over the next few years.
�� The company will invest Rs5 bn in the joint venture. Rs2.9 bn has already been invested
till date.
50:50 JV with John Deere for construction equipment
�� The company launched the 435 backhoe loader in November 2011. The company will be
launching wheeler loader in CY2013E from its Gummidipoondi facility.
�� The facility has a production capacity of 10,000 units and the company will be investing
Rs4 bn in the joint venture. The joint venture has received an investment of Rs1.4 bn till
date of which Ashok Leyland has invested Rs510 mn.
�� The company will also supply engines for the backhoe loader.
�� The company targets to sell 500 backhoe loaders in FY2012E and scale up volumes to
>8,500 over the next few years.
JV with Alteams for casings and housings
�� The joint venture was established to manufacture gear box casings, case oil coolers and
connection housings to Ashok Leyland’s trucks and telecom gensets.
�� The company will also manufacture cylinder heads and inlet manifold in future from this
joint venture.
�� The total project cost is Rs1.6 bn of which Ashok Leyland will invest Rs350 mn.
Hinduja Leyland finance
�� Hinduja Leyland Finance has disbursed ~Rs9.5 bn till Sep 2011 and has financed 2,150
vehicles in 1HFY12.
�� Equity capital in the company is Rs3.25 bn of which Ashok Leyland has invested Rs1.29
bn and the rest has been invested by group companies of the Hinduja group.
�� Operations have been spread to 394 locations with manpower strength of over 850.
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