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http://content.icicidirect.com/mailimages/ICICIdirect_Ashok%20Leyland_InitiatingCoverage.pdf
P u r e C V p l a y ; r e - r a t i n g i n s i g h t ! ! !
Ashok Leyland (ALL) is one of the few pure play major commercial
vehicle manufacturers in India. ALL is the second largest player across
various segments with an overall market share of ~23% YTD. It has
remained highly cyclical in terms of revenues/earnings (MHCV led) as it
remains highly dependent on macros like GDP growth/interest rates.
However, the foray into various segments including LCV segment is
expected to provide lot of sustainable revenue streams. We believe ALL
would witness volume growth at ~19% CAGR (FY12E-14E) as both
MHCV/LCV witness higher than historical growth rates as the
investment cycle starts to take precedence over consumption. On
financials, we find ALL’s earnings potential on a free cash basis pretty
attractive as large capex is over. On earnings, we expect revenue &
profit to grow at ~14% & 28% CAGR over FY12E-14E to ~| 16,732 crore
& ~| 800 crore, respectively. On valuations, we assign a higher up-cycle
multiple of ~11x and initiate coverage on the stock with BUY rating.
Volume growth to surprise …
ALL is expected to be one of the strongest beneficiaries of the return of
the up-cycle in industrial segment. In FY12E, CV demand has remained
highly resilient surprising mostly bearish analysts as underlying
fundamentals of freight rates, financier loans and operator profitability
remained strong. We believe this is a reflection of strong inherent
economic activity leading to higher road freight. Thus, we have modelled
volume growth at ~19% CAGR (FY14-12E) at ~1,44,700 units as both LCV
segment ramp-up and MHCV segment are expected to rebound post a
sedate FY12E.
Lone cyclical pure play in CV business; scarcity premium attached
ALL remains one of the few pure plays in the CV segment unlike Tata
Motors (luxury play) and Eicher Motors (two wheelers). We believe our
change of bias is justified in terms of multiples as we believe the interest
rate cut scenario would lead to a re-rating in expectations of better
earnings growth in the coming periods.
Valuation
We have analysed the business with both macro and stock specific
features in mind. We believe that though competition has strengthened
from EIM/AMW, ALL would be able to maintain a significant market
share. At the CMP of | 29, the stock is trad ing at 9.6x FY14E PE. We
believe the interest rate cycle is ripe for reversal and could trigger a
strong multiple re-rating for ALL in earnings expectations. Thus, we
have arrived at a target price of | 36. We initiate coverage on the stock
with a BUY rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_Ashok%20Leyland_InitiatingCoverage.pdf
P u r e C V p l a y ; r e - r a t i n g i n s i g h t ! ! !
Ashok Leyland (ALL) is one of the few pure play major commercial
vehicle manufacturers in India. ALL is the second largest player across
various segments with an overall market share of ~23% YTD. It has
remained highly cyclical in terms of revenues/earnings (MHCV led) as it
remains highly dependent on macros like GDP growth/interest rates.
However, the foray into various segments including LCV segment is
expected to provide lot of sustainable revenue streams. We believe ALL
would witness volume growth at ~19% CAGR (FY12E-14E) as both
MHCV/LCV witness higher than historical growth rates as the
investment cycle starts to take precedence over consumption. On
financials, we find ALL’s earnings potential on a free cash basis pretty
attractive as large capex is over. On earnings, we expect revenue &
profit to grow at ~14% & 28% CAGR over FY12E-14E to ~| 16,732 crore
& ~| 800 crore, respectively. On valuations, we assign a higher up-cycle
multiple of ~11x and initiate coverage on the stock with BUY rating.
Volume growth to surprise …
ALL is expected to be one of the strongest beneficiaries of the return of
the up-cycle in industrial segment. In FY12E, CV demand has remained
highly resilient surprising mostly bearish analysts as underlying
fundamentals of freight rates, financier loans and operator profitability
remained strong. We believe this is a reflection of strong inherent
economic activity leading to higher road freight. Thus, we have modelled
volume growth at ~19% CAGR (FY14-12E) at ~1,44,700 units as both LCV
segment ramp-up and MHCV segment are expected to rebound post a
sedate FY12E.
Lone cyclical pure play in CV business; scarcity premium attached
ALL remains one of the few pure plays in the CV segment unlike Tata
Motors (luxury play) and Eicher Motors (two wheelers). We believe our
change of bias is justified in terms of multiples as we believe the interest
rate cut scenario would lead to a re-rating in expectations of better
earnings growth in the coming periods.
Valuation
We have analysed the business with both macro and stock specific
features in mind. We believe that though competition has strengthened
from EIM/AMW, ALL would be able to maintain a significant market
share. At the CMP of | 29, the stock is trad ing at 9.6x FY14E PE. We
believe the interest rate cycle is ripe for reversal and could trigger a
strong multiple re-rating for ALL in earnings expectations. Thus, we
have arrived at a target price of | 36. We initiate coverage on the stock
with a BUY rating.
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