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With a heritage of over six decades, Ashok Leyland (ALL) is the only listed
pureplay commercial vehicle (CV) manufacturer in India. We are broadly
affirmative on the stock, although we do have concerns. Our positive view is
based on: a) EBITDA margins that appear to have bottomed out, and b) a longterm
trend pointing at the CV industry’s shift towards high-end trucks, which is
ALL’s forte. Our concerns arise from: a) the company’s dependence on core
infrastructure sectors, which makes near-term volume growth vulnerable, b)
increasing competition, which will limit ALL’s pricing power. We expect ALL’s
EPS to grow from ~Rs2.0 in FY12 to Rs2.2/Rs3.1 in FY13/FY14 owing to sales of
~Rs134bn/Rs152bn, and EBITDA margins of 10.1%/10.9% in FY13/14 respectively.
We value ALL at Rs32 (7x FY13-14 average EBITDA, and Rs3/share for its key joint
ventures). Initiate with ADD.
Mild concerns on volume growth… Around 70% of ALL’s volumes come from the
12te+ trucks, which depend on the country’s core infrastructure sectors –
construction, mining, etc. With question marks on most of these sectors for FY13, we
expect ALL’s ex-Dost FY13 volumes to grow 5% vs (-3%)/54% in FY12/FY11.
Geographically, ~50% of ALL’s volumes come from South India and the company
has 48% market share in that region vs ~21% pan-India share. There are signals
that core industry growth has started recovering in the South but we believe a proper
growth in ALL’s volumes will only come in FY14.
…though margins may have bottomed out. We believe EBITDA margins
bottomed out in Q3FY12 and may improve hereon – from 9.9% in FY12E to
10.1%/10.9% in FY13/FY14E. The impact of discounts plus the lower margin of sub-
3.5te Dost SCVs, will be more than compensated by flattish commodity prices and
benefits from the Pantnagar plant. Because ALL is exempt from excise duty at
Pantnagar, post Budget 2012 hike in excise duties by 2%, ALL’s savings from that
plant increase by ~Rs17,674/vehicle
Intense competition will constrain pricing power: ALL lost 4% market share in
the past one year and future years will see an increase in competitive intensity. ALL
is more dependent on transporters in the organised sector – a segment that will be
strongly targeted by global majors like Daimler and Volvo (through JV with Eicher).
Moreover, players like Asia Motor Works (AMW) are getting more aggressive. Thus,
discounts of ~3% introduced in Jan’12 will most likely continue through FY13,
limiting margin upside.
The only pureplay CV stock; initiate with ADD: ALL is the only pureplay CV
manufacturer among listed companies. The industry is undergoing a structural
change by way of increasing preference for larger trucks which will benefit ALL but,
on the flip side, competition is increasing. We value ALL’s core business at 7x FY13-
14E average EBITDA – translating into Rs29/share – and investments in JVs at
Rs3/share. Initiate with ADD.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
With a heritage of over six decades, Ashok Leyland (ALL) is the only listed
pureplay commercial vehicle (CV) manufacturer in India. We are broadly
affirmative on the stock, although we do have concerns. Our positive view is
based on: a) EBITDA margins that appear to have bottomed out, and b) a longterm
trend pointing at the CV industry’s shift towards high-end trucks, which is
ALL’s forte. Our concerns arise from: a) the company’s dependence on core
infrastructure sectors, which makes near-term volume growth vulnerable, b)
increasing competition, which will limit ALL’s pricing power. We expect ALL’s
EPS to grow from ~Rs2.0 in FY12 to Rs2.2/Rs3.1 in FY13/FY14 owing to sales of
~Rs134bn/Rs152bn, and EBITDA margins of 10.1%/10.9% in FY13/14 respectively.
We value ALL at Rs32 (7x FY13-14 average EBITDA, and Rs3/share for its key joint
ventures). Initiate with ADD.
Mild concerns on volume growth… Around 70% of ALL’s volumes come from the
12te+ trucks, which depend on the country’s core infrastructure sectors –
construction, mining, etc. With question marks on most of these sectors for FY13, we
expect ALL’s ex-Dost FY13 volumes to grow 5% vs (-3%)/54% in FY12/FY11.
Geographically, ~50% of ALL’s volumes come from South India and the company
has 48% market share in that region vs ~21% pan-India share. There are signals
that core industry growth has started recovering in the South but we believe a proper
growth in ALL’s volumes will only come in FY14.
…though margins may have bottomed out. We believe EBITDA margins
bottomed out in Q3FY12 and may improve hereon – from 9.9% in FY12E to
10.1%/10.9% in FY13/FY14E. The impact of discounts plus the lower margin of sub-
3.5te Dost SCVs, will be more than compensated by flattish commodity prices and
benefits from the Pantnagar plant. Because ALL is exempt from excise duty at
Pantnagar, post Budget 2012 hike in excise duties by 2%, ALL’s savings from that
plant increase by ~Rs17,674/vehicle
Intense competition will constrain pricing power: ALL lost 4% market share in
the past one year and future years will see an increase in competitive intensity. ALL
is more dependent on transporters in the organised sector – a segment that will be
strongly targeted by global majors like Daimler and Volvo (through JV with Eicher).
Moreover, players like Asia Motor Works (AMW) are getting more aggressive. Thus,
discounts of ~3% introduced in Jan’12 will most likely continue through FY13,
limiting margin upside.
The only pureplay CV stock; initiate with ADD: ALL is the only pureplay CV
manufacturer among listed companies. The industry is undergoing a structural
change by way of increasing preference for larger trucks which will benefit ALL but,
on the flip side, competition is increasing. We value ALL’s core business at 7x FY13-
14E average EBITDA – translating into Rs29/share – and investments in JVs at
Rs3/share. Initiate with ADD.
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