“Leap of faith” on big economic recovery! • Ashok Leyland :: ICICI Securities

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“Leap of faith” on big economic recovery! • Ashok Leyland (ALL) reported revenues of | 3361 crore (up ~72% YoY) vs. our estimate of | 3344 crore due to higher net realisations • Margins at 7.1% were lower than anticipation at 8.6% as product mix (M&HCV/LCV) as well as share of spares was down in the quarter • ALL posted a PAT of | 32.1 crore but witnessed a higher than normal tax rate at 46% due to re-assessment of annul tax provisions Core infra driven economic upturn to have multiplier effect on CV industry The CV industry has been facing challenges on two counts, viz. slowing demand as industrial activity levels have declined in the past two years and increasing competition leading to escalating discounts. However, with an expectation of core infra driven economic growth, we believe the CV industry, especially the M&HCV segment, is likely to witness a strong multiplier effect and surpass industry volume peaks of FY11 at ~400,000 units. Already, policy actions like reversal of mining bans and resumption of stalled infra projects have led to a visible rebound in >25 tonne segment, especially in South India. ALL has gained significant share and remains at ~27% level, up from ~23-24% since FY14. Thus, it remains well placed to capture probable growth. “Pure-play” CV player to focus on exports as well as domestic growth The domestic M&HCV segment has seen a sharp volume drop from FY13 onwards with the total industry shrinking from ~350,000 units in FY12 to ~200,000 units in FY14. With ~27% market share, ALL, the second largest M&HCV player is reaping the benefits of focusing on expansion of network (~620; 2x since FY13) and timely new product launches (Captain, Boss etc). ALL is focussing extensively on consolidating its exports markets (Middle East, Sri Lanka and Bangladesh) and venturing into newer African markets. The company aspires to grow export to a third of total M&HCV sales over the next five years. Cash flows to improve as capex recedes and capacity utilisation rises! With the domestic demand cycle for M&HCVs likely to have bottomed out, management initiatives to cut costs and improve the balance sheet by improving working capital cycle, divestment of non-core assets and manpower cost control have aided financial improvements. The efforts have started bearing fruit as ALL now boasts of a much stronger balance sheet with debt/equity levels down to 1x from 1.5x from FY13-14. With a major capex, investment cycle (FY08-13 entailing ~| 6000 crore, ~| 2000 crore, respectively) behind and no major capex plans in the medium term, ALL’s hitherto under-utilised capacity is likely to see higher utilisation and lead to stronger operating leverage benefits. Valuations stretched even as market factors in blue sky scenario The sharp rally in the stock price has taken us by surprise with the market perceptibly believing in stronger profitability growth (we expect ~70% CAGR in FY15E-17E). Although we subscribe to the view that ALL’s performance is likely to improve after the underperformance in the past two years, the relatively lower return ratios (~16% RoCE FY17E) compel us to be cautious on a bigger upgrade on valuation multiples from current levels (~3x P/BV, ~18x PE FY17E, ~12x EV/EBITDA FY17E). We believe the stock has little margin of safety vis-à-vis financial performance. Thus, we maintain our HOLD rating on the stock. We value on an SOTP basis, to arrive at an upgraded target price of | 68. We recommend that investors wait for better risk-reward opportunities to enter the stock.

LINK
 http://content.icicidirect.com/mailimages/IDirect_AshokLeyland_Q3FY15.pdf