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| India Infoline Research Team / 17:57 , Aug 31, 2010 |
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CMP Rs72, Target Rs83, Upside 14.6%
To gain market share amidst strong CV demand growth
Commercial vehicle (CV) volumes jumped 33% in FY10. This momentum is bound to continue considering recent trends in industrial activity, rise in infrastructure focus and better finance availability. Our market share gain expectation for Ashok Leyland is based on of 1) commencement of Uttarakhand plant translating into higher share in the northern region, 2) strong traction in southern market, 3) entry into newer segments and 4) support from Hinduja Leyland Finance for CV financing. Our assumptions factor in sale of 87,000 vehicles in FY11 and 95,000 in FY12 for the company, as compared to 63,942 numbers in FY10.
Resilient margin performance seen over the next two years
The oligopolistic nature of the domestic CV industry has allowed manufacturers including Ashok Leyland to raise product prices by 10-12% over the last 12 months. Such pricing power along with excise duty benefits from Uttarakhand plant, gains from operating leverage and stable raw material prices, would result in resilient margin performance in the medium term. We are factoring in a 70bps increase in margins over the next couple of years for Ashok Leyland.
Strong earnings CAGR of 36% supportive of valuation upsides
We expect Ashok Leyland to witness revenue CAGR of 23.6% during FY10-12E on the back of 22.2% CAGR in volumes. This, along with an expected 70bps increase in operating margin and 200bps lower tax rate (benefits of ramp up at Uttarakhand plant) would result in earnings CAGR of 36% during the same period. The stock currently trades at 12.2x FY12E EPS of Rs5.9, which we feel is attractive considering the uptrend in business cycle. We reiterate our BUY rating with a target price of Rs83 based on 14x FY12E earnings.
Valuation summary
Y/e 31 Mar (Rs m)
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FY09
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FY10
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FY11E
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FY12E
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Revenues
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59,811
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72,447
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97,759
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110,762
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yoy growth (%)
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(22.8)
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21.1
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34.9
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13.3
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Operating profit
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4,694
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7,628
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10,656
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12,405
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OPM (%)
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7.8
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10.5
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10.9
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11.2
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Pre-exceptional PAT
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2,035
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4,269
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6,558
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7,846
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Reported PAT
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1,900
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4,237
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6,558
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7,846
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yoy growth (%)
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(59.5)
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123.0
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54.8
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19.6
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EPS (Rs)
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1.5
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3.2
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4.9
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5.9
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P/E (x)
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47.1
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22.4
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14.6
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12.2
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Price/Book (x)
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2.8
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2.6
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2.3
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2.0
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EV/EBITDA (x)
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24.4
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14.7
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10.2
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8.6
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Debt/Equity (x)
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0.6
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0.6
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0.5
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0.5
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RoE (%)
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7.2
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12.0
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16.7
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17.6
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RoCE (%)
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7.6
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10.5
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13.9
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15.3
| Source: Company, India Infoline Research
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