Ashok Leyland - 'In reverse gear'

Economic headwinds such as poor economic growth, high interest rates, mining ban, falling domestic and international trade and low capital formation will result in lower demand for M&HCVs and decline in growth rate for LCVs.

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs21.2, Target Rs18.5, Downside 12.7%

Commercial Vehicle (CV) industry in India, after witnessing a 28.4% CAGR over the past four years, is now seeing multiple headwinds in the form of poor economic growth, high interest rates, mining ban, falling domestic and international trade and low capital formation. With excess tonnage capacity in the system and bleak economic outlook we expect CV volumes, particularly M&HCV, to be under pressure. LCV volume growth is also expected to moderate on a high base created with a 32% CAGR over the past four years.

With robust long term outlook for domestic CV industry, foreign players such as Daimler, Volvo, Navistar are establishing their presence in India. Incumbents are now feeling the heat of competition and have resorted to steep discounts. Financiers for CV purchases have seen a rise in their gross NPA levels leading to tightening of financing norms such as lowering of loan to value ratio. Fleet operators are reeling under the pressure of declining freight rates and increased waiting period for return trips.

Ashok Leyland (AL) gained market share across segments in YTD FY13 on the back of relatively lesser decline in southern market. However, we believe, this would not sustain as increasing competition would eventually eat into the market share. For M&HCV, we expect AL to report a decline of 4% in FY13. AL, with its Dost model, has made its presence felt in the LCV segment which has been outperforming in the CV industry. However, lower margins on Dost will hurt profitability of the company. We estimate that PAT would decline by 21% in FY13.

With Rs4.5bn planned spend on capex and Rs3.5bn infusion in JVs and subsidiaries, cash-flows will remain strained. Leverage on the books is also expected to rise. Although, the stock price has corrected by 33% since the beginning of FY13, current valuation multiples continue to be higher than historic average and previous downcycle. We downgrade our rating from Market Performer to SELL with a revised 9-month price target of Rs18.5.

Financial summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 111,771 128,420 140,099 154,391
yoy growth (%) 54.3 14.9 9.1 10.2
Operating profit 12,137 12,561 11,557 13,062
OPM (%) 10.9 9.8 8.2 8.5
Reported PAT 6,313 5,660 4,478 5,507
yoy growth (%) 49.0 (10.3) (20.9) 23.0
EPS (Rs) 4.7 2.1 1.7 2.1
P/E (x) 4.5 10.0 12.6 10.2
EV/EBITDA (x) 4.3 6.9 7.8 7.0
Debt/Equity (x) 0.6 0.7 0.8 0.8
RoE (%) 16.5 13.8 10.4 12.1
RoCE (%) 14.8 12.7 10.0 11.0
Source: Company, India Infoline Research

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