Ashok Leyland : Accumulate on every dip.Good stock !!!

ON 5 Jan 2012

Scrip Code: 500477 / ASHOKLEY

CMP:  Rs. 22.60; Buy at Rs. 22.20 levels.

Short term Target: Rs. 24; Medium to Long Target – Rs.30; STOP LOSS – Rs.20.50; Market Cap: Rs. 6,013.13 cr; 52 Week High/Low: Rs. 34.38 / Rs. 20.00

Total Shares: 266,06,76,634 shares; Promoters : 102,72,37,424 shares –38.61 %; Total Public holding : 163,34,39,210 shares – 61.39 %; Book Value: Rs. 9.99; Face Value: Rs. 1.00; EPS: Rs. 2.19; Div: 200 % ; P/E: 10.31 times; Ind. P/E: 25.95; EV/EBITDA: 6.92. Total Debt: 2658.19 Cr; Enterprise Value: Rs. 8711.05 Cr.

ASHOK LEYLAND LTD: The Company was founded in 1948 and is based in Chennai, India. Ashok Leyland limited is a subsidiary of Hinduja Automotive Ltd. It was named after the founder Raghunandan Saran’s son Ashok, the company was renamed ‘ASHOK LEYLAND’ with equity participation from Leyland Motors Ltd in 1955. Ashok Leyland ltd engages in the manufacture and sale of commercial vehicles and related components in India and internationally. In the year 1967, India’s first inland made double decker was launched by Ashok Leyland. The Company's products include Buses – double decker and vestibule buses, CNG buses, Trucks – including multi axle trucks & tractor trailers, diesel engines, defense and special vehicles for Indian army. From 18 seater to 82 seater double-decker buses, from 7.5 ton to 49 ton in haulage vehicles, from numerous special application vehicles to diesel engines for industrial, marine and genset applications, Ashok Leyland offers a range of products. In the year 2006 Ashok Leyland acquired AVIA the Czech Republic based truck manufacturer. In 2007 the company formed a JV with Nissan Motor Company, Japan for the manufacture and marketing of light commercial vehicles, same year Ashok Leyland signed another JV with Continental AG, Germany – for the development of automotive Infotronics. In 2010, the Company acquired 26% stake in Optare plc. a bus manufacturer in the United Kingdom. Ashok Leyland Ltd is compared to: Bajaj Auto Limited, Motherson Sumi Systems Limited in India and Xiamen King Long Motor Company Limited globally.

Investment Rationale:

Management expects industry to grow at a moderate rate of 5 % - 6 % in FY12. Higher interest rates, rising fuel prices and sluggish freight rates in Southeast are likely to impact sentiments negatively. Higher tonnage tipper segment is witnessing strong demand with about 50 % YoY growth in H1FY12 largely driven by construction activities. Regional wise sales increased by 112 % in west, 42 % in South, 15 % in North and decline in East. Company’s strength in Tipper segment was affected due to supply constraints of fully built vehicles. Management expects to maintain its market share of 25 % in FY12 driven by penetration in northern and eastern markets. To achieve this Ashok Leyland is increasing dealerships and service stations, increasing production of fully built vehicles (FBV) and necessary price corrections (for select products). It aims to do 3500 units of FBV as of 2000 to 2500 units per month currently. Implementation of ban on overloading has been gaining momentum in Uttar Pradesh, Madhya Pradesh, Bihar and now in Karnataka also. Ashok Leyland has started dispatching its LCV ‘Dost” under Nissan JV with volumes of 210 units in October. During November domestic prices were increased upto 1 %. Internationally prices of metals like Aluminum & Copper are witnessing marginal reduction which is partly offset by unfavorable exchange rate. Management expects benefits in second half of FY12 and maintains EBITDA margins of 10.5 % for FY12. Management targets 9,000 units of manufactured engine sales in H2FY12. Spare parts sales were at Rs. 370 Cr in H1 and management targets Rs. 400 Cr in H2FY12. Ashok Leylands JV with John Deere is expected to launch its first product named Backhoe loader followed by wheel loader in FY13, with the target volumes of 8,000 to 9,000 units. Ashok Leylands Continental JV has started supplying dashboard electronic equipment which is to be fitted in UTruck platform. Management expects major of its JVs to turn EBITDA positive in the next 2 to 3 years. U-Truck has been launched in tractor-trailer and tipper segments only - with the volumes of 2,000 units in H1FY12 and targets its volumes of 6,000 by H2FY12.  Loans & Advances are up by Rs 310 Cr largely due to VAT accumulation of Rs. 46 Cr and excise of Rs. 55 Cr. Also, capital advances are up by Rs. 50 Cr. Management targets to bring down Loans & Advances by Rs. 100 Cr going ahead. It is expected that Ashok Leyland will maintain exports target of 13,000 vehicles for FY12 and targets 15 % of total volumes as exports this is possible due to increased penetration in new markets of Latin America and Africa.

Outlook and Valuation:

Ashok Leyland is raising its stake in British bus maker Optare Plc to 75.1 % following a re-financing agreement.  Ashok Leyland had already acquired a 26 % stake in Optare in July 2010 aiming at a long-term strategic partnership. This re-financing was achieved with Ashok Leyland facilitating a credit-line to support Optare's re-banking options and providing a substantially improved working capital facility for the business. Optare's management believes that this re-financing represented a "defining moment" in the company's turnaround plan, which the company had commenced in 2009. Along with the access to Optare’s technology including modern range of city buses, Ashok Leyland sees a large opportunities to grow in the global bus market. Both the management sees this as an important element in their vision of being among the top 5 bus manufacturers globally. Through leveraging the synergies of the two companies, managements are confident that going forward they will be able to accelerate technology sharing, develop future-ready products and substantially increase their global footprint. Ashok Leyland has been trading in the range of Rs. 21 & Rs. 24. Keeping these in mind, Ashok Leyland could be an ideal Buy as well as at declines with a stop loss placing at Rs. 20.50 for a target of Rs. 30.00. Uncertainty with respect to demand for Ashok Leyland (due to regional disparity) continues to be a concern on the volume front. However, price hikes and lower Raw Material cost can provide cushion against the drop in earnings due to lower volumes. The company could report EPS of Rs. 2.40 x for FY12E and Rs. 3.00 for FY13 estimates. The stock could be bought with the short term target of Rs. 24 & Rs. 30 for Medium to long term period with the strict stop loss of Rs. 20.50 

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	7,244.70	11,117.70	12,542.70	14,274.70
NET PROFIT (Rs. Crs)	388.90	657.30	627.40	786.20
EPS (Rs.)	1.50	2.50	2.40	3.00
PE (x)	18.50	10.90	11.40	9.10
P/BV (x)	3.10	2.70	2.40	2.10
EV/EBITDA (x)	11.20	6.70	5.90	4.90
ROE (%)	17.60	26.40	22.30	24.70
ROCE (%)	12.50	18.50	17.40	19.40

I would buy ASHOK LEYLAND LTD with a price target of Rs. 24 for Short term and Rs. 30 for the Medium to long term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 20.50 on every purchase.