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.

New Year Wishes for Readers !!!

Every man should be born again in the first day of January. Start with a fresh page.  Take up one hole more in the buckle if necessary, or let down one, according to circumstances; but on the first of January let every man gird himself once more, with his face to the front, and take no interest in the things that were and are past.

Keep smiling, God Bless u all and Take Care !!!

NMDC : A VALUE PICK !!!

Scrip Code: 526371 / NMDC

CMP:  Rs. 150.60; Buy at Current levels.
Short term Target: Rs. 165, 6 month Target – Rs. 240; STOP LOSS – Rs. 138.55; Market Cap: Rs. 59,708.62 cr; 52 Week High/Low: Rs. 305.00 / Rs. 135.60

Total Shares: 396,47,16,000 shares; Promoters : 356,84,18,180 shares –90 %; Total Public holding : 39,62,97,820 shares – 10 %; Book Value: Rs. 48.46; Face Value: Rs. 1.00; EPS: Rs. 18.62; Div: 330 % ; P/E: 8.09 times; Ind. P/E: 17.23; EV/EBITDA: 10.81. 

Total Debt: NIL; Enterprise Value: Rs. 57,072.08 Cr.

National Mineral Development Corporation LTD: The Company was founded in 1958 and is based in Hyderabad, India. NMDC is an iron ore producer & exporter, operating in Chhattisgarh & Karnataka. NMDC ltd engages in the exploration and production of various minerals in India and internationally. It explores for iron ore, copper, rock phosphate, lime stone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite & beach sand. The company also focuses on coal and gold properties, as well as platinum group of elements and bauxite. It has iron ore deposits in Bailadila Chhattisgarh, Iron ore mines at Donimalai Karnataka; diamond mines at Panna Madhya Pradesh; magnesite mines at Jammu; & Arki lime stone project in Himachal Pradesh. In addition, the company involves in investing in the development of renewable energy resources, which include wind mill projects of approximately 10.5 MW capacities at Karnataka. NMDC supplied 2.3752 Cr tons of iron ore to domestic industries & had exported 25.63 lakh tons of iron ore. On December 10, 2010, NMDC announced a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 2mn tonne steel plant in Karnataka. This JV will have captive coking coal mine in Russia, while it will have an iron ore mining subsidiary in India. On September 2011, NMDC purchased a 50 % stake in Australian-based Legacy Iron Ore (Legacy) as a cornerstone investor for Rs. 92 Cr. NMDC is compared with SESAGOA LTD in India, Cliffs Natural Resources Incorporation and Ferexpo Plc globally.      

Investment Rationale:

NMDC management aims to ramp up its production capacity to 50mn tonnes by FY2014–15E through increased exploration of its existing mines and development of new mines, i.e., Deposit 11B in Bailadila and Deposit 13 in Kumaraswamy in Karnataka. The targeted cost for the development of the three mines is around Rs. 2,400 Cr. However, in FY2011, the company’s volumes have been impacted by iron ore ban in Karnataka and Naxal activities in the Dantewada region of Chhattisgarh. Management intends to diversify its operations by moving downstream through the establishment of steel plants and pellet plants.

Historically, NMDC has maintained its dividend payout ratio at in the range of 22 % -24 %. In FY11, it paid an interim dividend @ 115 % on the equity shares, aggregating to Rs. 460 Cr in February 2011 and also announced a final dividend of 215 % on the paid up equity share capital, aggregating to Rs. 850 Cr. The total dividend payout for the year stood at Rs. 1310 Cr. Including dividend tax, total cash outflow for the company stood at Rs. 1520 Cr. NMDC has been generating steady cash flow over the last two years. With the very little capex and no buyouts the cash level for the company has been rising year on year. On account of the buoyancy in prices in FY11 the company’s cash level rose the highest. Cash at the end of FY11 stood at Rs. 17,200 Cr. In fact NMDC’s cash level has jumped 5.5 x since FY06. As a result, NMDC has been on the lookout for mineral resources globally as domestic capacity expansion has been slower than expected and new mining licenses in the country are hard to come by. The company is also investing into facilities for value addition. Over the next two years, it is expected that the cash levels could increase 55.7 % to Rs.26,800 Cr, translating into cash per share of Rs. 67.59. With such a strong balance sheet, NMDC is currently prospecting various mining assets, including an iron ore mine and a phosphate mine in Australia, an iron ore mine in Brazil and a coking coal asset in Russia. So an over sea acquisition of mining assets cannot be ruled out. NMDC being a Cash rich PSU it’s the strong candidate for buyback of government held shares which will be an EPS accretive. NMDC is setting up value addition plants like -

Chattisgarh Steel plant: NMDC is setting up Chhattisgarh Steel Plant a 3mtpa steel plant at Nagarnar near Jagdalpur, Chhattisgarh. It has acquired 1,782.62 acres of land for the plant (995 in 1st phase and 787.62 acres in 2^nd Phase). Formal allotment of additional 102.64 acres of Government Land is under process. Besides, diversion of about 63.52 acres of forest land is also under process in the government. The board has approved an investment of Rs. 15,530 Cr for setting up the plant. Environmental Clearance from MoEF was received subject to the conditions.

Donimalai pellet plant: The 1.2mtpa pellet plant at Donimalai has been built largely to prolong the life of Tailing Dam at Donimalai by using slimes for making pellets. Execution of project is divided into six packages and the estimated capital expenditure is Rs. 570 Cr. Civil works are in progress at site. Orders are placed for site leveling. Project is scheduled to be completed by March 2013.

Bacheli pellet plant: Setting up of 2mtpa pellet plant project is kept on hold considering the proposed slurry pipeline from Bacheli to Vizag. It is planned to relocate the project from Bacheli, Dantewada to Nagarnar, Jagdalpur.

Outlook and Valuation:

Iron Ore market is expected to remain tight on the back of restricted supplies from India. Chinese steel production too has not cooled off as per the market’s expectations. Upside risks to the volume estimate remain high as the company has ramped up its output at the Kumarswamy mine in Karnataka over the last one month. Before the mining ban was implemented in Karnataka, NMDC had lowered its production target to 28-29mn tons in FY12 because of mining hurdles such as stricter green laws. However, with the Supreme Court allowing NMDC to mine iron ore in the Bellary area, partially lifting a ban levied by the Karnataka government, the company plans to produce 32mn tons, against the previous target of 29mn tons. NMDC’s cost of production increased sharply in FY11 on account of an increase in royalty and jump in transportation costs. Per ton cost of production increased to Rs. 1,077/ton in FY11 from Rs. 785/ton in FY10. The above two cost heads accounted for 88 % of the increase in per ton costs for the company in FY11. Royalty on iron ore was increased from a fixed royalty of up to Rs. 27 a ton, depending on its variety and grade to 10 % on its prevailing market price. To benefit from the strong iron ore prices, Railways have increased the freight on iron ore meant for exports. Over the last one year, railways have increased its fare by 3 x. Going forward it is expected that  the costs will decrease by 4.7 % yoy in FY12 as the impact higher royalty and export tax would be negated by an increase in overall volumes and decline in exports.

After the 24 % correction in the stock price over the last 6 months, the stock is trading at 5.5x FY13 EV/EBIDTA, which is marginally higher than its peers. NMDC should trade at a premium to its peers considering the high quality reserves and the low cost operations it has. NMDC reported strong growth in sales volumes during 2QFY2012, led by ramp-up in its Karnataka iron ore mines. Going forward, a robust growth in sales volumes is expected. The stock is currently trading at 6.5x FY2012E and 5.40x FY2013E EV/EBITDA. Valuing the stock at 5.4x FY2013E EV/EBITDA, the fair price of NMDC comes at Rs. 241. In my view NMDC could report EPS of Rs. 21.60/sh in FY12E & of Rs. 23.60/sh in FY13E.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	6,239.00	11,369.00	13,582.00	14,932.00
NET PROFIT (Rs. Crs)	3,451.00	6,499.00	8,565.00	9,346.00
EPS (Rs.)	8.70	16.40	21.60	23.60
PE (x)	27.20	14.50	11.00	10.10
P/BV (x)	6.60	4.90	3.60	2.80
EV/EBITDA (x)	18.30	8.90	6.50	5.40
ROE (%)	26.60	38.80	37.90	31.50
ROCE (%)	33.40	50.60	47.40	39.60

I would buy NMDC LTD with a price target of Rs. 241 for Medium to Long term and Rs. 165 for the Short 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. 138.55 on every purchase.


READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE