BUY with a target upside of 35% Ashok Leyland is the flagship company of Hinduja group and is the second largest medium and heavy commercial vehicle manufacturer (MHCV) after Tata Motors in India. It is also the largest bus manufacture company in India. Ashok Leyland has entered into joint ventures with Nissan and John Deere for manufacturing LCVs and construction equipment respectively. In the last couple of years, commercial vehicle industry has been under pressure due to economic slowdown in the country. This has resulted in heavy discounting in truck industry. Higher discounting in Q2FY14 has helped Ashok Leyland to recover the lost market share by 3%. Poor sales volume and rising discounts impacted Ashok Leyland’s financials leading to 13.6% YOY fall in H1FY14 revenue at `48.1bn and operating margins shrinking to 2.3% in H1FY14 from 9.6% in H1FY13. Additionally, higher financing cost has resulted in loss of `1.6 bn during H1FY14. In order to have tight control over the finances, the company has taken various initiatives. It plans to reduce its debt by `7-10 bn from current level of ~`48 bn by selling noncore assets and reducing working capital requirements. It has rationalized its manufacturing facilities to improve asset utilization. Apart from reducing executive compensation and plant working days, the company is planning to stop discounts and take price hikes to compensate raw material cost inflation. According to the management, recently launched Intermediate Commercial Vehicle (ICV) Boss truck and Stile MPV have received good response. It plans to extend the Boss offering from two states currently to national level in next six months. While there is significant uncertainty in near term about domestic capex cycle revival, we expect that decision making within the next government will be more focused and could provide a boost to the infrastructure and capital goods sectors. Management efforts and improvement in macro factors should better Ashok Leyland’s earnings in future. At CMP, we believe the stock has factored most of the negative sentiments and provides investors good buying opportunity. We recommend BUY rating on Ashok Leyland with a target price of `21 per share.
Posted on: Fri, 22 Nov 2013 10:36:11 +0000
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