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During 1QFY2016, ALL gained market share in the MHCV space due to
higher proportion of the fast growing heavy trucks and geographical
expansion. ALLs MHCV market share improved 460bp yoy to 30%. MHCV
truck market share improved 460bp yoy to 29.2%. Similarly, ALLs market
share in the MHCV passenger segment increased 440bp yoy to 33.2%.
Exhibit 4: Double digit volume growth continues Exhibit 5: Realisation & contribution jump yoy
35,000 50 1,700,000 500,000
30,000 40
1,500,000 450,000
25,000 30
400,000
20 1,300,000
20,000
10 350,000
15,000 1,100,000
0
300,000
10,000 (10)
900,000 250,000
5,000 (20)
0 (30) 700,000 200,000
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
Overall Volumes yoy chg % Realisation/vehicle Contribution/vehicle
Exhibit 6: Proportion of MHCVs continue to rise yoy Exhibit 7: Domestic market share trend
100 50
17.4
17.9
19.1
21.2
21.5
21.7
24.0
24.3
33.7
80 40
60 30
82.6
82.1
80.9
78.8
78.5
78.3
76.0
75.7
40 20
66.3
20 10
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
ALL maintained its double-digit margin for the second consecutive quarter,
reporting a margin of 10.1% in 1QFY2016. Higher proportion of MHCVs and
operating leverage led to the steep margin improvement.
Exhibit 8: EBITDA margin improves sharply yoy Exhibit 9: Bottom-line continues to improve yoy
500 12 300 10
10
400 200
8 5
300
6 100
200 0
4
0
100 2
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
(5)
0 (100)
0
(2)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
(10)
(100) (200)
(4)
The discounting levels in the MHCV industry continue to inch up. As per the
company, ALL has seen the discounting per vehicle shoot up from `1.75 lakh
in 2HFY2015 to `2.1 lakh in 1QFY2016.
ALL undertook a price hike of about 1% in the MHCV space in April 2015.
Commodity prices are expected to remain soft in the medium term given the
weakness in China.
The excise free Pantnagar plant, having a capacity of 50,000 units per
annum, has reached utilization levels of 75%.
The BS4 emission norms would be implemented across the country from
1.4.2017. The new emission norms are likely to increase the vehicle cost by
`60,000 to `70,000. ALL is ready for the new emission standards and expects
some pre-buying before the new norms come into effect.
The vehicle inventory remains under control and well within the normal range
of 1 month.
ALL has guided for a spending of `500cr for FY2016. This would include the
capex on new product introductions and maintenance capex along with
investments in subsidiaries.
Investment arguments
Double-digit volume growth over medium term as ALL would be a direct
beneficiary of the improving CV cycle: ALL is a pure CV play and is poised to
report strong double digit growth (~20% over FY2015-FY2017), given the uptrend
in the CV cycle. The MHCV segment, accounting for 80% of ALLs total volumes,
has undergone a sharp improvement in FY2015 (industry grew 16% yoy).
Improvement in fleet operators sentiments on back of better economic outlook,
and increase in profitability due to fall in diesel prices, would lead to continued
improvement in demand. The MHCV industry has shown improvement after a gap
of three years and we believe the industry would remain in an upcycle in the
medium term. Further we also expect improvement in the LCV segment in FY2016
on back of gradual improvement in sentiments.
ALLs MHCV volumes (accounting for 80% of the total volumes) have rebounded
sharply in FY2015, reporting a growth of 29% as against a double-digit decline in
the last two years. Fleet operators sentiments have improved considerably on the
back of revival in the economy, improvement in their profitabilities due to falling
diesel prices, and policy action initiated in the infrastructure and the mining space.
Also, ALL has significantly increased distribution network in non South regions
leading to market share gains. ALL is likely to outpace industry and we estimate a
20% CAGR in volume over FY2015- FY2017. Also, a better mix (higher proportion
of MHCVs), reduction in record high discounts due to volume growth, and
operating leverage would result in margin expansion. We expect operating margin to
improve from 7.6% in FY2015 to 11.1% in FY2017 (margins witnessed in the previous
upcycle in FY2011). We maintain Accumulate on the stock with a revised price target of
`94 (based on 12x FY2017 EV/EBIDTA).
Company background
Ashok Leyland Ltd (ALL) is the country's second largest CV manufacturer. The
company has a strong presence in the MHCV segment, with a domestic market
share of ~28% as of FY2015. ALL enjoys a dominant position in southern India,
with an ~50% market share, and is currently focusing on expanding its presence in
northern and western India by increasing its touch points in the region. The
company, through its JV with Nissan Motor and John Deere, intends to expand its
product portfolio and has launched Dost to tap the growing LCV demand, and a
backhoe loader used in the construction industry.
Key ratios
Y/E March FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E
Valuation Ratio (x)
P/E (on FDEPS) 42.4 159.8 NA 108.3 28.1 20.5
P/CEPS 26.2 44.8 NA 39.0 19.0 15.2
P/BV 8.2 5.3 5.3 4.9 4.6 4.3
Dividend yield (%) 1.1 0.7 NA NA 1.8 2.7
EV/Sales 2.1 2.1 2.7 2.0 1.5 1.3
EV/EBITDA 25.2 30.5 163.1 26.1 14.2 11.4
EV / Total Assets 3.9 3.1 3.1 3.2 3.1 2.9
Per Share Data (`)
EPS (Basic) 2.1 0.6 (1.8) 0.8 3.2 4.3
EPS (fully diluted) 2.1 0.6 (1.8) 0.8 3.2 4.3
Cash EPS 3.4 2.0 (0.4) 2.3 4.7 5.9
DPS 1.0 0.6 - - 1.6 2.4
Book Value 10.9 16.7 16.7 18.0 19.3 20.9
Dupont Analysis
EBIT margin 5.8 2.0 (5.3) 3.4 8.1 9.3
Tax retention ratio 0.8 0.9 (0.3) 0.8 0.7 0.7
Asset turnover (x) 2.3 1.5 1.1 1.8 2.1 2.5
ROIC (Post-tax) 10.9 2.6 1.9 4.7 12.2 16.1
Cost of Debt (Post Tax) 8.8 9.9 NA 11.5 9.0 9.1
Leverage (x) 0.2 0.8 0.8 0.3 0.3 0.2
Operating ROE 11.4 (3.1) NA 2.8 13.1 17.5
Returns (%)
ROCE (Pre-tax) 10.6 2.8 (6.0) 5.6 16.8 21.7
Angel ROIC (Pre-tax) 12.8 2.8 (6.0) 6.2 17.5 23.0
ROE 13.8 3.2 (10.7) 4.6 16.4 20.8
Turnover ratios (x)
Asset Turnover (Gross Block) 1.9 1.5 1.1 1.6 2.1 2.4
Inventory / Sales (days) 63 55 44 45 45 45
Receivables (days) 34 42 48 48 48 48
Payables (days) 108 123 144 145 145 145
WC cycle (ex-cash) (days) (6) (26) (52) (52) (52) (52)
Solvency ratios (x)
Net debt to equity 0.2 0.8 0.8 0.3 0.3 0.2
Net debt to EBITDA 0.8 4.0 20.9 1.4 0.9 0.5
Interest Coverage (EBIT / Int.) 2.9 0.6 (1.2) 1.2 4.5 6.2
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