Ashok Leyland Limited

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1 Ashok Leyland Limited NEUTRAL CMP: Rs Date: November 06, 2009 Market Cap. : Rs mn. Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt-Equity ratio Key Data: Sector Automobile Face Value Rs wk. High/Low Rs.53.65/12.45 Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk vsrsastry@firstcallindiaequity.com SYNOPSIS Ashok Leyland, the flag ship company of Hinduja Group, is the second largest commercial vehicle manufacturer of the country. The company is one of the worst hit automobile companies by the current global financial crisis. The company has rolled out up to 6,011 vehicles in October 2009, up by 66.5%yoy. The company would start delivery of the first 50 ultra low entry (ULE) buses to the Delhi Transport Corporation (DTC) soon as part of its Rs 11.9 billion contract to supply 875 buses this fiscal. Belgium-based Wabco has entered into a supply agreement with Ashok Leyland. The company has entered into an initial agreement to form a joint venture (JV) with Nissan Motor Company, for the development, manufacture and distribution of Light Commercial Vehicle (LCV) products. The domestic Commercial Vehicle (CV) industry is extremely positive and the company expects to exit this fiscal with a 20%yoy volume growth. The company has bagged orders for around 5,000 buses, of which the company has supplied around 700 vehicles. The remainder of the order is scheduled to spillover into 3QFY2010 and 4QFY2010. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Firstcall India Equity Advisors Pvt Ltd 1

2 Table of Content Content Page No. 1. Investment Highlights Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 13 Firstcall India Equity Advisors Pvt Ltd 2

3 Investment Highlights Result Updates (Q2FY10) For the second quarter, the top line of the company decreased 15%YoY and stood at Rs mn against Rs mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., an increase of 32%YoY. EPS of the company for the quarter stood at Rs.0.67 for equity share of Rs.1.00 each. Firstcall India Equity Advisors Pvt Ltd 3

4 Expenditure for the quarter stood at Rs mn, which is around 18% lower than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 63% of the sales of the company and stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., a decrease of 33%YoY. Employee cost increased 7%YoY to Rs mn from Rs mn. and accounts for 11% of the revenue of the company for the quarter. OPM and NPM for the quarter stood at 11% and 6% respectively from 9% and 4% respectively of the same period of the last year. Firstcall India Equity Advisors Pvt Ltd 4

5 Ashok Leyland rolls out 6,011 vehicles in Oct`09 The company has rolled out up to 6,011 vehicles in October 2009, up by 66.5% over 3609 in the same month last year. After a long gap, the company improved production to 5,477 vehicles in September The company also pushed sales by 57% to 5333 vehicles last month against 3397 in the same month in In September this year, it sold 5,448 vehicles. During April-October 2009, total production stood at 27,538 vehicles against 44,842 vehicles in the same period last year. Total sales were also lower at 27,323 (39,029) which included export sales of 2,997 (3,727). The plants are said to be working at almost full capacity. Ashok Leyland to supply 875 buses to DTC this fiscal The company would start delivery of the first 50 ultra low entry (ULE) buses to the Delhi Transport Corporation (DTC) soon as part of its Rs 11.9 billion contract to supply 875 buses this fiscal. The company also said it would fulfill its contract to deliver 5,000 buses to various state and local transport bodies under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in The delivery which was originally meant to have started in March got delayed because of changes in specifications of the vehicles. The company had secured Rs 4.8 billion contract for supply of the ULE buses from DTC earlier this year. The two parties had also signed Rs 7.1 billion contract for maintenance of the buses over a period of 12 years. Ashok Leyland inks pact with Belgian company Belgium-based Wabco has entered into a supply agreement with Ashok Leyland. The agreement is for development of transmission automation technology and the long term supply of automated manual transmission systems from 2010 through Wabco will supply its new OptiDrive modular AMT system, an automation technology, to Ashok Leyland. The company will be the first manufacturer of commercial vehicles in India to adopt OptiDrive system in volume production. Ashok Leyland to roll out four new outlets in Punjab Firstcall India Equity Advisors Pvt Ltd 5

6 The company would open three more outlets in Punjab including, one in Chandigarh in the current fiscal to expand its network. The company is currently present in eight locations in the state. Its service network is set to grow further with four more dealer locations at Ludhiana, Moga, Chandigarh and Bathinda to be opened this fiscal. It inaugurated its new outlet; spread over 10,000 square feet at Patiala. It is learnt that the new plant, which will be an integrated manufacturing facility, will bring the company closer to the north Indian market where operations are expanding. Also the company is readying itself for the launch of new products and that these vehicles will be tailor made for specific applications and are designed for better profitability. Ashok Leyland enters in JV with John Deere The company has completed the formation of a joint venture (JV) with the US-based agriculture equipment maker John Deere for manufacturing and marketing construction equipment. It is learnt that the joint venture will initially manufacture backhoes and wheel loaders and will market these in India and abroad. The range will subsequently be expanded to include a full line of construction equipment also the 50:50 JV would start producing various equipments by 2011 from a new production facility in Chennai. The two firms had tied up last year to form a JV in the country. The Hinduja group firm had earlier said the products made from the plant would initially reach neighboring countries before being exported to US and European markets. Joint venture The company has entered into an initial agreement to form a joint venture (JV) with Nissan Motor Company, for the development, manufacture and distribution of Light Commercial Vehicle (LCV) products. The company has a negligible presence in the LCV space, this partnership would be positive for it in the long run. Firstcall India Equity Advisors Pvt Ltd 6

7 Peer Group Comparison Name of the company CMP(Rs.) (As on November 06,2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Ashok Leyland Tats Motors M & M ltd Swaraj Mazda Key Concerns Recession in global economy Fluctuations in exchange rates High competition from global players Adverse Govt. policies Increasing number of models in domestic market. Firstcall India Equity Advisors Pvt Ltd 7

8 Financials Results Update 12 months ended Profit and Loss A/C (Standalone): Value(Rs in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Extraordinary Items Net Profit Equity Capital Reserves Face Value Total No. of Shares EPS Firstcall India Equity Advisors Pvt Ltd 8

9 Quarterly ended Profit and Loss A/C (Standalone): Value(Rs. in million) 31-Mar Jun Sep Dec-09E Description 3m 3m 3m 3m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Net Profit Equity Capital Face Value EPS Firstcall India Equity Advisors Pvt Ltd 9

10 Charts Net sales & PAT P/E Ratio (x) Firstcall India Equity Advisors Pvt Ltd 10

11 P/BV (X) EV/EBITDA(X) Firstcall India Equity Advisors Pvt Ltd 11

12 1 Year Comparative Graph Ashok Leyland ltd BSE SENSEX Outlook and Conclusion At the market price of Rs.51.00, the stock is trading at x and x for FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at x for FY10E and x for FY11E. Price to book value of the company is expected to be at 2.77 x for FY10E and 2.38 x for FY11E respectively. EPS of the company is expected to be at Rs.2.59 and Rs.3.02 for the earnings of FY10E and FY11E respectively. The company has rolled out up to 6,011 vehicles in October 2009, up by 66.5% over 3609 in the same month last year. After a long gap, the company improved production to 5,477 vehicles in September Firstcall India Equity Advisors Pvt Ltd 12

13 The company would start delivery of the first 50 ultra low entry (ULE) buses to the Delhi Transport Corporation (DTC) soon as part of its Rs 11.9 billion contract to supply 875 buses this fiscal. Belgium-based Wabco has entered into a supply agreement with Ashok Leyland. The agreement is for development of transmission automation technology and the long term supply of automated manual transmission systems from 2010 through The company has entered into an initial agreement to form a joint venture (JV) with Nissan Motor Company, for the development, manufacture and distribution of Light Commercial Vehicle (LCV) products. The company has a negligible presence in the LCV space, this partnership would be positive for it in the long run. The company has completed the formation of a joint venture (JV) with the US-based agriculture equipment maker John Deere for manufacturing and marketing construction equipment. The JNNURM programme for urban fleet modernization calls for the mobilization of 14,000 vehicles. Out of this, the company has bagged orders for around 5,000 buses, of which the company has supplied around 700 vehicles. The remainder of the order is scheduled to spillover into 3QFY2010 and 4QFY2010. The domestic Commercial Vehicle (CV) industry is extremely positive and the company expects to exit this fiscal with a 20%yoy volume growth. A majority of the factors that drive freight demand and, consequently, M&HCV demand have turned positive and we expect the CV manufacturers to benefit from the expected economic recovery in 2HFY2010E. We are giving a Neutral rating for this particular scrip. Industry Overview The growth of the Indian middle class along with the growth of the economy over the past few years has attracted global auto majors to the Indian market. Moreover, India provides trained manpower at competitive costs making India a favoured global manufacturing hub. The attractiveness of the Indian markets on one hand and the stagnation of the auto sector in markets such as Europe, US and Japan on the other have resulted in shifting of new capacities and flow of capital to the Indian automobile industry. According to the International Yearbook of Industrial Statistics 2008 released by United Nations Industrial Development Organization (UNIDO), India ranks 12th in the list of the world s top 15 automakers. Firstcall India Equity Advisors Pvt Ltd 13

14 Moreover, according to a new study released by global consultancy firm Deloitte, at least one Indian company will be among the top six carmakers that would dominate the global auto industry by According to the study, the car industry would see a massive capacity building in low-cost locations like India and China as manufacturers shift base from developed regions. Production Although the sector was hit by economic slowdown, overall production (passenger vehicles, commercial vehicles, two wheelers and three wheelers) increased from million vehicles in to million vehicles in Passenger vehicles increased marginally from 1.77 million to 1.83 million while two-wheelers increased from 8.02 million to 8.41 million. In recent times, India has emerged as one of the favourite investment destinations for automotive manufacturers. Mercedes-Benz is planning to launch over-dimensional-cargo (ODC) vehicles and longhaulage trucks that can carry up to 240 tonnes in India soon. Japanese major Nissan has decided to shift the entire production of its small car, Micra, from the UK to India. After production of the Micra begins here, Nissan plans to manufacture four more models in India, involving a total investment of over US$ million. Toyota Motors (TMC) plans to utilize the proposed Indo-Thai free trade agreement (FTA) to make India a hub for small cars to be exported to its global markets. Toyota has earmarked US$ million for to set up a second plant in Bangalore to make 200,000 cars from the current 80,000 units. Hyundai has made India its global hub for manufacturing small cars. It will invest US$ 1 billion in its second plant in Chennai by In addition, it is also investing US$ 40 million in its research and development (R&D) facility in Hyderabad. General Motors has so far invested about US$ 1 billion into its Indian operations. Domestic Market Sales of cars and commercial vehicles have been impacted due to global economic slowdown. However, in spite of that there has been a marginal increase in the number of vehicles sold in as compared to Total number of vehicles sold including passenger vehicles, Firstcall India Equity Advisors Pvt Ltd 14

15 commercial vehicles, two-wheelers and three-wheelers in was 9.72 million as compared to 9.65 million in According to an Ernst & Young analysis, passenger vehicle sales in the country will grow at a CAGR of 12 per cent to touch 3.75 million units by 2014 as against 1.89 million units at the end of While domestic market is expected to contribute 2.75 million units to the total tally, the remaining 1 million units would contribute towards exports. Likewise, as per estimates by CARE Research, the domestic two-wheeler sales will grow at a CAGR of 8.8 per cent by 2014 at 11.3 million units vis-a-vis 7.43 million units in German luxury car manufacturer Audi is eyeing higher sales this year than its earlier target of 1,500 units. This would make Audi India the third largest luxury car manufacturer in the country after BMW India and Mercedes Benz India. Audi aims to register a 70 per cent growth vis-à-vis last year by selling nearly 1,700-1,800 units in Exports According to the Society of Indian Automobile Manufacturers (SIAM), automobile sales (including passenger vehicles, commercial vehicles, two-wheelers and three-wheelers) in the overseas markets increased to 1.53 million units in from 1.23 million units in Export of passenger vehicles increased from 218,401 in to 335,739 units in Moreover, growth continued during the first half of the current year. India exported a total of 230,000 cars, vans, SUVs and trucks between January and July 2009, a growth of 18 per cent. India Yamaha Motor Ltd (IYML) plans to double its exports from India to 140,000 units by Maruti Suzuki India expects to export 120,000 cars during Of this, a lakh will be the A- Star, its newest hatchback. Policy In order to make India a power to reckon with in the automotive sector the government launched the Automotive Mission Plan (AMP) The vision of the AMP is "to emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016." Firstcall India Equity Advisors Pvt Ltd 15

16 As per the AMP, it is estimated that the total turnover of the automotive industry in India would be in the order of US$ 122 billion - US$ 159 billion in It is expected that in real terms, India would continue to enjoy its eminent position of being the largest tractor and three-wheeler manufacturers in the world and the world's second largest two-wheeler manufacturer. By 2016, India will emerge as the world's seventh largest car producer (as compared to the eleventh largest currently) and retain the fourth largest position in world truck manufacturing sector. Further, by 2016, the automotive sector would double its contribution to the country's GDP from current levels of five per cent to 10 per cent. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Advisors Pvt Ltd 16

17 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate Restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com Firstcall India Equity Advisors Pvt Ltd 17

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