MARKET OUTLOOK
Markets dance to local tunes
- Uncertainty and risk in the market have sharply risen in the recent past. In addition to the global uncertainties the market now has to grapple with domestic interest rate related risks as well.
- There are widespread concerns that the tightening of money supply has been excessive and could lead to a significant slowdown in the economy, especially in the interest rate sensitive sectors such as automobiles and housing.
- We are still maintaining our views that (1) inflation will moderate going forward and (2) the US economy will slow down but not go in recession. As these events unfold, concerns should ease and the environment for equities should improve. However, the risks around our base case have certainly risen.
- Volatility is likely to peak in the next four weeks. We expect inflation to ease by the end of this month. End April shall also bring the initial monsoon forecast as well as the credit policy of the Reserve Bank of India (RBI). While the fourth quarter results of Indian companies may not be a trigger, the market will keenly await the guidance on the FY2008 prospects of the corporate sector, especially that of automobiles, banks and the other interest rate sensitive sectors.
STOCK UPDATE
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs44
Current market price: Rs36
Price target revised to Rs44
Key points
- Ashok Leyland's total vehicle sales during March dropped by 1.55% to 8,444 units as against 8,577 units in the same month a year ago. The bus sales rose by 5% to 1,671 vehicles while the truck sales marked a decline of 2% of 6,773 vehicles. The domestic sales declined slightly by 1.9% year on year (yoy) to 7,936 vehicles while the exports saw an improvement of 3.7% with sales of 508 vehicles.
- The decline can be attributed to the non-availability of finance in the month and a bandh being declared in Tamil Nadu on the last working day of the year. The sales in Tamil Nadu comprise of approximately 15%-18% of the overall sales volume.
- For the full year FY2007, the company has marked a sales growth of 34.8% yoy to 83,101 vehicles. The company has comfortably surpassed its sales target of 80,000 vehicles for the year.
- Going forward, the company expects the growth in the commercial vehicle industry to continue at 10-15%. However, with the rising interest rates, tightening liquidity and huge capital expenditure planned for the next 3-4 years, we would take a cautious outlook at the industry and the company.
- The company had a dream run in FY2007 as its volumes marked a brilliant growth of 35%. The growth rates are expected to moderate henceforth. Consequently we are reducing our volume growth estimates for the company from 15% to 11.9% for FY2008. The doubling of the capital expenditure for FY2008 to Rs1,000 crore is expected to restrict the profit after tax (PAT) growth. Consequently, we are downgrading our earnings per share (EPS) estimate for FY2008 by 10% from Rs4 to Rs3.6.
- At the current market price of Rs36, the stock discounts its revised FY2008E earnings by 10x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.3x. We maintain our Buy recommendation on the stock with a revised price target of Rs44.
VIEWPOINT
Phoenix Mills
Flying high
Phoenix Mills Ltd (PML), promoted by the Atul Ruia group, has pioneered the concept of developing mill land (of defunct mills) into shopping-cum-entertainment-cum
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