Ashok Leyland

Investors willing to stay on for the long-term can buy the shares of Ashok Leyland (ALL). Greater operating leverage from sale of higher tonnage vehicles, higher profitability from increased utilisation of the Uttarakhand plant, de-risking of product portfolio and expected benefits from joint ventures lend high visibility to earnings growth.



Thanks to the upturn in the commercial vehicle (CV) cycle and buoyancy in the broader markets, the stock has given about 85 per cent returns in the last one year. At the current market price of Rs 73, the stock trades at a PE of about 17 times its expected FY11 earnings, giving reasonable room for appreciation over the long-term. But over the near to medium-term, returns are likely to be moderate.

As the base effect kicks in, growth in the second half of the year could slowdown. Besides, the first half had the advantage of incremental volumes from pre-buying due to the pan-India implementation of BS III emission norms from October1. This apart, the increase in cost of ownership due to raised prices, fuel price hikes and higher interest rates will also keep the demand tempered. The Society of Indian Automobile Manufacturers (SIAM) expects the CV industry to finish the year with a 20 per cent growth. That said, since we are in the fairly early stages of the current CV cycle, the stock is a worthy addition to the portfolio of investors with a 2-3 year perspective. Any fall in the stock price due to volatility in the markets can also be considered for fresh exposures.

Trucks on a ride

After being badly beaten down, the CV industry rebounded convincingly towards the second half of 2009-10. ALL's sales volume grew by 31 per cent in the trucks segment last year, with its growth bettering the industry growth towards the end of the year. Helped both by a low base and strong demand, the company continued its good run, growing by 117 per cent in the first half this year (April-September 2010).

Two trends that come up in the pattern of truck sales augur well for ALL. One, the relatively higher growth witnessed in the multi-axle and tractor trailer volumes compared to the haulage and tipper vehicles.



Two, the increasing market share of the southern and the western regions to the total industry volumes. Being a player focussed on the heavy vehicles segment and also one with a stronger market presence in the south and the west, ALL stands to benefit from the same.

Aside of this, good growth estimates for agriculture, the revival in construction and mining activity, fairly robust industrial freight availability and investments in road infrastructure will provide an impetus to growth in the CV industry.

To de-risk from the domestic truck industry, ALL is leveraging its U truck platform and the joint venture (JV) with Nissan for LCVs to improve its export performance. The company's truck portfolio is all set to get a facelift from the U Truck platform which will straddle the entire range of tractors, tippers, and haulage vehicles covering the 16-49 tonnage segments.

With 25 models to be rolled out over the next year and a half, almost all the existing tippers and tractors are expected to be launched in this new platform. Apart from keeping volumes ticking in India, it will also aid the company's larger strategy of improving its track record on truck exports.

This platform, with its 160-380 HP H series and Neptune engines, will offer higher ‘power to weight' ratio vehicles, which are currently in demand in export markets. ALL is also working on a new generation cabin for trucks to gain traction in exports.

Besides, the company's run rate on LCVs is set to improve with the rollout of its first vehicle from the JV in mid-2011. Interestingly, this JV, with about eight anchor models, will not focus on the one tonne or the sub-one tonne segment. The spotlight is instead on the 1.25-4 tonne payload segment for which there is export demand.

Encouraging outlook for buses

Thanks to the JNNURM, the company has had a healthy growth in the bus segment so far. The performance is expected to continue, considering the upbeat demand from State transport undertakings in addition; ALL has recently won an order for 2,850 buses from Tamil Nadu.

Given that the company has been traditionally strong in the bus segment in the export markets, it hopes to become a prominent player in the international bus market too.

Towards this end, it has developed a bus in a joint venture with TVS and IRIZAR of Spain for the Middle East. Besides, it has acquired a 26 per cent stake in UK-based Optare, which has one of the best design and technologies for low-floor and electric buses.

Financials

A favourable market, price increases and cost control efforts helped the company clock net sales of Rs 2,348 crore in the June quarter vis-à-vis Rs 918 crore in the same quarter last year. Net profit stood at Rs 123 crore and Rs 8 crore respectively. Operating margin was at 10 per cent.

Going forward, increased utilisation at the Uttarakhand plant (full capacity utilisation expected in FY12) will help boost profitability. Currently, the net benefit is Rs 35,000 per vehicle. Besides, the usage of idle capacity at the Hosur plant for manufacture of LCVs under the Nissan JV and the JV with Alteams for high pressure die-casting (giving a cost advantage of 5 per cent) is expected to have a positive effect on margins.

via BL