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Retail Equity Research

Ashok Leyland Ltd Automobile-Commercial

BSE CODE : 500493 NSE CODE: ASHOKLEY

BLOOMBERG CODE: AL IN SENSEX : 41,306

Accumulate

12M Investment Period Rating as per Mid Cap

CMP Rs. 81 TARGET Rs. 90 RETURN 11% (Closing: 01-01-20)

02 January, 2020

COMPANY UPDATE

Upgrade to Accumulate … Fair Valuation Ashok Leyland (AL) is the second-largest Commercial Vehicle (CV) manufacturer in India. It has a strong presence in the M&HCV (Medium and Heavy Commercial Vehicle) segment with a market share of 34% as on FY19.

We expect the volume numbers to stabilize at current level and going forward the demand to pick up on account of Pre-buying.

Positively, AL is able to reduce its inventory level from 18200 to 13200 on MoM level till November.

We believe government spending towards road infrastructure and impending scrappage policy to drive volume growth in the long run.

Revenue and PAT to grow by 11.4% and 20.4%YoY for FY21 and factor 9% volume growth for the same period.

We believe that the near term headwinds has been factored in the stock price and don't expect any meaningful downside. We value AL at 17x FY22E EPS and upgrade our rating to Accumulate.

Company Data

Market Cap (cr) Rs.23,052

Enterprise Value (cr) Rs.23,092 Outstanding Shares (cr) 293

Free Float 50%

Dividend Yield 2.6%

52 week high Rs.103

52 week low Rs.57

6m average volume (cr) 0.1 Beta 1.01 Face value Rs1

Shareholding (%) Q4FY19 Q1FY20 Q2FY20

Promoters 51.1 51.1 51.1 FII’s 19.1 19.1 17.1

MFs/Insti 10.0 10.0 13.0

Public 19.7 19.7 18.8

Total 100.0 100.0 100.0

Price Performance 3 month 6 Month 1 Year

Absolute Return 10.3% -7.0% -21.0%

Absolute Sensex 5.9% 4.1% 13.9%

Relative Return 4.3% -11.1% -34.9%

over or under performance to benchmark index

Standalone(cr) FY19A FY20E FY21E

Sales 29,057 21,171 23,574

Growth (%) 10.2 -27.1 11.4

EBITDA 3,136 1,757 2,145

EBITDA Margin(%) 10.8 8.3 9.1

PAT Adj. 2,041 983 1,183

Growth (%) 16.9 -51.8 20.4

Adj.EPS 7.0 3.4 4.0

Growth (%) 16.9 -51.8 20.4

P/E 11.6 24.1 20.0

P/B 2.0 1.9 1.8

EV/EBITDA 7.4 13.2 10.8

ROE (%) 35.0 15.6 18.6 D/E 0.0 0.0 0.0

Saji John

Research Analyst

KEY CHANGES: TARGET RATING EARNINGS

Volume to stabilize going forward During H1FY20, Auto industry witnessed a sluggish CV demand of -25%YoY , in which the Truck segment de grew by 38%. On the same period, AL’s revenue (constitutes 78% from M&HCV) de-grew by 31%YoY due to negative volume growth of –28% owing to multiple factors like lower demand, liquidity issue and axle load norms. The slower execution in the construction industry, which constitutes 45% of volume mix also impacted the demand. However, Q3FY20 volume have came in line with our expectation and also witnessed marginal pick up on MoM basis. During Q2FY20, discounts have risen from Rs5,25,000 as compared to Rs425,000 sequentially and we believe going forward the discounts will down owing to demand pick on account of pre-buying.

Medium term triggers to remain Given slowdown in domestic economy, trade concerns and weak industrial & construction activities, we expect the revival to be gradual and will see

meaningful recovery in H2FY21. However any significant policy action from the government in spending will spur the demand for pre-buying because as per our channel check there is a key interest by the fleet operators as the cost are likely to increase by 10-20% due to transition from BS-IV to BS-VI . In addition, Positive economic outlook will spur the demand for Tippers and haulage side of vehicle due to stable government in the centre and strong push for infrastructure development. Considering, the near term headwinds, we lower our revenue/PAT estimate for FY20 by –17%/-30% and factor negative –25% YoY volume de-growth for FY20.

Strong support from LCV business post-merger Currently, AL covers 45-50% of the entire LCV segment opportunity. The LCV business has increased its market share from 10% to 22% in last 10 years, registering a growth of 26% for FY19. For the quarter the segment de-grew by 11%YoY and flat growth for H1FY20. The company has successful products like Dost and its variants like Guru, Mitra and Partner models giving a tough time to its competitors. AL now plan to plug loopholes by launching a 3.5-6T LCV phoenix and thereby double their LCV capacity from current 75k p.a.

Valuations We lower our Revenue & PAT estimate to factor in lower demand in the near term. However any significant policy action from the government will spur the demand for pre-buying. We believe that the short term headwinds has been factored in the stock price and not expecting any meaningful decline. We rollover our valuation to FY22 and value AL at 17x FY22E EPS with a target of Rs90 and upgrade our rating to Accumulate from Hold.

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Quarterly Financials (Standalone)

Profit & Loss

Change in Estimates

Old estimates New estimates Change %

Year / Rs cr FY20E FY21E FY20E FY21E FY20E FY21E

Revenue 25,195 27,067 20,999 23,574 -16.7 -12.9

EBITDA 2,545 2,842 1,743 2,145 -31.5 -24.3

Margins (%) 10.1 10.5 8.3 9.1 -180bps -140bps

Adj. PAT 1,381 1,550 970 1,183 -29.8 -23.4

EPS 4.7 5.3 3.3 4.0 -29.8 -23.4

Rs cr) Q2FY20 Q2FY19 YoY Growth % H1FY19 YoY Growth % H1FY20

Sales 3,930 7,621 -48.3 13,871 -30.7 9,613

EBITDA 229 829 -72.4 1,477 -48.2 766

EBITDA margins 5.8 10.9 -510bps 10.6 -260bps 8.0

Depreciation 160 148 8.1 291 11.5 325

EBIT 69 681 -89.9 1,185 -62.8 441

Interest 30 20 47.6 32 33.3 43

Other Income 46 28 64.9 99 -69.9 30

Exceptional Items -6.5 -17 - -32 - -85

PBT 19 670 -97.2 1,193 -68.2 380

Tax -20 143 - 295 -62.5 111

Share of profit from Associate 0 0 - 0 - 0

Minority Interest - - - - - -

Reported PAT 39 523 -92.6 899 -70.0 269

Adjustments 65 17 - 32 - 85

Adj PAT 104 545 -81.0 930 -61.9 354

No. of Shares 293 293 - 293 - 293

EPS (Rs) 0.4 1.9 -81.0 3.2 -61.9 1.2

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27th December 2018

Standalone Financials

PROFIT & LOSS BALANCE SHEET

RATIOS CASH FLOW

Y.E March

(RsCr) FY18A FY19A FY20E FY21E FY22E

Sales 26,356 29,055 21,171 23,574 26,873

% change 30.9 10.2 -27.1 11.4 14.0

EBITDA 2964 3136 1757 2145 2741

% change 34.6 5.8 -44.0 22.1 27.8

Depreciation 598 621 659 730 797

EBIT 2365 2515 1098 1415 1944

Interest 147 70 75 92 106

Other Income 197 110 169 165 188

PBT 2218 2444 1023 1323 1838

% change 79.4 4.7 -58.3 37.9 37.4

Tax 668 514 210 325 466

Tax Rate (%) 28.0 20.6 20.1 22.6 23.6

Reported PAT 1718 1983 833 1113 1510

Adj. 29 57 150 70 40

Adj. PAT 1746 2041 983 1183 1550

% change 10.9 16.9 -51.8 20.4 31.0

No. of shares (cr) 293 293 293 293 293

Adj EPS (Rs) 6.0 7.0 3.4 4.0 5.3

% change 7.9 16.9 -51.8 20.4 31.0

DPS (Rs) 1.9 3.1 3.1 3.1 4.1

Y.E March (Rs

Cr) FY18A FY19A FY20E FY21E FY22E

Net inc. + Depn. 2,984 3,118 1,702 2,168 2,774

Non-cash adj. 102 -49 -4 -6 -8

Changes in W.C 2,962 -3,159 -540 60 93

C.F. Operation 5,633 -604 948 1,897 2,393

Capital exp. -1,278 -752 -885 -885 -785

Change in inv. -2,670 2,587 -200 -200 -200

Other invest.CF 645 0 0 0 0

C.F - Investment -3,323 1,835 -1,085 -1,085 -985

Issue of equity 46 0 0 0 0

Issue/repay debt 8,069 -214 170 90 90

Dividends paid -5,495 -8,998 -8,996 -8,996 -8,996

Other finance.CF -2,451 0 0 0 0

C.F - Finance -2,148 -1,211 -730 -810 -810

Chg. in cash 163 21 -867 3 598

Closing cash 1,031 1,052 185 188 786

Y.E March FY18A FY19A FY20E FY21E FY22E

Profitab & Return

EBITDA margin (%) 11.2 10.8 8.3 9.1 10.2

EBIT margin (%) 9.0 8.7 5.2 6.0 7.2

Net profit mgn.(%) 6.6 7.0 4.6 5.0 5.8

ROE (%) 30.4 35.0 15.6 18.6 22.9

ROCE (%) 11.6 11.7 6.4 8.3 9.9

W.C & Liquidity

Receivables (days) 12.5 21.7 34.1 23.7 23.5

Inventory (days) 42.2 39.2 54.6 39.9 39.3

Payables (days) 57.0 56.5 68.6 54.6 53.3

Current ratio (x) 1.3 2.1 1.6 1.6 1.8

Quick ratio (x) 0.6 1.1 0.7 0.7 0.9

Turnover &Leverage

Gross asset T.O (x) 4.6 4.7 3.1 3.0 3.1

Total asset T.O (x) 1.7 1.7 1.3 1.6 1.7

Int. covge. ratio (x) 16.1 35.7 14.7 15.4 18.4

Adj. debt/equity (x) 0.0 0.0 0.0 0.0 0.0

Valuation

EV/Sales (x) 0.9 0.8 1.1 1.0 0.9

EV/EBITDA (x) 7.8 7.4 13.2 10.8 8.4

P/E (x) 13.6 11.6 24.1 20.0 15.3

P/BV (x) 2.3 2.0 1.9 1.8 1.7

Y.E March (Rs Cr) FY18A FY19A FY20E FY21E FY22E

Cash 1031 1052 185 188 786

Accounts Receivable 945 2506 1450 1615 1841

Inventories 1758 2685 1678 1869 2140

Other Cur. Assets 1540 2191 1218 1356 1546

Investments 6280 3777 3831 4079 4345

Gross Fixed Assets 6436 7147 8007 8867 9627

Net Fixed Assets 4811 4830 5112 5325 5372

CWIP 234 275 300 325 350

Intangible Assets 737 809 727 644 560

Def. Tax (Net) -299 -250 -245 -240 -232

Other Assets 0 0 0 0 0

Total Assets 17,038 17,874 14,257 15,161 16,707

Current Liabilities 3228 3173 2313 2550 2883

Provisions 1064 1053 812 904 1031

Debt Funds 613 398 568 658 748

Other Liabilities 4888 5019 2398 2670 3057

Equity Capital 293 293 293 293 293

Reserves & Surplus 6953 7939 7872 8086 8696

Shareholder’s Fund 7246 8232 8165 8378 8989

Total Liabilities 17,038 17,874 14,257 15,161 16,707

BVPS 40 48 47 49 53

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Source: Bloomberg, Geojit Research.

27th December 2018

Dates Rating Target 22nd July 2016 Buy 116 1st December 2016 Buy 92 30th January 2017 Accumulate 102 26th July 2017 Buy 116 13th November 2017 Buy 123 14thFebruary 2018 Buy 147 22nd May 2018 Buy 155 19th June 2018 Buy 125 20thNovember 2018 Buy 125 21st February 2019 Buy 90 28 May 2019 Buy 112 03 August 2019 Hold 69

02 January 2020 Accumulate 90

Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable

Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable

To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being up-graded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral- The analyst has no investment opinion on the stock under review

General Disclosures and Disclaimers

PRICE HISTORY

Investment Criteria

CERTIFICATION

I, Saji John, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit.

COMPANY OVERVIEW

Geojit Financial Services Limited (hereinafter Geojit), a publically listed company, is engaged in services of retail broking, depository services, portfolio manage-ment and marketing investment products including mutual funds, insurance and properties. Geojit is a SEBI registered Research Entity and as such prepares and shares research data and reports periodically with clients, investors, stake holders and general public in compliance with Securities and Exchange Board of India Act, 1992, Securities And Exchange Board Of India (Research Analysts) Regulations, 2014 and/or any other applicable directives, instructions or guidelines issued by the Regulators from time to time.

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Geojit and/or its Affiliates and its officers, directors and employees including the analyst/authors shall not be in any way be responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Investors may lose his/her entire investment under certain market conditions so before acting on any advice or recommendation in these material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. This report does not take into account the specific investment objectives, financial situation/circumstances and the par-ticular needs of any specific person who may receive this document. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved). The price, volume and income of the investments referred to in this report may fluctuate and investors may realize losses that may exceed their original capital.

FUNDAMENTAL DISCLAIMER

We have prepared this report based on information believed to be reliable. The recommendations herein are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. The stocks always carry the risk of being upgraded to buy or downgraded to a hold, reduce or sell. The opinions expressed are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. This report is non-inclusive and does not consider all the information that the .recipients may consider material to invest-ments. This report is issued by Geojit without any liability/undertaking/commitment on the part of itself or anyof its entities. We may have issued or may issue on the companies covered herein, reports, recommendations or information which is contrary to those contained in this report. The projections and forecasts described in this report should be evaluated keeping in mind the fact that these are based on estimates and assumptions and will vary from actual results over a period of time. The actual performance of the companies represented in the report may vary from those projected. These are not scientifically proven to guarantee certain intended results and hence, are not published as a warranty and do not carry any evidentiary value whatsoever. These are not to be relied on in or as contractual, legal or tax advice. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.

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27th December 2018

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Geojit confirms that: It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein. It/its associates have no actual beneficial ownership greater than 1% in relation to the subject company (ies) covered herein.

Further, the Analyst confirms that: he, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject com-

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Geojit hereby confirms that no part of the compensation paid to the persons employed by it as Research Analysts is based on any specific brokerage services or transactions pertaining to trading in securities of companies contained in the Research Reports.

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It is affirmed that the I Saji John Research Analyst(s) of Geojit have not served as an officer, director or employee of the subject company

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