Date – 29th November, 2018

Price – Rs. 109.20

View: Neutral

Ashok Leyland Limited (“Ashok Leyland” or “Company”) is the 2nd largest manufacturer of commercial vehicles in India, the 4th largest manufacturer of buses in the world, and the 12th largest manufacturers of trucks.

Headquartered in Chennai, Ashok Leyland has six (6) manufacturing facilities in India (two at Hosur and one each at Bhandara, Ennore, Alwar and Pantnagar) and operates a facility each at Prague, Czech Republic and in Ras-Al-Khaimah, U.A.E.

The Company exports to over 50 countries worldwide, and is the leader in the bus markets of Sri Lanka, Bangladesh and Mauritius. In addition Ashok Leyland has significant presence in the Middle East and Africa.

Ashok Leyland has a product range from 2.5T GVW (Gross Vehicle Weight) to 49T GTW (Gross Trailer Weight) in trucks, 16 to 80 seater buses, vehicles for defence and special applications, and diesel engines for industrial, genset and marine applications.

Ashok Leyland launched India’s first electric bus and Euro 6 compliant truck in 2016.

Past Articles : Ashok Leyland Stock Analysis

Ashok Leyland: Gaining Share In A Falling Market

Recent Update – On 14th November 2018, Ashok Leyland stock closed 10.46% lower on CEO resignation.

Vinod Dasari resigned after nearly 14 years with the Company. However, the board at its meeting asked Dasari to continue till the end of March 2019 to facilitate a smooth transition.

Particulars FY14 FY15 FY16 FY17 FY18
Revenue (In Rs. Cr.) 11,486.72 15,340.89 21,259.90 22,870.97 29,619.57
Growth 33.55% 38.58% 7.58% 29.51%
EBITDA (In Rs. Cr.) 422.03 1,517.13 2,978.93 3,293.94 4,248.43
EBITDA Margin 3.67% 9.89% 14.01% 14.40% 14.34%
EBIT (In Rs. Cr.) (107.94) 937.22 2,454.99 2,721.15 3,602.54
EBIT Margin -0.94% 6.11% 11.55% 11.90% 12.16%
PBT (In Rs. Cr.) (820.98) 253.76 1,693.56 1,803.04 2,570.71
PAT (In Rs. Cr.) (164.12) 133.89 681.93 1,589.36 1,760.38
PAT Margin -1.43% 0.87% 3.21% 6.95% 5.94%
EPS (In Rs.) (0.62) 0.47 2.40 5.58 6.00
Historic P/E (Closing Price of 31st March) 156.33 45.30 15.14 24.23
CURRENT P/E (based on price of 29th Nov – Rs. 109.25 and EPS TTM – Rs. 6.63) 16.48
Shareholder funds (In Rs. Cr.) 3,989.23 4,511.31 5,263.70 6,392.94 7,420.59
Minority Interest (In Rs. Cr.) 652.11 263.15 417.29 588.99 825.33
Debt (In Rs. Cr.) 6,755.67 7,046.04 8,599.79 9,911.13 12,147.29
Cash (In Rs. Cr.) 113.42 905.09 1,716.52 1,063.61 1,230.51
D/E 1.69 1.56 1.63 1.55 1.64
Interest Coverage 0.52 1.74 3.22 3.14 3.45
ROCE -0.95% 7.93% 17.19% 16.11% 17.67%
ROE -20.58% 5.62% 32.17% 28.20% 34.64%

Quarterly Results

Quarterly Results Q2 FY 2018 Q1 FY 2019 Q2 FY 2019 Q-o-Q % Y-o-Y %
Revenue (In Rs. Cr.) 6,076.38 6,250.13 7,607.98 21.73% 25.21%
EBITDA (In Rs. Cr.) 611.80 647.55 805.93 24.46% 31.73%
EBITDA Margin 10.07% 10.36% 10.59%
PAT (In Rs. Cr.) 334.26 370.10 459.58 24.18% 37.49%
PAT Margin 5.50% 5.92% 6.04%
EPS 1.14 1.26 1.57 24.60% 37.72%


WHAT’S DRIVING THE STOCK?

Domestic and Exports Sales Performance By Segment:

Domestic Exports
Segment FY 2017 FY 2018 Change % FY 2017 FY 2018 Change %
M&HCV Buses 47,262 35,649 -25% 11,771 11,771 0%
M&HCV Trucks 255,267 304,664 19% 31,948 31,917 0%
M&HCV Total 302,529 340,313 12% 43,719 43,688 0%
LCV Buses 50,864 49,009 -4% 4,673 4,150 -11%
LCV Trucks 380,839 467,131 23% 59,879 48,622 -19%
LCV Total 431,703 516,140 20% 64,552 52,772 -18%
CV Total 734,232 856,453 17% 108,271 96,460 -11%

Strong Q2 Financial Performance

Ashok Leyland delivered strong numbers in Q2 FY 2019. Revenue grew 25.21% to Rs. 7608 Cr. supported by volume growth (52k units, +26%). EBIDTA rose 32% to Rs 806 Cr. with margin at 10.6%. Profit grew by 37.5% to Rs. 460 Cr.  With the government’s continued focus on the rural economy and infrastructure in select pockets, the CV segment should witness strong demand going forward. Despite admitting to demand weakness ahead of general and state elections, the management remains confident about its positioning and products.

  • Market Share – Ashok Leyland’s market share in MHCVs segment increased 35% in H1 FY 2019 led by strong market share gain in bus segment and expansion of network in East and North India.
  • The Company has shown impressive growth in LCV (+39% YTD FY 2019), however export went down by 15% YoY due to lower exports to Africa, Sri Lanka and Middle East.

Pre-Buying Ahead of BS VI Implementation

Bharat Stage VI emission norms are to be implemented from April 2020 and the management expects 30 percent growth in FY20 as the new BS VI compliant vehicles would be more expensive than current ones.

Earnings Con-call Highlights –

  • There has been slowdown in demand in last few weeks, but it is expected to be temporary. Next 6 months could see some weakness on account of elections.
  • Global experience of transition to EURO 6 suggests 30% growth in pre-buy year.
  • For FY 2021, 3 factors to counter decline in demand (1) construction led demand (40-45% of volumes), (2) Scrappage policy from April 2020 will potentially mandate replacement of 2-3 lakhs trucks of over 20 years of age, and (3) Export readiness with EURO 6 engines and left hand drive capabilities will expand addressable market globally substantially.
  • Discounting continues to be very high with Q2 FY19 average discount ofn ~INR400-410k/unit (v/s ~INR375k in Q1). It expects discounts to reduce substantially next year due to strong pre-buy and capacity constraints.
  • The Company has inventory of ~11,700 vehicles. Dealers 16-18 days inventory (v/s normaln of 2 weeks).
  • Price increase of 1-1.5% in Jul-18.
  • Exports have been weak due to delay in exports for Africa as well as uncertainties in key markets of Sri Lanka and Middle-East.
  • The Company is prepared for the export markets, as it now has entire product portfolio (from LCVs to LHD trucks), which will expand addressable market globally substantially.

Focus on Defence Business – Ashok Leyland has been increasingly targeting India’s defence segment and exports markets with a focus on the ‘Mobility on Land’ initiative. The Company plans to increase its defence business to Rs. 5,000 Cr. from Rs. 500 Cr. in the coming years.

Focus on Creating and Expanding its Revenue Sources– Ashok Leyland is focused on expanding and creating new revenue and profit sources. De-risking of the M&HCV business, along with expansion of nascent business like spares (5% of sales), exports (9% of sales) and defence (3% of sales), is the key focus area. Also, it is stepping up its presence in relatively weak segments like LCVs, ICVs and school buses. The Company has set up a new business vertical – Customer Solution – to target a higher share of the customer wallet across lifecycle in areas like finance, spares and fuel.

WHAT’S DRAGGING THE STOCK?

Resignation of Mr. Vinod Dasari, MD & CEO

The resignation of Mr. Vinod Dasari, MD & CEO of the Company seems to be a short term glitch. He has played an instrumental role in company’s overall transformation (scaled market share of Ashok Leyland in domestic M&HCV segment from 25% to 35% and turned Company into net cash positive during his 7 years tenure).

Increasing Competitive Intensity resulting in loss in market share and shrinking margins.