Ashok Leyland Equity Research

Date of Research – 12 January 2016

Price – Rs. 92.10

About the Company

Ashok Leyland (“Ashok Leyland” or the “Company”) is one of India’s leading manufacturers of commercial vehicles, such as trucks and buses, as well as emergency and military vehicles. The Company exports to over 30 countries worldwide, and are leaders in the bus markets of Sri Lanka, Bangladesh and Mauritius and have significant presence in the Middle East and Africa.


Increasing Focus on Export Market

In order to maintain its growth trajectory, the company is aiming to boost exports. The company is currently serving Bangladesh, Sri Lanka and the Middle East markets where it exports its medium and heavy commercial vehicles. The management highlighted that the above three markets together account for 80% of its total exports. Besides targeting these markets, the company is also looking at entering newer geographies including Africa, South America and South East Asian markets.

De-risking Portfolio by increasing focus on LCV Segment

The company’s strategy to de-risk its portfolio (against slowdown in the Medium and Heavy Commercial Vehicles (MHCV)), launch of “DOST” in the LCV segment has proved as a game changer for the company. The company’s brand has been able to increase its contribution to approx. 30% of total sales at the end of FY15.

Increasing Market Share

The company’s market share in the MHCV segment has increased to 27% in FY 2015 as compared to 24.7 % in FY 2014 driven by stronger growth in Southern markets coupled with market share gains in other regions as well. Strong growth in higher tonnage segments (where Ashok Leyland has higher market share) will also help the company to further expand market share in this segment.


Increasing Competition There is moderate to high competition in the automobile sector in domestic market. In commercial vehicle segment, Ashok Leyland stands second to Tata Motors. Other domestic competitors are Eicher Motors and SML Isuzu Limited. The competition is likely to further intensify in view of the continuing globalization and consolidation in the worldwide automobile industry.

*Figures from FY 2014 are Consolidated.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 12,481.20 11,486.72 15,340.89 20,658.71  24,068.35 
Expenses 11,604.73 11,064.70 13,823.75 17,726.25  20,774.41  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 876.47 422.02 1,517.14 2,932.46  3,293.94  
Depreciation 380.78 529.97 579.91 524.42  572.79  
Finance Costs 376.89 805.49 872.29 967.85  1,048.80  
Other income 62.35 92.45 188.83 151.88  130.69  
Exceptional items (289.56) (520.77) 295.32 (34.44)  (40.09) 
PBT 470.71 (300.21) (41.56) 1,626.50  1,843.13  
Tax 37.00 (68.50) 172.42 527.74  196.12  
PAT (before Minority Interest and share of Associates) 433.71 (231.71) (213.97) 1,098.76  1,642.78
Profit/ (loss) attributable to Minority Interest (57.66) (338.62) 34.22 
Share of profit / (loss) of Associates (9.92) (9.24) (6.14)  9.87  
Consolidated Profit / (Loss) for the year (164.12) 133.89 1,070.68  1,632.91  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 7.02 3.67 9.89 14.19  13.69 
Net Profit Margin Ratio 3.47 (2.02) (1.39) 5.32  6.83 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 266.07 266.07 266.07 284.59 284.59
Reserves & Surplus 3,942.10 4,189.04 4,181.82 4,226.72 4,707.58
Net worth (shareholders funds) 4,208.17 4,455.10 4,447.88 4,511.31                           4,992.17
Minority Interest 300.99
Long term borrowings 2,293.35 2,737.84 3,296.51 6,219.40 7,597.15
Current liabilities 4,843.70 5,296.10 4,586.60 7,872.70 9,242.72
Other long term liabilities and provisions 80.20 80.29 70.24 147.76                              294.58
Deferred Tax Liabilities 490.37 527.37 406.77 510.31 535.55
Total Liabilities 11,915.79 13,096.70 12,808.00 19,524.62                        22,963.15


Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 5,461.72 5,970.81 5,841.39 6,059.52                          5,893.86
Noncurrent Investments 1,534.48 2,337.63 2,405.31 806.37 690.40
Miscellaneous Expenditure 21.80
Current assets 4,303.89 4,296.53 3,855.44 7,567.71 9,165.66
Long term advances and other noncurrent assets 615.70 491.73 705.86 4,383.56                           6,539.07
Deferred tax assets 35.00
Goodwill (on consolidation) 639.17
Total assets 11,915.79 13,096.70 12,808.00 19,524.62                        22,963.15

Efficiency Analysis

Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 19.32 12.19 5.45 13.80 22.75 
ROE / RONW 13.45 9.74 (3.69) 2.97 22.01 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 12,481.20 11,486.72 15,340.89 20,658.71  24,068.35 
Growth (%) (2.81 %) (7.97 %) 33.55 % 34.66 %  16.50 % 
PAT (Rs. Cr.) 433.71 (231.71) (213.97) 1,098.76  1,642.78  
Growth (%) (23.37 %) (153.42 %) 720.65 %  49.51 % 
Earnings Per Share – Basic (Rs. ) 1.63 (0.62) 0.48 3.76  5.52 
Earning Per Share – Diluted (Rs. ) 1.63 (0.62) 0.48 3.76  5.52 
Price to Earnings 13.47 150.00 28.87  16.61 

Dividend History

The Company has maintained an average dividend yield of 3.23 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. AL’s average current ratio over the last 5 financial years has been 0.91 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

AL’s average long term debt to equity ratio over the last 5 financial years has been 0.77 times which indicates that the Company operates with a high level of debt which is typical in the automobile sector.

Interest Coverage ratio Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

AL’s average interest coverage ratio over the last 5 financial years has been 3.19 times which indicates that the Company has been meeting its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Ashok Leyland reported a promoter holding of 50.38 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 31.69 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.