Stock Pick From Auto Sector
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Here is Why!
Shift to BS IV to drive sales
Bigger market share driven by new order book
Focus on Debt reduction, operational efficiency
Ashok Leyland is leading medium and heavy commercial vehicle (MHCV) player in India. ALL is a flagship company of Hinduja Group. The company is 4th largest bus and 14th largest truck maker in India. FY12-14 has witnessed a collapse in Industry by ~42 per cent due to lack of demand. As Industry was in downturn move, company decided to restructure its business and focus on building up cash by trimming working capital, strengthening earnings and selling out non- core assets. Ashok Leyland’s new growth strategy aims at enhancing portfolio, network expansion at domestic and international level. The company also aims to upgrade to BS-IV.
We can sense a scenario change after 2014. New government in FY14, economic growth driven by resumption of stalled infra projects and mines and switch to BS-IV fuel are going to boost up demand for domestic MHCV industry. Development at company’s front and rise in demand for CV, helped company to swell its market share in MHCV segment to 31 per cent in FY16 over 25 per cent in FY14. As per Society of Indian Automobile Manufacturers (SIAM), Leyland’s commercial vehicle (CV) market share also rose to 18.57 per cent in FY15-16 from 14.96 per cent a year ago and SIAM also expects that MHCV sales are going to rise by double digits in coming years. Overall Industry is expected to grow by 15-20 per cent in 2016-17. We expect company to outperform in near future.
The net debt-equity ratio of the company is 0.24 in FY16 as against 0.75 last year. The company also reduced its working capital days to zero in FY16. Company also had cash inflows of Rs 1618 crore by disposing of non-core assets in FY16.
Recently Ashok Leyland bagged the order for 3566 buses of Rs 450 crore from state transport undertakings (STU) for this fiscal year. Besides this, company is about to deliver 2000 odd buses under JNNURM scheme by March-17 as per government instruction to STU. Company’s domestic bus market went up to 35.9 per cent against 33.2 per cent in same quarter a year ago. With addition of new order book company is looking to enhance its market share further plus we can see improvement in profit margins as well.
On financial front, ALL’s total sales rose by 35 per cent to Rs 20,490 crore in FY16 against last year. EBIDT of the company has grown by whopping 93 per cent to Rs 2932 crore in FY16 over Rs 1517 crore in FY15. Its operating profit margin expanded by 365 basis points to 13.90 per cent in Fy16 on yearly basis. Ashok Leyland’s net profit has posted stellar numbers; it is grown by 613 per cent in FY16 on yearly basis.
On valuation front, company looks attractive with ROCE of 18.69 per cent over Force Motors (17.1) and Tata Motors (13.24). Company with EPS of 3.76 in is trading at P/E of 25x and P/B of 6.6x which seems reasonable given its growth prospects and demand levers. We expect Ashok Leyland to give robust performance in near turn. So we recommend to BUY this stock at current position.