Ashok leyland is a 7500 Cr company in the automobile industry. It is the no.2 manufacturer of commercial vehicles in india. It has a 28% market share in commerical vehicle and is no.1 in the bus segment. It has a current capacity of around 80000 vehicles which would be expanded to 100000 vehicles in the next 1-2 years. The company has 6 plants at Ennore, hosur, Alwar and Bhandar and is putting a new plant in Uttaranchal.
The company has the following product segment – Buses, trucks, defence, spares, services and now the company is entering into design and other OEM services.
The company has doing well inline with the commerical vehicle industry. The turnaround in the sector performance has happened from 2002 and the industry has seen good growth since then. ALL (ashok leyland Ltd) has seen its revenue increase by 23% per annum since then and profits increase by 25%+. The company has become more efficient as its return on capital has increased from 15% to 25%+. The net margins have gone up from 3.8% to 5.2% during this period. The increase in ROC has come from better utilization of assets which have increased from 1.9 turns to 3.6 turns.
The company has used the free cash flows to reduce debt from a ratio of 0.75 in 2003 to 0.36 currently. Net of cash and cash equivalents the company is a zero debt company.
The financials of the company has improved a lot during the last 5 years. The company has used the upcycle to improve the balance sheet and make a few strategic acquisitions.
The company has acquired the truck Business of Avia in Europe and would be selling around 1000 trucks per annum (not sure of the exact number). In addition the company has agreed to purchase DTE in the US which provides testing services to OE manufacturers in the US. The company also has a JV with in UAE to build bus bodies in the UAE. The above acquisitions and other service initiatives should add value to the company and reduce the cyclical nature of the business.
In addition the company has been a good allocator of capital in the last 5 years and has a resonable dividend payout of almost 50%.The current management team seems to be more aggressive and focussed on doing well. The company has managed to increase its market share in the last 2-3 years too.
The business is cylical and during the down cycle there is considerable margin pressure. In addition the company has turnaround its performance during the last 5 years of boyant demand. However it still remains to be seen how the company will do during the down cycle.
Competition in the Commercial vehicle segment is now increasing due to the entry of foreign players and this could increase the pressure on the margins, especially during a down cycle.
The management is currently expanding capacity. However a drop in overall demand could depress profits in the short to medium term due to this excess capacity. However this risk is on the lower side and could be mitigated by increasing exports.
The company sells at a PE of 12. The current EPS is around 3.3 per share. The company can be expected to grow at 10-12% over the next few years. In addition the company has some competitive advantage such as a known brand name (especially in the south), long operating history and experience in the market, rational management and a decent distrubution/ service network.
The company can be valued at around 16-18 times PE and given an intrinsic value of around 60 Rs/ share.
The company seems to be undervalued, but it is still not a screaming buy. A 10% drop in stock price could make it a good buy. In addition the company is selling close to its 52 week lows due to the slowdown in the CV sector. A further drop in the share price could present an attractive opportunity.