Stock corner: Maintain ‘buy’ on Ashok Leylands, target price Rs 79

Ashok Leyland (AL) has corrected significantly (price erosion of more than 60% from its highs of `167). We believe its CMP has priced in most of the negative factors (liquidity issues due to the NBFC crisis, one of the worst demand slowdowns, axle load norms) that led to the decline. We believe having priced in most of the negative factors, the sequential increase in vehicle sales due to discounts, festive season buying and pre-BS6 buying would start reflecting in prices as month-on-month demand picks up.

In the recent past, there have been a lot of reports on government working on a plan to cap the life of vehicles to 10-15 years and set up guidelines and rules to allow structural scrap page of old vehicles.

Policy framework on this is already a work in progress and the government is expected to announce something definitive, sooner rather than later, as it is keen to revive demand in the industry.

This may act as an X-factor for CV manufacturers including AL.

The management is looking at every aspect to reduce costs, be it manufacturing, people productivity, overheads, etc. They are having regular meeting across all functions to look at cost cutting areas. They estimate a reduction of `500 cr for FY20. This would make AL much more efficient operationally and would augur well when the cycle turns.

Ashok Leyland has been trading at its lower end (near mean -1 SD) of its PE based valuations for past several months and even a mean reversion to its historic valuation translates to a 10-15% upside in the stock from its current levels.

With the CV cycle going through its trough, government focused on demand revival (as seen through various fiscal initiatives like tax cuts, accelerated depreciation), and other demand impetus such as discounts, festive season buying & pre-BS6 buying should lead to a rebound in prices of Ashok Leyland to its mean PE valuations.

Demand does not pick up in the coming months and there is no policy support/stimulus by government to support the CV industry. We maintain ‘buy’ with a target price of `79.

Ashok Leyland Limited