Buy Ashok Leyland on volume growth outlook: Nomura

Maintain buy on Ashok Leyland (AL) and raise target price to Rs 77. We value the standalone business at R71.7 per share based on 9x FY17f ebitda of R2,560 crore. Our target price moves up due to 23% increase in our FY17f ebitda estimates; lower net debt of R2,650 crore in FY16f versus R3,380 crore earlier due to strong profitability and some non-core asset sale; roll forward to March 2016 from November 2015 earlier and inclusion of value of Optare and Hinduja Energy as the company is looking to unlock value by divesting stakes in these companies.

AL reported Q3FY15 ebitda margins at 7.1% which was largely in-line with our estimates; however ASPs were 3.4% ahead of our estimates, leading to a 4% beat on ebitda estimates. There was some fall in gross margins though due to lower mix of defence and spare parts sales, which the company hopes to make up in future. The company has been very successful in gaining market share and hence we now estimate AL to report 30% MHCV volume growth in FY15 compared to 15% for the industry.

We estimate AL’s volumes to grow 25% in FY16f as industrial production picks up. AL, being a pure play on CV growth, will be a key beneficiary of this pick-up. We estimate AL’s ebitda margins to move up by 390 bps over FY15-17f. Of this, improved utilisation of its plant in a tax free zone contributes 50bps and rise in excise duty leads to higher tax incentive of 120 bps.

Ashok Leyland Limited