Ashok Leyland - Waiting for RoE expansion... - Antique

The only pure CV play...

As we reach the seemingly fag-end of the deteriorating macro, Ashok Leyland (with its predominantly heavy CV portfolio) appears to be nearing its positive cycle. Long term demand drivers for the CV segment remain intact. There are multiple volume triggers - A) A more stringent implementation of the overloading ban, which will result in the need for addition of capacities. B) Gradual uptick in replacement demand - currently, around 50% of the trucks population is estimated to be over 10 years old; and 30% of the truck population is estimated to be over 15 years old. C) The development of newer highways, which will boost the demand for higher horsepower trucks as it will enable higher turnaround time.

That said, in a weak CV cycle, the unaffordable investment phase (where we have very less cashflow visibility) makes us maintain our cautious view on the company.

Rising contribution of Dost to offset Pantnagar benefits!

The contribution of Dost would increase from 7% in FY12 to ~30% in FY14 of total volumes, on which the company earns marketing margins (reckon 5-7%).

Hence, while there are favourable tailwinds on a macro level, the company's margins/realisations are structurally on a downtrend, which would offset the benefit of rising contribution of Pantnagar volumes.

Digression from core competencies could keep RoEs suppressed...

While the company's JV with Nissan has kicked-off with a decent product launch in the SCV segment (Dost), we are concerned about their foray into the small car space through this JV. The other JVs - with ALTEAMS and John Deere (construction equipment) are other instances where the company is digressing from its core competencies, which we believe would keep the blended ROEs suppressed.

HOLD... Prefer VECV in the CV space!

While the company has gained (or re-gained) ~400bps market share due to a recovery in Southern markets, the high debt to service the high capex/investment phase (on which we have less cashflow visibility) is a tad uncomforting.

For the stock, the only support remains the high dividend yield (~4%) and hopes of an improving macro. We maintain HOLD with a target price of INR26 (11x FY14e EPS). We continue to prefer Eicher Motors in the space owing to its much superior return ratios/fixed asset turns and a relatively cleaner business structure.

Source : Equity Bulls

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