5060977

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Rashi Talwar Bhatia ( [email protected]); Tel: +91 22 56575318

2QFY05 Results UpdateSECTOR: AU TOMOBILES

© Motilal Oswal Securities Ltd., 81-82, Bajaj Bhawan, Nariman Point, Mumbai 400 021 Tel: +91 22 56575200 Fax: 2281 6161

Ashok Leyland

YEAR N ET SA LES PAT EPS EPS P/E P/BV ROE ROCE EV / EV /

END (RS M ) (RS M ) (RS) GROWTH (% ) (X ) (X ) (% ) (% ) SALES EB ITDA

3/04A 33,939 1,998 1.7 58.7 10.8 2.1 18.4 18.3 0.7 5.6

3/05E * 40,436 2,144 1.4 -14.8 12.9 1.9 18.2 16.9 0.6 5.8

3/06E * 46,222 2,436 1.7 16.0 11.1 1.7 18.8 17.5 0.5 5.2

Equity Shares (m) 1,189.3

52-Week Range 31/15

1,6,12 Rel. Perf. (%) -2/-28/-33

M.Cap. (Rs b) 21.9

M.Cap. (US$ b) 0.5

QUARTERLY PERFORM AN CE (RS M IL L IO N )

Y /E M A RCH FY 04 FY 05 FY04 FY05E

1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE

No of Vehicles 8,314 12,020 12,387 15,747 10,836 12,481 14,280 17,817 48,468 55,909

Net Sales 5,843 8,238 8,459 11,187 8,212 9,147 10,494 12,583 33,939 40,436

Change (%) 4.8 29.7 47.5 20.0 40.5 11.0 24.1 12.5 23.4 19.1

Total Cost 5,544 7,628 8,045 8,948 7,864 8,792 9,013 10,793 29,993 36,462

Operating Profit 521 1,053 842 1,530 750 748 1,080 1,396 3,946 3,974OPM (%) 8.9 12.8 10.0 13.7 9.1 8.2 10.3 11.1 11.6 9.8

Change (%) -14.1 35.8 17.0 33.2 44.0 -29.0 28.4 -8.8 21.4 0.7

Non-Operating Income 18 93 18 57 30 119 30 28 186 207

Extraordinary Expense 6 0 18 54 23 24 24 22 95 93

Interest 86 95 45 -18 30 -9 35 34 208 90

Gross Profit 447 1,051 797 1,551 726 853 1,052 1,368 3,829 3,998

Less: Depreciation 230 251 233 251 240 258 258 177 965 934

PBT 217 800 564 1,300 486 594 793 1,190 2,865 3,065

Tax 69 248 184 427 167 164 262 388 929 981

Effective Tax Rate (%) 31.9 31.0 32.6 32.8 34.3 27.6 33.0 32.6 32.4 32.0

PAT 148 552 380 873 319 430 532 803 1,936 2,084

Change (%) 51.9 165.1 63.1 31.6 115.7 -22.1 40.0 -8.1 61.0 7.7

Extraordinary Item -17.6

Adj. PAT 152 540 392 908 335 446 547 817 1,998 2,144

E: Inquire Estimates

NeutralPrevious Recommendation: Neutral Rs18

27 October 2004

BLOOMBERG

AL IN

REUTERS CODE

ASOK.BO

STOCK INFO.

BSE Sensex: 5,663

S&P CNX: 1,784

Stock split from June 2004; * Equity fully diluted

Ashok Leyland’s (ALL) 2QFY05 numbers were below expectations. Net sales grew 11% to Rs9.1b but operating profit

declined 29% to Rs748m. Operating margins at 8.2% contracted 460bp YoY and 90bp QoQ largely on account of

increase in other expenditure. Net profit fell 22% to Rs330m.

ALL has been continuously losing market share in the CV segment, despite the industry witnessing buoyant demand.

While we expect the segment to continue its buoyant growth, we believe ALL would grow slower than the industry.

We are downgrading our estimates for FY05. We expect 19% growth in sales to Rs40.4b and flat EBITDA of Rs3.9b.

Operating margins would contract 180bp to 9.8%. Net profit would grow 6% to Rs2.1b.

The stock currently trades at 12.9x FY05E EPS (fully diluted) of Rs1.4. It has typically traded at a justified 20% discount

to Tata Motors. In the recent past, this discount has shrunk despite Tata Motors’ superior performance and ALL’s

disappointing performance. We believe that the stock is unlikely to provide superior returns from current levels. We

maintain Neutral with a target price of Rs17.

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Ashok Leyland

227 October 2004

63.0 64.0 64.7 64.168.0 66.4

23.423.3

28.827.930.130.8

0

20

40

60

80

1QFY04 2QFY04 3QFY04 4QFY04 1QFY05 2QFY05

Tata Motors Ashok Leyland

0

500

1,000

1,500

2,000

1Q 2Q 3Q 4Q 1Q 2Q

FY04 FY05

6

8

10

12

14

16EBITDA (Rs m) - LHS

Operating Margins (%) - RHS

0

3,000

6,000

9,000

12,000

1Q 2Q 3Q 4Q 1Q 2Q

FY04 FY05

50

60

70

80

90RM (Rs m) - LHS RM/VOP (%) - RHS

Volumes grew only marginally…

ALL’s CV volumes grew marginally in 2QFY05. Domestic

sales declined 4.7% to 10,822 units. However, exports

remained buoyant, growing 149% to 1,659 units.

VOLUM E BREAK-UP

2QFY04 2QFY05 CH G . (% )

Domestic Volumes

MHCV (Passenger) 2,967 2,789 -6.0

Market Share (%) 45.4 42

MHCV (Goods) 8,289 7,972 -3.8

Market Share (%) 25.6 20.3

LCV 97 61 -37.1

Total Domestic Sales 11,353 10,822 -4.7

Exports 667 1,659 148.7

Total 12,020 12,481 3.8

Source: Company/Inquire

...and market share continued to slide

ALL’s HHCV volumes declined 5% during the quarter as

against an industry growth of 18.1%. As a result, the

company’s market share has fallen from 30% in 2QFY04

to 23.4% in 2QFY05. Despite the resolution of its productionproblems, we expect ALL to continue growing slower than

the industry and, thus, lose market share.

MH CVS: MARK ET SHARE OF TOP-2


Margins under pressure

ALL’s operating margins declined 460bp YoY and 20bp QoQ

to 8.2%, mainly due to higher other expenditure. Raw

material cost as a percentage of sales remained flat at 78%

YoY but dropped by 100bp QoQ. Other expenditure

increased from Rs902m in 2QFY04 to Rs1,154m in

2QFY05. There was one-time expenditure of Rs120m

relating to IT and R&D. We expect margins to improve in

2HFY05 on higher volume growth and likely price increase.

However, for the full-year, margins would show a drop of

180bp.

OPERATING MARGINS

RAW MATERIAL COST


Exports do well

Exports jumped 149% to 1,659 units in 2QFY05. ALL would

complete the Iraq order by October 2004 and still has order

backlog from the Middle East. We expect export sales to

continue growing at a rapid pace on account of a healthy

order book. ALL’s buses have been received well in the

Middle East and it is looking to increase its presence in

defense, globally. ALL has already exported 3,039 units of

the targeted 6,000 units for FY05.

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Ashok Leyland

327 October 2004

Rs2.5b capex planned for FY06

In FY06, the management plans capex of about Rs.2.5b. A

large part of it would be utilized to ramp-up capacity from

67,000 units to 75,000 units.

ALL fails to grow in line with industry

We continue to have a positive outlook on the industry and

expect 18-20% volume growth in FY05. However, we do

not expect ALL to grow volumes more than 15%.

While all OEMs have witnessed good growth in demand

over the last 24 months, ALL has had the most problems in

ramping up production. It has, therefore, lost market share

to Tata Motors.

Downgrading our estimates

We have downgraded our FY05 estimates. We now expect

sales growth to be Rs40.4b, a growth of 19.1%. Operating

margins would decline to 9.8%, resulting in an EBITDA of

Rs3.9b - a marginal growth of 0.7%. Net profit would grow just 6% to Rs2.1b.

REVISED FY05 ESTIMATES

ESTIM ATES ESTIM ATES CH G.

OLD NEW (% )

Volumes 55,909 55,909

Volume Growth (%) 15.4 15.4

Sales 42,644 40,436 -5.2

Growth (%) 25.6 19.1

Operating Profits 4,643 3,974 -14.4

Growth (%) 17.7 0.7

OPM (%) 10.9 9.8

Profit (adjusted) 2,479 2,107 -15.0

Growth (%) 24.0 6.0

Source: Inquire

Valuation and view

We expect the CV industry to continue its buoyancy into

FY05, but ALL would grow slower than the industry and

lose market share. We expect a 180bp drop in ALL’s margins

in FY05. The stock currently trades at 12.9x FY05E EPS

of Rs1.4. ALL is currently trading at a superior multiple to

the industry leader, Tata Motors, while delivering sub-par

performance. We maintain our Neutral recommendation.

8/4/2019 5060977


Ashok Leyland

427 October 2004

Company description

Ashok Leyland is the second largest commercial vehicle

manufacturer in India. Its product portfolio includes

passenger and goods carriers across tonnage categories.

It was earlier concentrated in South India but in the last 12

months it has broad-based its markets to include not only

North India but also South East Asia.

Key investment arguments? Ashok Leyland is now present in both the LCV and

HCV segments of the industry. The LCV segment has

shown secular consistent growth over the last couple

of years while the HCV industry has continued to show

high cyclicity in sales.

? Ashok Leyland is making definitive investments to enter

the ancillary segment, specifically for heavy engine

forgings. While this segment is currently witnessing

huge demand, there are not enough players focusing

on it.

Key investments risks

? Recent fears have emerged on the sustainability of

growth rates in the CV industry. Ashok Leyland has

the highest exposure to the cyclicity of the industry.

Recent developments

? The strike at Ashok Leyland’s Hosur plant was called

off following an agreement with the workers.

? The company has increased capacity to 67,000 units a

year from 50,000 units after de-bottlenecking and

productivity improvements.

Valuation and view

? ALL has typically traded at a justified 20% discount toTata Motors. In the recent past, this discount has shrunk

despite Tata Motors’ superior performance and ALL’s

disappointing performance.

? At 12.9x FY05E and 11.1x FY06E earnings, we believe

that valuations factor all possible upsides. We maintain

Neutral with a target price of Rs17.

Sector view

? Demand related factors, IIP and agricultural production

remain strong.? The sector has witnessed some excess capacity being

built, but more on the HCV side.

? Freight rates have remained firm, quelling any near-

term fears.

? We maintain an Overweight stance on the sector.

EPS: INQUIRE FORECAST VS CONSENSUS (RS)

IN Q U IRE CON SEN SU S VARIATION

FORECAST FORECAST (% )

FY05 1.6 2.0 -19.2

FY06 1.8 2.2 -19.3

TARGET PRICE AN D RECOMMENDATION

CU RREN T TA RGET U PSIDE RECO.

PRICE (RS) PRICE (RS) (% )

18 17 -5.6 Neutral

SHAREHOLDING PATTERN (%)

SEP.0 4 J U N .0 4 SEP.0 3

Promoters 50.9 50.9 50.9

Domestic Institutions 24.4 27.0 26.5

FIIs/FDIs 8.1 10.9 10.5

Others 16.7 11.1 12.0

Ashok Leyland: an investment profile

STOCK PERFORMANCE (1 YEAR)

0

10

20

30

40

Nov-03 Feb-04 May-04 Aug-04 Oct-04

-45

-30

-15

0

15

Ashok Leyland (Rs) - LHS Rel. to Sensex (%) - RHS

COMPARATIVE VALUATIONS

ASH OK L EYLAN D TATA M OTORS M & M

P/E (x) FY05 12.9 10.5 10.5

FY06 11.1 8.2 7.9

EPS Growth FY05 -14.8 35.9 42.0FY06 16 18.6 32.1

Dividend Yield FY05 4.6 2.5 1.6

FY06 4.9 2.9 1.9

RoE FY05 18.2 25.7 17.9

FY06 18.2 28.5 19.7

EV/EBITDA (x) FY05 5.8 5.4 4.3

FY06 5.2 3.7 3.0

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Ashok Leyland

527 October 2004

IN COM E STATEM EN T (RS M IL L ION )

Y /E M A RCH 2002 2003 2004 2005E 2006E

Net Sales 23,274 27,504 33,939 40,436 46,222

Change (%) 0.5 18.2 23.4 19.1 14.3

Total Income 23,274 27,504 33,939 40,436 46,222

Raw Material 14,905 18,312 23,249 28,755 32,157

Employee Cost 2,571 2,906 3,097 3,525 3,789

Other Mfg. Expenses 955 937 1,157 1,213 1,964

Selling & Distribution 1,895 2,101 2,489 2,969 3,828

EBITDA 2,951 3,250 3,946 3,974 4,483

Change (%) 3.7 10.1 21.4 0.7 12.8

% of Net Sales 12.7 11.8 11.6 9.8 9.7

Depreciation 954 1,030 965 934 1,073

EBIT 1,997 2,220 2,982 3,041 3,410

Interest & Finance Charges 825 585 208 90 0

Other Income 179 153 186 207 176

Non-recurring Expense 30 87 95 93 93

PBT 1,322 1,701 2,865 3,065 3,493

Tax 400 499 929 981 1,118

Effective Rate (%) 30.2 29.3 32.4 32.0 32.0

PAT 923 1,202 1,936 2,084 2,375

Adj. PAT 942 1,258 1,998 2,144 2,436

Change (%) -0.4 33.6 58.7 7.3 13.6

B ALAN CE SH EET (RS M IL L ION )

Y /E M A RCH 2002 2003 2004 2005E 2006E

Share Capital 1,189 1,189 1,189 1,189 1,189

Reserves 9,180 8,406 9,329 10,276 11,447

Net Worth 10,370 9,595 10,518 11,465 12,636

Loans 8,884 7,172 4,991 6,000 6,000

Deferred Tax Liability 1,892 1,685 1,803 1,803 1,803

Capital Employed 21,146 18,452 17,312 19,268 20,439

Gross Fixed Assets 16,904 18,121 18,756 20,556 22,356

Less: Depreciation 7,343 9,096 10,008 10,942 12,015

Net Fixed Assets 9,561 9,025 8,748 9,615 10,342

Capital WIP 537 373 463 463 463

Investments 1,173 1,576 1,466 1,076 1,076

Curr.Assets, L & Adv. 15,552 13,405 14,637 17,667 19,031

Inventory 5,953 4,105 5,069 6,163 7,055

Sundry Debtors 4,928 5,182 4,056 4,768 5,440

Cash & Bank Balances 2,749 2,219 3,250 3,905 3,301

Loans & Advances 1,921 1,899 2,261 2,831 3,236

Current Liab. & Prov. 5,727 5,927 8,325 9,652 10,573

Sundry Creditors 4,277 4,134 5,248 6,491 7,259

Other Liabilities 662 798 1,573 1,573 1,573

Provisions 788 995 1,504 1,588 1,742

Net Current Assets 9,825 7,478 6,312 8,015 8,458

Miscellaneous Expenditures 49 0 323 100 101

Application of Funds 21,146 18,452 17,312 19,268 20,439

E: Inquire Estimates

RATIOS

Y/E M ARCH 2002 2003 2004 2005E 2006E

Basic (Rs)

EPS Basic 0.8 1.1 1.7 1.6 1.8

EPS Fully Diluted 0.8 1.1 1.7 1.4 1.7

Cash EPS 1.6 1.9 2.4 2.5 2.9

Book Value per Share 8.7 8.1 8.8 9.6 10.6

DPS 0.4 0.5 0.8 0.9 0.9

Payout (Incl. Div. Tax) % 58.0 55.8 51.8 54.6 50.7

Valuation

P/E 17.0 10.8 12.9 11.1

EV/EBITDA 7.8 5.6 5.8 5.2

EV/Sales 0.9 0.7 0.6 0.5

Price to Book Value 2.3 2.1 1.9 1.7Dividend Yield (%) 2.7 4.1 4.6 4.9

Profitability Ratios (%)

RoE 8.9 12.5 18.4 18.2 18.8

RoCE 10.3 12.9 18.3 16.9 17.5

Turnover Ratios

Debtors (Days) 67 61 38 38 38

Inventory (Days) 107 62 62 62 62

Creditors (Days) 105 82 82 82 82

Working Capital (Days) 154 99 68 72 67

Asset Turnover (x) 1.1 1.5 2.0 2.1 2.3

Leverage Ratio

Debt/Equity (x) 0.9 0.7 0.5 0.5 0.5

CASH FL OW STATEM EN T (RS M IL L IO N )

Y/E M ARCH 2002 2003 2004 2005E 2006E

OP/(Loss) before Tax 1,997 2,220 2,982 3,041 3,410

Interest/Dividends Received 179 153 186 207 176

Depreciation & Amortisation 954 1,030 965 934 1,073

Direct Taxes Paid 1,492 -705 -811 -981 -1,118

(Inc)/Dec in Working Capital 1,498 1,817 2,197 -1,048 -1,048

Other Items -1,805 -1,266 -8 -126 -134

CF from Oper. Activity 4,315 3,248 5,510 2,026 2,360

Extra-ordinary Items -30 -87 -95 -93 -93

Other Items 53 49 -323 223 -1

CF after EO Items 4,338 3,210 5,092 2,157 2,266

(Inc)/Dec in FA+CWIP -1,439 -330 -777 -1,800 -1,800

(Pur)/Sale of Invest. 6 -519 110 390 0

CF from Inv. Activity -1,433 -849 -667 -1,410 -1,800

Inc/(Dec) in Debt -446 -1,712 -2,182 1,009 0

Interest Paid -825 -585 -208 -90 0

Dividends Paid -535 -595 -1,003 -1,011 -1,070

CF from Fin. Activity -1,806 -2,892 -3,393 -92 -1,070

Inc/(Dec) in Cash 1,100 -530 1,031 655 -604

Add: Beginning Balance 1,649 2,749 2,219 3,250 3,905

Closing Balance 2,749 2,219 3,251 3,905 3,301

8/4/2019 5060977


This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal

Securities Limited (hereinafter referred as MOSt ) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solelyfor your information and should not be reproduced or redistributed to any other person in any form.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or

any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding

any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The

recipients of this report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Ashok Leyland

1. Analyst ownership of the stock No

2. Group/Directors ownership of the stock No

3. Broking relationship with company covered No

MOSt is not engaged in providing investment-banking services.

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required

from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide

information in response to specific client queries.

For more copies or other information, contact

Institutional: Navin Agarwal. Retail: Manish Shah, Mihir Kothari

Phone: (91-22) 56575200 Fax: (91-22) 22885038. E-mail: [email protected]

627 October 2004

5060977

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