Ashok Leyland - A major CV player


(AKGupta) #1

I think Ashok Leyland Ltd. (ALL) deserves a separate thread on this esteemed forum. In the below note, I have summarised whatever information I can obtain (and whatever variables are worth tracking from the perspective of an investor) from the sources in public domain (the numeracy of which is an advantage in case of a large cap company!).

Looking at the past 5 quarter performance of ALL, the following picture emerges:

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ALL is a reliant on medium & heavy commercial vehicles, which make up for ~70% of quarterly volumes:

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Q4 of 2018 was exceptional in terms of volumes because of (as per mgmt comments) strong GDP growth, pickup in investment, mining, road building and construction activity in Rajasthan and UP along with rated load legislation/overloading ban. (http://www.newindianexpress.com/business/2018/apr/19/gst-ban-on-overloading-to-lift-heavy-vehicle-sales-says-ashok-leyland-1803384.html)

Things I like about ALL:

  1. Mgmt wants customer profitability first and wants to keep its margins intact by focusing on reducing operating cost/total cost of ownership of its CVs rather than initial purchase price. This is clearly visible from the financials as well (10%+ OPM in consecutive quarters). Refer below extract from Q4 concall:

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In fact, ALL has increased its market share from 22% to 33% in the last 5 years. It’s dominant in the Southern parts and is gaining share in North, East, West & Central as well.

  1. ALL has reduced debt significantly and has strong cash flows as well (Cash from operations was 5400 crs driven by higher trade payables (ALL doing business with cash from its suppliers!) by 1500 crs. ALL also has 800 crs advance from customers on the BS. (I have a bias for companies with this kind of working capital management).

If we look at the Balance Sheet as of FY2018, the following picture emerges:

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And the interest cost has come down:

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  1. Management is of high quality and with a strong pedigree (Hinduja Group). High promoter holding at 51%.

  2. Electric buses is an area where ALL is planning a lot of things. Refer the following comment from ALL MD in the concall:
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Steps ALL is taking to reduce impact of cyclicality of CV business on its financials:

  1. Getting deeper into defence procurement business – ALL won 25 tenders in the last 2 years and are going for more. Growth of 30% YoY in FY18 albeit making just 3% of Gross revenues. Though this business segment is a long gestation, it stays for 15-20 years once entered. (Read comments in screenshot) (https://economictimes.indiatimes.com/news/defence/ashok-leyland-looking-at-rs-5100-crore-revenue-from-defence-orders/articleshow/63815004.cms)
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  2. Expanding after-market solutions/services, spare parts offerings, network. 5% of Gross Revenues in FY18.

  3. Expanding into more and more international markets. Growth of 36% YoY in FY18. (Recently they inaugurated Ivory Coast office to serve West Africa: https://www.thehindubusinessline.com/companies/ashok-leyland-makes-ivory-coast-a-hub-for-west-africa/article9990707.ece).

  4. LCV business - grew by 37% YoY in FY18.

Key risks to the business:

  1. Impact of cyclicality is still a concern. The business is based on primary economic activity, factors like GDP growth, mining, construction, roads & highways. Timing the entry and more importantly exit is important. Though India currently is a secular growth story (can’t see a sharp downturn on the horizon). Mgmt has also indicated the steps it is taking to reduce cyclicality impact (highlighted above).

  2. Axle load norms recently announced allow higher loading by 20-25% thus allowing truckers to ship more on their existing trucks. (Whether this rule is applicable retrospectively or prospectively is still unclear: https://economictimes.indiatimes.com/industry/auto/lcv-hcv/axle-load-norms-may-create-short-term-impact-but-will-reset-in-august-gopal-mahadevan-ashok-leyland/articleshow/65039291.cms). Mgmt says overloading already happens and what this rule will do is bring unwarranted overloading to warranted overloading with strict implementation. And if this increases the extent of overloading further, it could impact safety of the vehicle.

  3. High competitive intensity with players like Tata Motors, Eicher, Mahindra and Bharat Benz. Ultimately discounting price to win market share by competitors will force ALL to follow to some extent as well just to maintain market share. This will put a pressure volumes.

For comparison, look at the TMT numbers vis a vis ALL:

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Note that in the above, Revenues and PAT for TML is PV+CV segments. If anybody can find out segmented financials for TML (CV, PV separately), please share!

  1. Raw material costs (which make up for ~70% of direct costs) dependent on commodity primarily steel which is in an upcycle. Mgmt has indicated it regularly raises prices to offset that impact but in a highly competitive environment, pricing power might be limited thus impacting margins.

Factors expected to drive demand in the coming years:

  1. Hub & spoke model: Mgmt expects GST to encourage faster adoption of Hub and spoke model in the logistics sector which will drive demand. This demand will be for larger trucks resulting in higher avg sales realization. This is expected to improve demand for products like Dost (LCV) as well.

  2. Cash for clunkers scheme: Govt is coming up with a scheme for old truck owners to exchange polluting trucks with new ones and avail a discount on the same to be funded by the govt. (https://timesofindia.indiatimes.com/business/india-business/cash-for-clunkers-set-to-hike-demand-for-trucks/articleshow/63372417.cms).

  3. BS VI transition: Volume growth due to pre buy before BS6 kicks in expected in April 2020 as per mgmt. Also, ALL is readying a product portfolio expansion in the 2 tonne to 7 tonne LCVs for 2020 which will be ready with BS VI technology thus plugging gaps in product offerings.
    ALL has planned capex of 1000 crores in small plants (not brownfield plants) and new product development for FY19 expecting strong demand in the coming couple of years: (https://www.thehindubusinessline.com/news/ashok-leyland-plans-1000-cr-capex-for-fy19/article23589716.ece)

I am sure there is a lot more to be discussed about this company and I would invite fellow VP members to share their perspective.

Disclosure: Invested recently after a sharp correction & will add more on clarity about axle load norms. ALL might correct more though valuations look comfortable at 18 times trailing 12 months earnings


(sumit680) #2

Hii…
I have assumed a growth of 10% for next year and 15 % for FY20, to be on a conservative side…ill feel comfortable in entering at 15 X 1 year forward looking PE…for FY 19 my assumed EPS comes to be 6.72 which gives a price of 101…so im waiting for that price to enter…

The FY 20 will a much better year…so assuming a 15% growth. the EPS comes to be 7.73…assuming a PE of 17 onto a higher side, the exit price can be determined around 137…if we add Rs10 cash held with the standalone company, it can reach 147 also…

so price reached 105, but moved up quickly due to upswing in overall mkt…i feel a few downswing days will bring the price to 101 range…


(AKGupta) #3

I’d definitely double down on ALL if it reaches ~100 levels. But till then not wanting to miss out on the potential upside (just one of the many biases I have!), entered earlier.

If we only compare the mgmt, I think ALL is better performer than Tata Motors which has ceded so much market share (TML used to have 65% five years ago!). ALL has been smart enough to capture a chunk of that market.

And now to win back that market share, TML is resorting to product discounting. That too ALL is trying to prevent, not by tit for tat discounting (that’ll be too easy) but by offering a product which minimises total cost of ownership (because, as declared by mgmt, EMI of a CV will make up less than 10% of operating cost of that CV. So price is NOT the only factor in the fleet operator’s list of decision-making factors.

This shows the brevity with which the mgmt is trying to compete with a far bigger player: not by following it but by differentiating from it.

Yes there is always a chance of failure in strategy (reduced margins, sales etc) but isn’t that risk ultimately worth the returns in equities?

Plus by resorting to discounts, Tata Motors is actually damaging the value proposition of the industry as a whole whereas by offering a product which improves profitability of the customer (either through iEGR tech, network expansion and superior after sales), ALL is increasing the value proposition for the industry.

I’m comfortable riding along with such a mgmt even if I have to pay a slightly higher price.

Cheers,
Aakash


(AKGupta) #4

Good July sales numbers posted by ALL : total monthly volumes at 15K against 12K last year.

MHCV - 11K vs 9K
LCV - 4K vs 3K


(k praveen) #5

can you share q4 earnings call transcript pdf?


(Raman Sharma) #6

Good Aug sales numbers posted by Ashok Leyland

MHCV - 13K vs 10.5K (24%)
LCV - 4K vs 3K(38%)


(AKGupta) #7

Q218: http://www.aceanalyser.com/Conference%20Call/100477_20171109.pdf
Q318: http://www.aceanalyser.com/Conference%20Call/100477_20180202.pdf
Q119: https://www.ashokleyland.com/documents/1305159/1312388/Q1-Conference-18-July-18-Final.pdf/aaa5ba7e-1321-6ac9-271a-7d3c49c35c8c

Somehow I can’t find Q418 transcript in my archives. Will share when I come across it.


(k praveen) #8

AshokLeylandLimited.pdf (375.8 KB)

q4 2018 earnings transcript


(k praveen) #9

thank you.
where to get these links?


(sreeramkvs) #10

Ashok leyland has strong expertize in electric buses through it’s UK based subsidiary Optare. This may give it a strong chance in the upcoming electrification of Indian buses other CVs. Solicit your views on if this will help them gain more market share.


(Gorthi) #11

I just reading one of the ingerview…could recall the details… But content was Maruthi is entering into the LCV segmeng…which is going to be not so good news for esisting players like Ashoka and Tamo…is any one has views on this… Also, one more point i could want to check there is a regulatory hang of Scrap issues… Is someone has details on this.
.


(AKGupta) #12

Vinod Dasari has resigned as CEO & MD wef Mar’19. Dheeraj Hinduja will step in as Executive Chairman in the interim.
Q2’19 results came in: Revenue up 25% YoY to ₹7600cr. EBITDA up 32% YoY to ₹800cr and EBITDA margin at 10.6% vs 10.1% LY. PAT up 38% YoY at 460 cr.
Volumes this quarter:-
MHCV: 38,386 (up 22% YoY and 25% sequentially)
LCV: 13,572 (up 42% YoY and 18% sequentially)

Link: https://www.moneycontrol.com/news/business/earnings/ashok-leyland-q2-net-profit-rises-38-yoy-at-rs-460-crore-vinod-dasari-resigns-3163081.html


#13

Markets discounting key man risk. However looks like a good time to enter into the stock, prices are beaten down to 110 at present, profit growths are good and available at a good P/E
I remember in an interview even Basant Maheshwari was talking about Ashok Leyland


#14

Tight liquidity conditions and the resultant squeeze on finance companies means that sales have hit the slow lane. Sales during October increased 17%, compared to 32% growth, so far, in this fiscal year.

Compared to an 18% fall in the Nifty Auto index, the Ashok Leyland stock has done relatively better, gaining 6.9% over the past one year

Analysts were expecting the company’s margins and profits to cross 11% and ₹500 crore, but net profit at ₹460 crore is at least 10% lower than Street estimates

On the face of it, however, the performance does look healthy. Revenue, operating profit and net profit grew 25-37%. But the Street was expecting faster earnings growth.


#15

Pardon me for taking short cut :stuck_out_tongue_winking_eye::pray:… Pasting a summary of important ratios of Ashok Leyland. Its near 52 weeks low and 36 % down from High. CEO exit like yes bank case has exacerbated the fall. But considering a formidable CV player and long term Gdp growth of India, it looks like another quality stock at cheap valuation. Any concerns which needs attention pls share. Thanks!

Disc… Tracking only.


(simplyraghav) #16

Ex CEO has issued a statement that he was mulling about an exit since long but couldn’t due to as the company was underperforming. He believes the company is in better shape and poised for growth. I find his explanation for exit credit worthy. I feel the market is discounting the cyclical nature of CV segment, otherwise the sales growth and ROE are above industry average.

Disc : Invested from 2017, buying more in SIP mode


#17

@simplyraghav

Cycles are always tricky, as entry exit signals are conflicting…

I assume as you said, you are a long term holder of ALL, and doing SIP, you must have built a better mental map of it…

If possible and if your time permits, can you plot sales profit and price correlation and help in understanding whether its right time to enter…or something similar.

I don’t intend to borrow your conviction but will learn cycles a bit better. Thanks!


(simplyraghav) #18

Do you mean market cap to sales? My conviction comes from improving sales and ROE 2014 onwards. Also, the undervaluation by more than 20 percent, as per my estimates of 142 per share provides me with margin of safety against the cyclical nature.


(AKGupta) #19

Everything in the market is cyclical after all because the market itself is cyclical.

I don’t think even FMCG companies, which are so called non-cyclicals, are going to be scot free if a correction hits the market overall.

If people’s incomes don’t rise or fall for some quarters they wont buy CVs, but they also won’t spend more on consumption goods, stalling growth of FMCGs as well and given the sky high valuations FMCGs trade at today, a correction is all but certain in a period of economic slowdown.

Cyclicality, which impacts CV players in general, is all about the GDP growth rate & no matter how it might fluctuate in the short run, India’s GDP is in a secular growth trend for a long time ahead. There’s no denying that.

Plus, it gives me confort that ALL is trying hard to reduce impact of cyclicality on its business. (I’ve mentioned the points in my original post).

Cyclicality bites those companies more which are heavily indebted. ALL, in my opinion, has done very well to reduce debt substantially over the last few years of strong business growth.

Cheers!


#20

No… I meant something else. Nevermind, will PM you. However, this estimate of fair value is constant or it also improves. I mean say you buy at 110, will you sell at 142 or by that time fair value also increases…