Barclays Ashok Leyland Ltd Strong Finish to a Weak Year

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Barclays | Ashok Leyland Ltd.

26 May 2014

2

Asia ex-Japan Autos & Auto Parts Industry View: NEUTRAL

Ashok Leyland Ltd. (ASOK.NS) Stock Rating: EQUAL WEIGHT

Income statement (INRmn) 2013A 2014E 2015E 2016E CAGR Price (23-May-2014) INR 32.85

Price Target INR 31.00

Why Equal Weight? With the volume and margincorrection, earnings have been impacted significantly

in FY14. In our view, as macro factors improve inFY15 and FY16, the earnings cycle is expected torecover. However, given the limited upside we rateAshok Leyland as EW.

Upside case INR 48.00

M&HCVs volumes recover faster, with revenueshigher by 15% with multiples expanding to 1xEV/Sales

Downside case INR 16.00

M&HCV sales continue to remain depressed in FY15Eas well with weak margins. Revenues lower by 20%with multiple contracting by 20% to 0.65x EV/sales.

Upside/Downside scenarios

POINT® Quantitative Equity Scores

Source: POINT®. The scores are valid as of the date of thisreport and are independent of the fundamental analysts'views. To view the latest scores, please go to the equitycompany page on Barclays Live.

Revenue 124,812 99,434 118,448 144,206 4.9%

EBITDA (adj) 8,675 1,666 8,761 12,913 14.2%

EBIT (adj) 4,867 -2,105 4,933 8,964 22.6%

Pre-tax income (adj) 1,811 -5,969 1,747 6,033 49.3%Net income (adj) 1,441 -4,763 1,311 4,525 46.4%

EPS (adj) (INR) 0.54 -1.79 0.49 1.70 46.4%

Diluted shares (mn) 2,661 2,661 2,661 2,661 0.0%

DPS (INR) 0.6 0.0 0.0 0.4 -12.6%

Margin and return data Average

EBITDA (adj) margin (%) 7.0 1.7 7.4 9.0 6.2

EBIT (adj) margin (%) 3.9 -2.1 4.2 6.2 3.0

Pre-tax (adj) margin (%) 1.5 -6.0 1.5 4.2 0.3

Net (adj) margin (%) 1.2 -4.8 1.1 3.1 0.2

ROA (%) 3.0 -1.4 2.7 4.7 2.3

ROE (%) 9.7 0.7 2.9 9.2 5.6

Balance sheet and cash flow (INRmn) CAGRTangible fixed assets 49,184 53,779 51,450 49,500 0.2%

Intangible fixed assets 3,634 3,634 3,634 3,634 0.0%

Cash and equivalents 139 117 1,367 1,330 112.1%

Total assets 130,085 126,040 134,850 142,549 3.1%

Short and long-term debt 35,048 38,839 38,839 35,839 0.7%

Pension liabilities 0 0 0 0 N/A

Other long-term l iabil it ies 5,171 3,761 4,120 4,120 -7.3%

Total liabilities 85,534 81,561 89,061 93,479 3.0%

Net debt/(funds) 34,909 38,722 37,472 34,509 -0.4%

Shareholders' equity 44,551 44,479 45,789 49,069 3.3%

Change in working capital -936 896 -749 -265 N/A

Cash f low from operations 7,459 3,767 7,575 11,139 14.3%

Capital expenditure -8,756 -2,476 -1,500 -2,000 N/A

Free cash flow -1,298 1,291 6,075 9,139 N/A

Valuation and leverage metrics Average

P/E (adj) (x) 60.6 N/A 66.6 19.3 48.8

EV/EBITDA (adj) (x) 14.1 75.7 14.3 9.4 28.4

EV/EBIT (adj) (x) 25.1 -59.9 25.3 13.6 1.0

Equity FCF yield (%) 7.6 1.4 3.3 3.7 4.0

EV/sales (x) 1.0 1.3 1.1 0.8 1.0

P/BV (x) 2.0 2.0 1.9 1.8 1.9

Dividend yield (%) 1.8 0.0 0.0 1.2 0.8

Total debt/capital (%) 41.2 44.5 42.2 38.8 41.7

Net debt/EBITDA (adj) (x) 4.0 23.2 4.3 2.7 8.6

Selected operating metrics Average

FCF/NI (x) -0.3 4.4 4.6 2.0 2.7R&D/sales (%) N/A N/A N/A N/A N/A

Capex/sales (%) 7.0 2.5 1.3 1.4 3.0

D&A/sales (%) 3.1 3.8 3.2 2.7 3.2

Source: Company data, Barclays ResearchNote: FY End Mar

Value

Quality

Sentiment

Low High

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26 May 2014

3

FIGURE 1

Ashok Leyland – 4Q FY14 results review vs. Barclays Research estimates

4QFY14 4QFY13 YoY 3QFY14 QoQ 4QFY14E vs Barclays Consensus vs Consensus

Net Sales 30,768 37,285 -17% 19,532 58% 27,709 11% 30,087 2%

Material Costs 23,164 28,245 -18% 15,568 49% 21,114 10%

Employee C osts 2,473 2,821 -12% 2,396 3% 2,494 -1%

Other costs 3,292 4,235 -22% 2,537 30% 3,325 -1%

EBITDA 1,839 1,983 -969 776 1,007

EBITDA Margin 6.0% 5.3% 66bps -5.0% 1094bps 2.8% 318bps 3.3% 263bps

PBDIT 1,997 2,098 -815 936

Depreciation 1,034 1,000 883 900

PBIT 962 1,098 -1,698 36

PBIT Margin 3.1% 2.9% -8.7% 0.1%

Interest 1,126 828 1,153 1,275

PBT -163 271 -2,851 -1,239

Tax -36 114 -256 -372PAT (Adjusted) -127 157 -181% -2,595 95% -867 -575

PAT (Reported) 3,634 1,500 -1,672 -867

PAT (Adj) Margin -0.4% 0.4% -13.3% -3.1% -1.9%

EPS (Adjusted) -0.05 0.06 -0.98 -0.33 -0.36

Ashok Leyland (INR Mn)

Source: Company data, Barclays Research estimates

FIGURE 2

Ashok Leyland – revenue and EBITDA margin trends

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(%)(INRbn)

Revenue EBITDA margin % (RHS)

Source: Company data, Barclays Research




26 May 2014

4

4Q FY14 earnings call takeaways

• Management indicated that volumes are expected to pick up on the reversal of the

mining ban in Karnataka and Goa along with the improved sentiment for truck

operators. In addition, management said it is confident of raising prices further to

improve overall realisations.

• The overall discount/vehicle fell to Rs0.16mn in Q4 from Rs0.18mn in Q3 FY14.

• AL’s market share in the M&HCV segment (domestic) improved to 29% in 4QFY14 vs

23% in 3Q FY14.

• Management met its guided debt reduction target of Rs10bn in FY14 through lower

working capital requirements and sales of non-core assets (Indusind bank shares). As

an example, management indicated that the company have moved its material

requirement planning cycle from 30 days to a daily basis along with a cash and carry

model for sales.

• The company expects the JNNURM scheme to aid in an additional 3,000 buses to be

sold in FY15. In addition, management expects the private bus market to also improve in

FY15 and FY16 as demand for inter-city travel improves.

• On a consolidated basis, the management has indicated that Ashok Leyland’s captive

finance arm had a debt of Rs30bn for FY14.

FIGURE 3

Ashok Leyland – M&HCV volumes have seen a cyclical uptick in Q4

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(%)('000s)

M&HCV Volumes Growth % YoY (RHS)

Source: Company data, Barclays Research




26 May 2014

5

FIGURE 4

Ashok Leyland – performance has been ahead of the

industry …

FIGURE 5

… resulting in market share gains

FIGURE 6

Ashok Leyland – volume contribution from LCVs

FIGURE 7

… while market share remains largely steady

11.814.0

26.929.5

35.331.6

29.6 30.4

38.3

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AL - Domestic LCVs

FIGURE 8

Ashok Leyland – EBITDA margin rebounded sharply in Q4 FY14

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(%)(USDmn) EBITDA (USD) EBITDA margin % (RHS)

Source for all the charts above: SIAM, company data, Barclays Research

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M&HCVs growth % (3M) Ashok Leyland growth % (3M

28 20 27 22 24 21 26 26 25 2331 23 28 23 29

5863

58 61 59 61 57 53 5755

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Ashok Leyland Tata Motors VECV

Mahindra SML Izusu Volvo




26 May 2014

6

FIGURE 9

Ashok Leyland – product mix changes

5 6 5 5 7 7 8 8 12 13 15 15 16 17 15 14

28 3141

3035 35 30 29

33 3238 33 30 28

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(%)

AL - Domestic M&HCV volumes 7.5-12T 12-16T 16-25T >25T

Source: SIAM, company data, Barclays Research

Estimate changes

Although we raise our M&HCV volume estimates by 2% each for FY15 and FY16, our

EBITDA estimates rise by 33% and 6%, respectively, on the better operating leverage and

greater cost control. We forecast profit after tax of Rs1.3bn for FY15 and Rs4.5bn for FY16.

FIGURE 10

Ashok Leyland – revised estimates

2015E 2016E 2015E 2016E 2015E 2016E

M&HCV 70,354 82,793 68,978 80,927 2.0% 2.3%

LCV 34,247 41,476 34,259 41,111 -0.0% 0.9%

Total 104,601 124,269 103,236 122,037 1.3% 1.8%

2015E 2016E 2015E 2016E 2015E 2016E

Net Sales 118,448 144,206 115,043 139,461 3.0% 3.4%

EBITDA 8,761 12,913 6,563 12,203 33.5% 5.8%

EBITDA margin 7.4% 9.0% 5.7% 8.8% 169bps 20bps

PAT (Adj) 1,311 4,525 -1,150 3,513 - 28.8%

PAT (Adj) margin 1.1% 3.1% -1.0% 2.5% 211bps 62bps

EPS (Adj) (INR) 0.49 1.70 -0.43 1.32 - 28.8%

Revised Previous Change %Volumes (units)

Particulars (INR

mn)

Source: Barclays Research estimates




26 May 2014

7

Maintain EW with a revised price target of Rs31

We roll forward our valuation period to FY16 with a valuation multiple of 0.8x EV/sales plus

Rs2.30/share for subsidiaries (raised from earlier 0.75x EV/sales), thereby implying a price

target of Rs31. Our valuation multiple is in line with AL’s historical EV/sales trend. We retain

our EW rating on the stock given the limited upside from current level. However, we remain

enthused by the management’s guidance of debt reduction and believe that the multiples

could expand further if visibility on debt reduction increases.

Key risks: The key downside risks to our investment thesis and price target on Ashok Leyland,

in our view, include the following: 1) the prolonged cyclical slowdown in the CV industry could

result weaker earnings and 2) increased competition with weak volumes could further result

in discounts over a longer period, marring profitability. The key upside risks include the

following: 1) faster recovery in volumes than we expect and 2) improvement in the realisations

led by price hikes and lower discounts that would be margin accretive given the high

operating leverage in the firm.

FIGURE 11

Ashok Leyland – historical EV/Sales bands

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0.9

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EV/Sales

1 year Forward Average +1 SD -1 SD

Source: Thomson Reuters DataStream, Barclays Research estimates

FIGURE 12

Ashok Leyland – Barclays Research estimates vs. consensus forecasts

2015E 2016E 2015E 2016E 2015E 2016E

Net Sales 118,448 144,206 118,493 143,876 -0.0% 0.2%

EBITDA 8,761 12,913 7,203 11,971 21.6% 7.9%

EBITDA margin 7.4% 9.0% 6.1% 8.3% 132bps 63bps

PAT (Adj) 1,311 4,525 264 3,782 395.5% 19.6%

PAT (Adj) margin 1.1% 3.1% 0.2% 2.6% 88bps 51bps

EPS (Adj) (INR) 0.49 1.70 0.03 1.48 1484.8% 14.8%

Barclays Consensus % difference

Source: Bloomberg consensus forecasts of 26 May 2014, Barclays Research estimates




26 May 2014

8

ANALYST(S) CERTIFICATION(S):

I, Sahil Kedia, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subjectsecurities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to thespecific recommendations or views expressed in this research report.

The POINT® Quantitative Equity Scores (POINT Scores) referenced herein are produced by the firm’s POINT quantitative model and Barclayshereby certifies that (1) the views expressed in this research report accurately reflect the firm's POINT Scores model and (2) no part of the firm'scompensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

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Primary Stocks (Ticker, Date, Price)

Ashok Leyland Ltd. (ASOK.NS, 23-May-2014, INR 32.85), Equal Weight/Neutral, D/E/J/K/L/N

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26 May 2014

9


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Industry View

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Below is the list of companies that constitute the "industry coverage universe":

Asia ex-Japan Autos & Auto Parts

Ashok Leyland Ltd. (ASOK.NS) Bajaj Auto Ltd. (BAJA.NS) Bharat Forge (BFRG.NS)

Brilliance China Automotive Holdings Ltd.

(1114.HK)

BYD Co., Ltd. (1211.HK) Cheng Shin Rubber Industry Co., Ltd.

(2105.TW)

Dongfeng Motor Group Co., Ltd, (0489.HK) Exide Industries (EXID.NS) Geely Automobile Holdings Ltd. (0175.HK)

Great Wall Motor Co., Ltd. (2333.HK) Guangzhou Automobile Group Co., Ltd.(2238.HK)

Hankook Tire Co., Ltd. (161390.KS)

Hero Motocorp Ltd. (HROM.NS) Hyundai Glovis Co., Ltd. (086280.KS) Hyundai Mobis (012330.KS)

Hyundai Motor Company (005380.KS) Hyundai Wia Corp. (011210.KS) Kia Motors Corporation (000270.KS)

Mahindra & Mahindra Ltd. (MAHM.NS) Mando Corp. (060980.KS) Maruti Suzuki India Limited (MRTI.NS)

Motherson Sumi Systems (MOSS.NS) Nexen Tire Corp. (002350.KS) Tata Motors Ltd. (TAMO.NS)

TVS Motor Co., Ltd. (TVSM.NS)

Distribution of Ratings:

Barclays Equity Research has 2615 companies under coverage.

45% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 55% ofcompanies with this rating are investment banking clients of the Firm.

38% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 47% ofcompanies with this rating are investment banking clients of the Firm.

15% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 43% ofcompanies with this rating are investment banking clients of the Firm.

Guide to the Barclays Research Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock willtrade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's pricetarget over the same 12-month period.

Guide to the POINT® Quantitative Equity Scores:




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The POINT Quantitative Equity Scores (POINT Scores) are based on consensus historical data and are independent of the Barclays fundamentalanalysts’ views. Each score is composed of a number of standard industry metrics.

A high/low Value score indicates attractive/unattractive valuation. Measures of value include P/E, EV/EBITDA and Free Cash Flow.

A high/low Quality score indicates financial statement strength/weakness. Measures of quality include ROIC and corporate default probability.

A high/low Sentiment score indicates bullish/bearish market sentiment. Measures of sentiment include price momentum and earnings revisions.

These scores are valid as of the date of this report. To view the latest scores, which are updated monthly, click here.

For a more detailed description of the underlying methodology for each score, please click here.

Barclays offices involved in the production of equity research:

London

Barclays Bank PLC (Barclays, London)

New York

Barclays Capital Inc. (BCI, New York)

Tokyo

Barclays Securities Japan Limited (BSJL, Tokyo)

São Paulo

Banco Barclays S.A. (BBSA, São Paulo)

Hong Kong

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

Toronto

Barclays Capital Canada Inc. (BCCI, Toronto)

Johannesburg

Absa Bank Limited (Absa, Johannesburg)

Mexico City

Barclays Bank Mexico, S.A. (BBMX, Mexico City)

Taiwan

Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)

Seoul

Barclays Capital Securities Limited (BCSL, Seoul)

Mumbai

Barclays Securities (India) Private Limited (BSIPL, Mumbai)

Singapore

Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

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Ashok Leyland Ltd. (AL IN / ASOK.NS) Stock Rating Industry View

INR 32.85 (23-May-2014) EQUAL WEIGHT NEUTRAL

Rating and Price Target Chart - INR (as of 23-May-2014) Currency=INR

Date Closing Price Rating Adjusted Price Target

24-Jan-2014 17.05 17.00

08-Nov-2013 16.95 14.00

21-Sep-2013 14.10 15.00

18-Jul-2013 15.35 19.00

18-Apr-2013 22.40 21.00

28-Jan-2013 24.90 26.00

12-Nov-2012 26.85 Equal Weight 26.06

08-Aug-2012 22.90 Underweight 21.32

Source: Thomson Reuters, Barclays Research

Historical stock prices and price targets may have been adjusted forstock splits and dividends.

Source: IDC, Barclays Research

Link to Barclays Live for interactive charting

D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Ashok Leyland Ltd. in the past 12months.

E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from Ashok LeylandLtd. within the next 3 months.

J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of Ashok Leyland Ltd..

K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Ashok Leyland Ltd. within the past 12months.

L: Ashok Leyland Ltd. is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.

N: Ashok Leyland Ltd. is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of BarclaysBank PLC and/or an affiliate.

Valuation Methodology: Our 12-month price target of Rs31 for Ashok Leyland is based on 0.8x FY16E EV/sales plus Rs2.30/share for value of investments. We believe EV/sales is a better measure of company operations than EV/EBITDA given that weak industry volumes. Our targetmultiple of 0.8x EV/Sales is in line with its the 10-year historical average.

Risks which May Impede the Achievement of the Barclays Research Price Target: The key risks to our price target, in our view, include thefollowing: To the downside,1) the prolonged cyclical slowdown in the CV industry could result in lower earnings; 2) increased competition withweaker volumes could further result in higher discounts, marring profitability; and 3) the inability of the company to generate steady cash flows inthe future could result in higher leverage. To the upside, 1) a faster recovery in volumes than we expect and 2) improvements in the realisations,led by price hikes and lower discounts, which would be margin accretive.

Clos ing Pr i ce Target Pr i ce Rat i ng Change

Ju l - 2011 Jan- 2012 Ju l - 2012 Jan- 2013 Ju l- 2013 Jan- 2014

9

12

15

18

21

24

27

30

33

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Barclays Ashok Leyland Ltd Strong Finish to a Weak Year