1

Ashok Leyland Limited

HOLD Target Price: Rs.60.00

CMP: Rs.51.05 Market Cap. : Rs.67913.86mn.

Date: February 03rd

, 2010

Key Ratios:

Particulars FY09

(12 m)

FY10E

(12 m)

FY11E

(12 m)

OPM (%) 8 11 11

NPM (%) 3 5 6

ROE (%) 9 14 14

ROCE (%) 8 11 11

P/BV(x) 3.22 2.77 2.38

P/E(x) 35.74 20.05 16.68

EV/EBDITA(x) 3.67 10.83 10.51

Debt-Equity ratio 0.93 0.88 0.83

Key Data:

Sector Automobile

Face Value Rs.1.00

52 wk. High/Low Rs.56.80/13.80

Volume (2 wk. Avg.) 770000

BSE Code 500477

SYNOPSIS • Ashok Leyland, the flag ship company of Hinduja Group, is

the second largest commercial vehicle manufacturer of

the country.

• The company has reported a whopping 164% surge in its

December sales numbers. The company sold total 6,099

vehicles during the month under review against 2,307

vehicles in the year ago period.

• The company has inked a Memorandum of Understanding

(MoU) with Cisco for developing solutions as per the

requirements of different sectors, which will facilitate

Vehicle-to-Infrastructure (V2I) communication.

• The company unveiled India's first plug-in hybrid bus --

Hybus -- at the Auto Expo 2010.

• The company launched the new, innovative U-Truck

platform with the unveiling of the U-4936 (6x4) Tractor

and the U-2523 (6x4) Tipper.

• The company would start delivery of the first 50 ultra low

entry (ULE) buses to the Delhi Transport Corporation

(DTC) as part of its Rs 11.9 billion contract to supply 875

buses this fiscal.

• Belgium-based Wabco has entered into a supply

agreement with Ashok Leyland.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

2

Table of Content

Content Page No.

1. Investment Highlights 03

2. Peer Group Comparison 07

3. Key Concerns 07

4. Financials 08

5. Charts & Graph 10

6. Outlook and Conclusion 12

7. Industry Overview 13

3

Investment Highlights

• Result Updates (Q3FY10)

For the third quarter, the top line of the company increased 81%YoY and stood at

Rs.18155.34mn against Rs.10008.48mn of the same period of the last year. The bottom

line of the company for the quarter stood at Rs.1046.33mn from Rs.188.68mn of the

corresponding period of the previous year i.e., an increase of 455%YoY.

EPS of the company for the quarter stood at Rs.0.79 for equity share of Rs.1.00 each.

4

Expenditure for the quarter stood at Rs.16102.79mn, which is around 75% higher than the

corresponding period of the previous year. Raw material cost of the company for the

quarter accounts for 82% of the sales of the company and stood at Rs.14849.92mn from

Rs.5674.65mn of the corresponding period of the previous year i.e., an increase of

162%YoY. Employee cost increased 42%YoY to Rs.1736.17mn from Rs.1225.27mn. and

accounts for 10% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 11% and 6% respectively from 9% and 2%

respectively of the same period of the last year.

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• December Sales

The company has reported a whopping 164% surge in its December sales numbers. The

company sold total 6,099 vehicles during the month under review against 2,307 vehicles

in the year ago period.

On the flip side, the exports of the leading truck maker of the country witnessed a decline

of 37.51% in December 2009 to 563 units as compared to 901 units in the corresponding

month of 2008.

• MoU

The company has inked a Memorandum of Understanding (MoU) with Cisco for

developing solutions as per the requirements of different sectors, which will facilitate

Vehicle-to-Infrastructure (V2I) communication.

The company also showcased the vehicle with wireless connectivity -- iBus2 -- at the Auto

Expo 2010, as part of this MoU.

• Ashok Leyland unveils Hybus at Auto Expo 2010

The company unveiled India's first plug-in hybrid bus -- Hybus -- at the Auto Expo 2010.

The latest in green technology for urban mass transportation, Hybus is more eco-friendly

than a CNG-powered bus, because of integration of hybrid technology. Compared to a

conventional bus powered by IC engine, Hybus offers significant fuel saving of 20-30%.

The Hybus combines conventional CNG engine with electric propulsion system. The

engine is operated at an optimal efficiency to drive the generator for charging the on-

board battery. The lithium ion battery that powers the electrical drive system provides the

propulsion.

The company is plans to approach the government for subsidies on lithium ion batteries.

At present, the duty on lithium ion batteries, that powers the drive system of a vehicle, is

18%. And also plans to use these buses during the Commonwealth Games to be held in

Delhi in October.

• New launches

The company launched the new, innovative U-Truck platform with the unveiling of the U-

4936 (6x4) Tractor and the U-2523 (6x4) Tipper.

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The U-Truck platform will straddle the entire range of tractors, tippers and haulage trucks

in the 16 – 49 tonne segment, with over 25 models and a host of variants to roll out in 18

months starting April 2010. The range will be powered by BS III and BS IV engines that are

also protected for BS V norms, ranging from 160 to 380 hp.

• Ashok Leyland to supply 875 buses to DTC this fiscal

The company would start delivery of the first 50 ultra low entry (ULE) buses to the Delhi

Transport Corporation (DTC) soon as part of its Rs 11.9 billion contract to supply 875

buses this fiscal.

The company also fulfills its contract to deliver 5,000 buses to various state and local

transport bodies under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM)

in 2009-10.

The delivery which was originally meant to have started in March got delayed because of

changes in specifications of the vehicles. The company had secured Rs 4.8 billion contract

for supply of the ULE buses from DTC earlier this year. The two parties had also signed Rs

7.1 billion contract for maintenance of the buses over a period of 12 years.

• Ashok Leyland inks pact with Belgian company

Belgium-based Wabco has entered into a supply agreement with Ashok Leyland. The

agreement is for development of transmission automation technology and the long term

supply of automated manual transmission systems from 2010 through 2015.

Wabco will supply its new OptiDrive modular AMT system, an automation technology, to

Ashok Leyland. The company will be the first manufacturer of commercial vehicles in India

to adopt OptiDrive system in volume production.

• Ashok Leyland to roll out four new outlets in Punjab

The company would open three more outlets in Punjab including, one in Chandigarh in

the current fiscal to expand its network.

The company is currently present in eight locations in the state. Its service network is set

to grow further with four more dealer locations at Ludhiana, Moga, Chandigarh and

Bathinda to be opened this fiscal. It inaugurated its new outlet; spread over 10,000 square

feet at Patiala.

It is learnt that the new plant, which will be an integrated manufacturing facility, will bring

the company closer to the north Indian market where operations are expanding. Also the

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company is readying itself for the launch of new products and that these vehicles will be

tailor made for specific applications and are designed for better profitability.

Peer Group Comparison

Name of the

company

CMP(Rs.)

(As on

February

03,2010)

Market Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Ashok Leyland 51.05 67913.86 1.91 27.38 3.30 100.00

Tats Motors 724.10 372302.00 43.46 16.66 3.01 125.00

M & M ltd 1046.95 292958.90 69.17 15.14 5.59 100.00

Swaraj Mazda 308.00 3229.90 14.96 20.59 3.35 15.00

Key Concerns

� Recession in global economy

� Fluctuations in exchange rates

� High competition from global players

� Adverse Govt. policies

� Increasing number of models in domestic market.

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Financials

Results Update

12 months ended Profit and Loss A/C (Standalone):

Value(Rs in million) FY08A FY09A FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 77291.23 59810.74 63935.34 73525.64

Other Income 739.99 496.23 703.81 809.38

Total Income 78031.22 60306.97 64639.15 74335.02

Expenditure -69251.34 -55251.28 -57614.22 -66256.36

Operating Profit 8779.88 5055.69 7024.92 8078.66

Interest -497.40 -1187.09 -755.57 -831.13

Gross Profit 8282.48 3868.60 6269.35 7247.53

Depreciation -1773.61 -1784.14 -1976.52 -2095.12

Profit before Tax 6508.87 2084.46 4292.85 5152.42

Tax -1731.69 -184.50 -905.18 -1082.01

Profit after Tax 4777.18 1899.96 3387.67 4070.41

Extraordinary Items -84.08 - - -

Net Profit 4693.10 1899.96 3387.67 4070.41

Equity Capital 1330.34 1330.34 1330.34 1330.34

Reserves 19935.71 19760.00 23147.67 27218.08

Face Value 1.00 1.00 1.00 1.00

Total No. of Shares 1330.34 1330.34 1330.34 1330.34

EPS 3.53 1.43 2.55 3.06

9

Quarterly ended Profit and Loss A/C (Standalone):

Value(Rs. in million) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10E

Description 3m 3m 3m 3m

Net Sales 9124.51 15776.85 18155.34 20878.64

Other Income 606.24 55.60 19.52 22.45

Total Income 9730.75 15832.45 18174.86 20901.09

Expenditure -9013.20 -14125.03 -16102.79 -18373.20

Operating Profit 717.55 1707.42 2072.07 2527.88

Interest -258.03 -170.04 -162.13 -165.37

Gross Profit 459.52 1537.38 1909.94 2362.51

Depreciation -435.01 -505.82 -512.72 -522.97

Profit before Tax 24.52 1031.56 1397.23 1839.54

Tax 53.20 -145.50 -350.90 -461.98

Net Profit 77.72 886.06 1046.33 1377.56

Equity Capital 1330.34 1330.34 1330.34 1330.34

Face Value 1.00 1.00 1.00 1.00

Total No. of Shares 1330.34 1330.34 1330.34 1330.34

EPS 0.06 0.67 0.79 1.04

10

Charts

• Net sales & PAT

• P/E Ratio (x)

11

• P/BV (X)

• EV/EBITDA(X)

12

1 Year Comparative Graph

Outlook and Conclusion

• At the market price of Rs.51.05, the stock is trading at 20.05 x and 16.68 x for FY10E and

FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 10.83 x for FY10E and 10.51 x for FY11E.

• Price to book value of the company is expected to be at 2.77 x for FY10E and 2.38 x for FY11E

respectively.

• EPS of the company is expected to be at Rs.2.55 and Rs.3.06 for the earnings of FY10E and

FY11E respectively.

• The company has reported a whopping 164% surge in its December sales numbers. The

company sold total 6,099 vehicles during the month under review against 2,307 vehicles in

the year ago period.

• The company has inked a Memorandum of Understanding (MoU) with Cisco for developing

solutions as per the requirements of different sectors, which will facilitate Vehicle-to-

Infrastructure (V2I) communication.

Ashok Leyland ltd BSE SENSEX

13

• The company unveiled India's first plug-in hybrid bus -- Hybus -- at the Auto Expo 2010. The

latest in green technology for urban mass transportation, Hybus is more eco-friendly than a

CNG-powered bus, because of integration of hybrid technology. Compared to a conventional

bus powered by IC engine, Hybus offers significant fuel saving of 20-30%.

• In January the company launched the new, innovative U-Truck platform with the unveiling of

the U-4936 (6x4) Tractor and the U-2523 (6x4) Tipper.

• Belgium-based Wabco has entered into a supply agreement with Ashok Leyland. The

agreement is for development of transmission automation technology and the long term

supply of automated manual transmission systems from 2010 through 2015.

• The company has entered into an initial agreement to form a joint venture (JV) with Nissan

Motor Company, for the development, manufacture and distribution of Light Commercial

Vehicle (LCV) products. The company has a negligible presence in the LCV space, this

partnership would be positive for it in the long run.

• The company has completed the formation of a joint venture (JV) with the US-based

agriculture equipment maker John Deere for manufacturing and marketing construction

equipment.

• The JNNURM programme for urban fleet modernization calls for the mobilization of 14,000

vehicles. Out of this, the company has bagged orders for around 5,000 buses, of which the

company has supplied around 700 vehicles. The remainder of the order is scheduled to

spillover into 3QFY2010 and 4QFY2010.

• The domestic Commercial Vehicle (CV) industry is extremely positive and the company

expects to exit this fiscal with a 20%yoy volume growth. A majority of the factors that drive

freight demand and, consequently, M&HCV demand have turned positive and we expect the

CV manufacturers to benefit from the expected economic recovery in 2HFY2010E.

• We recommend ‘HOLD’ with a target price of Rs.60.00 for long term.

Industry Overview

The growth of the Indian middle class along with the growth of the economy over the past few

years has attracted global auto majors to the Indian market. Moreover, India provides trained

manpower at competitive costs making India a favored global manufacturing hub. The

attractiveness of the Indian markets on one hand and the stagnation of the auto sector in

markets such as Europe, US and Japan on the other have resulted in shifting of new capacities

and flow of capital to the Indian automobile industry.

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The midas touch of India is clearly visible on the financials of global auto majors. Be it Japanese

auto majors Suzuki and Honda, or Korean car giant Hyundai, all are increasingly banking on their

Indian operations for adding weight to their businesses as numbers stay uncertain in developed

markets due to economic recession and slowdown.

Hyundai’s Indian subsidiary contributes between 15 per cent and 20 per cent to Hyundai's global

turnover. According to the International Yearbook of Industrial Statistics 2008 released by United

Nations Industrial Development Organization (UNIDO), India ranks 12th in the list of the world’s

top 15 automakers.

Moreover, according to a new study released by global consultancy firm Deloitte, at least one

Indian company will be among the top six carmakers that would dominate the global auto

industry by 2020. According to the study, the car industry would see a massive capacity building

in low-cost locations like India and China as manufacturers shift base from developed regions.

Production

Although the sector was hit by economic slowdown, overall production (passenger vehicles,

commercial vehicles, two wheelers and three wheelers) increased from 10.85 million vehicles in

2007-08 to 11.17 million vehicles in 2008-09. Passenger vehicles increased marginally from 1.77

million to 1.83 million while two-wheelers increased from 8.02 million to 8.41 million.

In recent times, India has emerged as one of the favorite investment destinations for automotive

manufacturers.

• Japanese major Nissan has decided to shift the entire production of its small car, Micra,

from the UK to India. After production of the Micra begins here, Nissan plans to

manufacture four more models in India, involving a total investment of over US$ 412.2

million.

• Toyota Motors (TMC) plans to utilize the proposed Indo-Thai free trade agreement (FTA)

to make India a hub for small cars to be exported to its global markets. Toyota has

earmarked US$ 657.1 million for 2008-11 to set up a second plant in Bangalore to make

200,000 cars from the current 80,000 units. The company is also keen to set up a

transmission and engine unit at the second plant.

• Suzuki Motorcycle India (SMIPL), a wholly-owned subsidiary of Japanese auto major

Suzuki Motor Corporation, plans to double production capacity of its two-wheelers to

300,000 units by the end of the current fiscal year. The company will invest Rs 125 crore

(US$ 26.77 million).

• Ford Motor Company is investing US$ 500 million on transforming its India business into a

volume manufacturing and export hub and a regional centre of excellence for small car

development and production.

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• Volkswagen has set a target to localize production in India to about 80 per cent in 2-3

years from the current levels of almost 50 per cent as it seeks to offer cars at more

competitive prices.

Domestic Market

In spite of global economic slowdown, there was a marginal increase in the number of vehicles

sold in 2008-09 as compared to 2007-08. Total number of vehicles sold including passenger

vehicles, commercial vehicles, two-wheelers and three-wheelers in 2008-09 was 9.72 million as

compared to 9.65 million in 2007-08.

Further, the sales also picked up in 2009-10. On the back of strong festive demand and easier

availability of finance, passenger car sales in the country during October registered the highest

growth in more than two years. According to the Society of Indian Automobile Manufacturers

(SIAM), sales of passenger cars increased by 34 per cent at 132,615 units in October against

99,052 units during the same month last year. While this is the ninth consecutive month of

positive growth for passenger cars, the double-digit growth registered across other auto

segments may actually result in the highest-ever growth of the industry this fiscal at a time when

markets like Europe and the US are struggling with single digit growth.

Sales of trucks and buses in India, a key barometer of industrial activity, rose 52 per cent at

42,562 units in October, the fourth straight rise and the strongest expansion since April 2007.

Total two-wheeler sales went up 10.6 per cent at 750,229 units from 678,245 units in the same

period last year.

According to a survey by Credit Analysis and Research (CARE) Ratings, the domestic passenger

vehicle sales will accelerate at a CAGR of 13.9 per cent from 1.55 million units in FY 09 to 2.98

million units in FY 14. Passenger vehicle exports are likely to grow at a CAGR of 22 per cent from

335,739 units in FY 09 to 909,000 units by the end of FY 14.

Exports

According to SIAM, automobile sales (including passenger vehicles, commercial vehicles, two-

wheelers and three-wheelers) in the overseas markets increased to 1.53 million units in 2008-09

from 1.23 million units in 2007-08.

Export of passenger vehicles increased from 218,401 in 2007-08 to 335,739 units in 2008-09.

Moreover, growth continued during the first half of the current year. India exported a total of

230,000 cars, vans, SUVs and trucks between January and July 2009, posting a growth of 18 per

cent.

India has become the second-largest maker of small cars, overtaking Brazil. Small cars account for

80 per cent of the domestic market (up from 75 per cent last year) and exports are growing at top

speed. According to SIAM, small car exports rose 53 per cent between April and September to

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197,249 units against 129,090 units a year ago. India Yamaha Motor Ltd (IYML) plans to double

its exports from India to 140,000 units by 2010.

Maruti Suzuki India expects to export 120,000 cars during 2009-10. Of this, 100,000 will be the A-

Star, its newest hatchback.

Policy

In order to make India a power to reckon with in the automotive sector the government launched

the Automotive Mission Plan (AMP) 2006-2016.

The vision of the AMP is "to emerge as the destination of choice in the world for design and

manufacture of automobiles and auto components with output reaching a level of US$ 145 billion

accounting for more than 10 per cent of the GDP and providing additional employment to 25

million people by 2016."

As per the AMP, it is estimated that the total turnover of the automotive industry in India would

be in the order of US$ 122 billion - US$ 159 billion in 2016. It is expected that in real terms, India

would continue to enjoy its eminent position of being the largest tractor and three-wheeler

manufacturers in the world and the world's second largest two-wheeler manufacturer. By 2016,

India will emerge as the world's seventh largest car producer (as compared to the eleventh

largest currently) and retain the fourth largest position in world truck manufacturing sector.

Further, by 2016, the automotive sector would double its contribution to the country's GDP from

current levels of five per cent to 10 per cent.

____________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other sources

believed to be reliable but we do not represent that it is accurate or complete and it should

not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates 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. This document is provide for

assistance only and is not intended to be and must not alone be taken as the basis for an

investment decision.

17

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