Pitchbook for Ashok Leyland

Click here to load reader

  • date post

    13-Apr-2017
  • Category

    Business

  • view

    332
  • download

    1

Embed Size (px)

Transcript of Pitchbook for Ashok Leyland

PowerPoint Presentation

Abhirup LahiriSwati Singh

ASHOK LEYLAND :Sell Side Pitch book

FOR THE GREATER GREED

Indian Institute of Foreign Trade | Delhi

Rationale for Comparison

Valuation by Comparable

Potential Buyers

Introduction

Overview

Valuation by DCF Method

Executive Summary

GROWTH DRIVERSPoised to be thesecond largest automobile industryby 2016Market sizeExpected to risefrom US$ 67 bn inFY13 to US$145 bnIn FY16Domestic salesof commercial vehicles(CV) are 0.5 million units

AutomobileExports grew at a CAGR of 14.65%During DY10-15Trucks accountedfor the largest shareof revenue (47.8%)in 2011An idealdestination forFDI, as auto firmssave about 10-25% costs vis--visEurope

AUTOMOBILE INDUSTRY : AN OVERVIEWintroductionIndian commercial and passenger car industry now the sixth largest in the worldIndustrial Production has been steady over the last yearMHCV growth rate has been increasing constantly in the last few years100% FDI; excise duty on commercial vehicles reduced from 12% to 8%Increasing in IIP and construction activity(see graph2)R&D focus; GOI has set up a technology modernisation fundBetter governance leading to kick starting of infrastructure projectsDecreasing commodity prices, leading to cheaper raw materials Better conditions for small and medium fleet operatorsINTRODUCTION : AUTO INDUSTRYOne of the fastest growing segments in India todayCommercial vehicles expected to register a CAGR of 19% during FY 201421Favorable government policies like lower excise duties, automotive mission plans, the constitution of NATRiP, National Mission for Electric Mobility 2020 etc. are set to spell medium-long term growth Source: www.tradingeconomics.comSource: IBEF Sectoral Report August 2015

Indian Institute of Foreign Trade | Delhi

Rationale for Comparison

Valuation by Comparable

Potential Buyers

Introduction

Overview

Valuation by DCF Method

Executive Summary

ASHOK LEYLAND : AN OVERVIEW

OPPORTUNITIESSWOTSTRENGTHSWEAKNESSTHREATSOne of the oldest commercial vehicles manufacturer, with a high brand equityLong relationship with the Indian Army along with other defence forcesPresence across the globe, giving the acquirer access to the world marketsStill room for the operating margins to grow; this can be achieved through optimised production processesHas played second fiddle to TATA motors since many years, and that is why the market share has remained stagnant at around 25-27%Due to BS IV norms over the next two years, pre buying of M/HC vehicles will be increasing significantlyLower commodity prices rises marginsAfter a stagnant 3-4 years, the sales of Ashok Leyland is beginning to pick up Governments aggressive push for Make in India can mean significant competition from foreign playersReduced capital expenditure and investment from debt private players, leading to reduced construction activity and other investments.

16th largest producer of trucks globally Significant partnerships with armed forces across the globe, and also the largest fleet of logistics vehicles deployed in the Indian ArmyTurnover in excess of US $ 2.3 billion Eight manufacturing plants across the globeJoint Ventures include Nissan motors in Japan, John Deere in USA, Continental AG in Germany. Hence It aligns itself with the best practices across the globe Second largest producer of commercial vehicles in India1Fourth largest manufacturer of buses in the world234567Source: Annual ReportSource: JP Morgan ReportOVERVIEWOVERVIEW : ASHOK LEYLANDAshok Leyland is the oldest Indian player in the market and has immense knowledge of the Indian marketWith a large demand by the Indian Army, Ashok Leyland is liable to get extensive support from the Government in its initiativesWidespread manufacturing setup and strong R&D facility

Indian Institute of Foreign Trade | Delhi

Rationale for Pitching

Valuation by Comparable

Potential Buyers

Introduction

Overview

Valuation by DCF Method

Executive Summary

Ashok Leyland has acquired 35% market share in the medium and heavy commercial vehicle (M&HCV) segment in July 2015 on the back of a strong demand, expansion of the dealership network in the north and east India and high discounts on vehiclesThe Chennai based commercial vehicle manufacturer registered a 53% y-o-y increase to 8,803 units. Volumes for the April to June quarter increased by 44% y-o-y to 21,485 vehicles compared to 14,908 units in the year ago periodAshok Leylands market share reached all time high driven by market share gains in the above 25 ton truck (up 400 bps to 38%) and bus segment (up 200 bps to 38%)Market capture of LCV category High cost to peopleReplenish depletion of reserve ABCFACTORSRATIONALE FOR pitchingAshok Leyland is primarily dominant in HCV market. They have not yet tapped the potential LCV category has to offerThey have expanded their dealerships partnering with 58 new dealers using its reserves, which now need to be replenished

123

The revenue of the company has been on a constant decline and the reserves are depleting in dealerships. This makes it a good time for bigger companies to invest in it and turn the sales around.Although it has an increasing trend of book value while compared to rival firms, we realize that the shares are undervalued making the opportunity the best fit for acquisition.A high quick ratio indicates that the firm has high disposable liquidity. Here, the growth in quick ratio has become stagnant indicating that cash at hand is not readily available.Recent market trends

Financial ratios Factors for pitching

Manufacturing cost of vehicles armed with Anti Lock Braking System will rise, so truckers are expected to buy vehicles before thisSource: www.moneycontrol.com

Indian Institute of Foreign Trade | Delhi

Rationale for Pitching

Valuation by Comparable

Potential Buyers

Introduction

Overview

Valuation by DCF Method

Executive Summary

MeanAshok Leyland ValuesPrice23.9(P/E)1.9 (EPS)45.38.7(P/BV)14.0(BV)122.31.7(P/S)40.8(S)70.8Share Price = 79.4020.6(EV/EBITDA) 289(EBITDA) 5,948.52.3(EV/S) 11,608.1(S) 26,118.2Enterprise Value = 16,033

Price MultiplesValuation Multiples

Trading MultiplesValues intrinsic to an organization (internal valuation)

AcquirerTargetTVBook Value (in crores)Multiple (TV/BV)Revenues (in crores)Multiple (TV/R)2003Tata Motors LtdDaewoo Commercial Vehicles Co Ltd 4,650 7760.39$1,9012.452007MahindraPunjab Tractors 13,910 5,1202.72 99114.042010MahindraSYMC 30,738 12,3552.49 14,6942.092002Amtek AutoGWK Automotive 1,700 5603.04 7142.38

MultipleValueAshok LeylandValuationFinal ValuationTV/BV17.1 3,989 68,444 64,607TV/R5.24 11,600 60,770Removed OutliersTV/BV2.75 3,989 10,957 18,855TV/R2.31 11,600 26,753

Other AcquisitionsInternalValuationExternalValuationTransaction Multiples(in crores)

16,033 crore18,855 crore

VALUATION BY COMPARABLE

Source: www.moneycontrol.comSource: www.moneycontrol.com

Indian Institute of Foreign Trade | Delhi

Rationale for Pitching

Valuation by Comparable

Potential Buyers

Introduction

Overview

Valuation by DCF Method

Executive Summary

EstimatingFCFEstimating growth profileCalculating Discount rateCalculatingPVEstimating sales growthThis is the cash available to bond holders and stock holders after all expense and investments have taken placeWe have used WACC as the discount rate . Cost of equity was calculated through CAPM model and cost of debt was taken as 6% - the average cost of debt in India.Starting from 6th year, we assumed a growth of 3% till perpetuity. Using this rate, we have calculated the firms terminal valueTotal PV is the summation of PV of all cash flows and terminal value. This gives the firms total value. DCFValuation 13,733 crore

Tax amount leviedDiscount factor for future valueDebt to Equity ratioSales growth YoY of 19% from 2016 to 2020 (equivalent to the CAGR of the automobile industry in India)A tax amount equivalent to 30% of the EBIT is levied for the period till 2020Discount factor is 10% for the period till 2020Debt to Equity Ratio is assumed to remain the same as in FY 2015 for the period till 2020ASSUMPTIONSDebt to equity ratio0.63Risk free rate5%Beta1.45Cost of debt6%Calculated WACC10.9%TV as a percentageof EV75%VALUATION BY DCF METHOD

Indian Institute of Foreign Trade | Delhi

Rationale for Pitching

Valuation by Comparable

Potential Buyers

Introduction

Overview

Valuation by DCF Method

Executive Summary

Eicher is the 2nd largest commercial vehicle producer in India with a market cap of 510 bn Rupees, double to that of Ashok Leyland1The one area where Eicher lags behind Ashok Leyland is in the production and sale of bus business2Eicher could acquire Ashok Leyland in order to have strong footing in the bus business3The Debt to Equity ratio for Eicher is 0.69. Owing to larger market cap, there is sufficient scope to get the debt for the acquisition4Eicher could benefit from geographically diversified production, economies of scope& market consolidation to beat TATA Motors 5

Isuzu currently operates in the Indian market through a joint venture with Sumitomo Corporation known as SML Isuzu1 In counties like US and Japan, it is popular for its high performance trucks while in India it currently offers only small pick up trucks2To be a major competitor in the industry, Isuzu can benefit by acquiring AshokLeyland3Isuzu has a large market cap, PAT and a low D/E ratio, thus it can acquire Ashok Leyland without major effects on its financial ratios4SML Isuzu on being merged (through acquiring) can benefit from ahigher asset turnover ratio at Ashok Leyland5

M&M recently demerged its struggling trucks and buses division from Mahindra Trucks and Buses and merged with its parent company1On top of that, it announced investments worth 500 Cr spread over 3-4 years2Instead of investing on its failed business , it will be better for M&M to acquire an established business3The Debt to Equity ratio for M&M is 0.14, which leaves it with ample scope to takemore debt for the acquisition. 4M&M can benefit from higher P/E ratio of Ashok Leyland, thus getting better return in one to one exchange of shares5

POTENTIAL BUYERSSource: www.moneycontrol.com

Indian Institute of Foreign Trade | Delhi

Rationale for Pitching

Valuation by Comparable

Potential Buyers

Introduction

Overview

Valuation by DCF Method

Executive Summary

Mahindra and Mahindra has presence in several countries ,like South Korea, South America, Italy , Thailand thus the combined company can bene fit from it in case it goes global in the future.GLOBAL REACH

Currently Mahindra and Mahindra aspires to be one of the leading commercial vehicle manufactures in India , thus acquiring Ashok Leyland will lead to a combined R&D, Manufacturing etc., thus giving an opportunity to save costs.COST SAVINGSDue to the large presence of Mahindra and Mahindra in the passenger cars business, it has a very large and effective distribution network, while Ashok Leyland has a very large commercial vehicle network, thus the combined company can have a very efficient distribution networkDISTRIBUTION NETWORKMahindra and Mahindra dominates the LCV category while Ashok Leyland primarily operates in the HCV category, thus the combined company will have a wider product line that covers the whole market.EXTENDED PRODUCT LINE

SYNERGIESEXECUTIVE SUMMARYInternal Valuation in Comparable 16,033 croreExternal Valuation in Comparable 18,855 croreValuation through DCF Method 13,733 croreAVERAGE ENTERPRISE VALUE 16,207 crore

Emergence of large automotive clusters in the country in all four regions North, South, East, West1Strong Government support in the setting up of NATRiP centers an emerging R&D hub2With a CAGR of ~19%, India is expected to be the 3rd largest automotive market by 20163Why auto industry?

Strong player in the M&HCV segment with over 35% market share1Though with increasing book value, share price is undervalued, making it a good target2Oldest player in the segment, with 8 large manufacturing facilities and strong installed R&D capacity3Why Ashok Leyland?Our recommended buyer is Mahindra & Mahindra

Thank you

Data

VOLVO (VOLVB)DONGFENG (DNFGY)FIAT CHRYSLER (FCAU)EICHER MOTORS LIMITED (ECQRY)Force Motors Ltd (500033)Mahindra and Mahindra Ashok Leyland

in millionsVolvo (SEK)Volvo (INR)in millionsVolvo (USD)Volvo (INR)in millionsCHRYSLER (EUR)CHRYSLER (INR)in millionsEICHER (INR)in millionsFORCE (INR)in millionsMahindra (INR)in millionsAL (INR)Market Cap156,600.01,237,140.0Market Cap11,600.0786,364.0Market Cap10,450.0691,267.5Market Cap442,361.1Market Cap350,225.0Market Cap730,746.2Market Cap242,041.8No. of shares2,141.02,141.0No. of shares189.0189.0No. of shares1,424.01,424.0No. of shares28.0No. of shares132.0No. of shares622.0No. of shares2,846.0Income StatementIncome StatementIncome StatementIncome StatementIncome StatementIncome StatementIncome StatementEBITDA17,066.0134,821.4EBITDA2,581.4174,991.6EBITDA6,711.0496,345.6EBITDA14,709.0EBITDA14,709.0EBITDA53,251.0EBITDA2,890.0Sales301,044.02,378,247.6Sales12,668.9858,821.9Sales100,361.07,422,699.6Sales100,534.0Sales100,534.0Sales740,009.0Sales116,081.0Balance SheetBalance SheetBalance SheetBalance SheetBalance SheetBalance SheetBalance SheetBook Value112,267.0886,909.3Book Value11,553.8783,234.4Book Value13,425.0992,913.0Book Value25,159.0Book Value12,277.0Book Value233,069.0Book Value39,892.0Debt289,375.02,286,062.5Debt11,211.9760,054.3Debt87,085.05,760,672.8Debt38,917.0Debt12,495.0Debt649,634.0Debt135,451.0Cash and Equivalents26,242.0207,311.8Cash and Equivalents3,945.5267,468.2Cash and Equivalents23,601.01,561,206.2Cash and Equivalents13,977.0Cash and Equivalents2,190.0Cash and Equivalents87,538.0Cash and Equivalents5,878.0EV419,733.03,315,890.7EV18,866.41,278,950.1EV73,934.04,890,734.1EV467,301.1EV360,530.0EV1,292,842.2EV371,614.8Cash Flow StatementCash Flow StatementCash Flow StatementCash Flow StatementCash Flow StatementCash Flow StatementCash Flow StatementCFO8,737.069,022.3CFO-154.1-10,449.6CFO7,731.0571,784.8CFO-985.0CFO120.7CFO-2,437.0CFO-1,040.0

RatiosRatiosRatiosRatiosRatiosRatiosRatiosBook Value per Share52.4414.3Book Value per Share61.14,144.1Book Value per Share9.4697.3Book Value per Share898.5Book Value per Share93.0Book Value per Share374.7Book Value per Share14.0Price73.2577.9Price61.74,180.6Price7.3542.9Price16,297.8Price2,658.0Price1,176.6Price85.1Earnings Per Share3.930.9Earnings Per Share12.1818.2Earnings Per Share12.1892.7Earnings Per Share243.9Earnings Per Share89.4Earnings Per Share53.0Earnings Per Share1.9CFO per share4.132.2CFO per share-0.8-55.3CFO per share5.4401.5CFO per share-35.2CFO per share0.9CFO per share-3.9CFO per share-0.4Financial RatiosFinancial RatiosFinancial RatiosFinancial RatiosFinancial RatiosFinancial RatiosFinancial RatiosEV/EBITDA24.624.6EV/EBITDA7.37.3EV/EBITDA11.011.0EV/EBITDA31.8EV/EBITDA24.5EV/EBITDA24.3EV/EBITDA128.6EV/S1.41.4EV/S1.51.5EV/S0.70.7EV/S4.6EV/S3.6EV/S1.7EV/S3.2Price MultiplesPrice MultiplesPrice MultiplesPrice MultiplesPrice MultiplesPrice MultiplesPrice MultiplesP/E18.718.7P/E5.15.1P/E0.60.6P/E66.8P/E29.7P/E22.2P/E44.8P/BV1.41.4P/BV1.01.0P/BV0.80.8P/BV18.1P/BV28.6P/BV3.1P/BV6.1P/CF17.917.9P/CF-75.6-75.6P/CF1.41.4P/CF-463.3P/CF2,907.6P/CF-300.3P/CF-232.7P/S0.520.52P/S0.920.92P/S0.100.10P/S4.54P/S3.49P/S0.99P/S2.09

Internal Valuation

VolvoDongFengChryslerEicherForce MotorsM&MAverageAshok LeylandPriceP/E18.75.10.666.829.722.223.9EPS1.9 45.32P/BV1.41.00.817.628.53.18.7BV14.0 122.27P/S0.50.90.14.43.51.01.7S40.8 70.75Average Share Price 79.44

VolvoDongFengChryslerEicherForce MotorsM&MAverageAshok LeylandEV (million)EV/EBITDA24.607.3011.0031.8024.5024.3020.6EBITDA 2,890 59,485.83EV/S1.401.500.704.603.601.702.3Sales 116,081 261,182.25Average EV (in crores) 16,033

External Valuation

YearAcquirerTargetTVBook ValueMultiple (BV)RevenuesMultiple (Revenues)2007MahindraPunjab Tractors 13,910 5,1202.72 99114.042003Tata Motors LtdDaewoo Commercial Vehicles Co Ltd 4,650 7760.39 1,9012.452010MahindraSYMC 30,739 12,3552.49 14,6942.092002Amtek AutoGWK Automotive 1,700 5603.04 7142.38Average Multiple (BV)17.16Average Multiple (Revenues)5.24Book value of Ashok Leyland 3,989Revenue of Ashok Leyland 11,600Valuation 68,445 60,770

MultipleValueAshok LeylandValuationFinal ValuationTV/BV17.16 3,989 68,445 64,608TV/R5.24 11,600 60,770Removed OutliersTV/BV2.75 3,989 10,958 18,855TV/R2.31 11,600 26,753

DCF Valuation

ActualForecast periodInputOutput201220132014201520162017201820192020WACC CalculationEnterprise value (in crores)Sales 13,050 12,561 10,091 13,840 16,470 19,599 23,323 27,754 33,027Target Capital StructurePresent value of Free Cash Flow 3,452% growth-3.7%-19.7%37.2%19.0%19.0%19.0%19.0%19.0%Debt to Total Capitalization38.7%2Equity to Total Capitalization61.3%Terminal Value 19,144Total costs 11,752 11,332 9,352 12,588 14,823 17,639 20,990 24,979 29,724Debt to Equity Ratio63.0%Discount Factor0.54% sales90.1%90.2%92.7%91.0%90.0%90.0%90.0%90.0%90.0%Cost of EquityPresent Value of Terminal Value 10,281Risk-free rate (1)5.0%% of Enterprise Value75%EBITDA 1,298 1,229 739 1,252 1,647 1,960 2,332 2,775 3,303Market risk Premium7.0%Enterprise value 13,733% margin9.9%9.8%7.3%9.0%10.0%10.0%10.0%10.0%10.0% Beta1.45 Cost of Equity15.2%Depreciation & Amortization: 352 380 377 416 513 611 727 865 1,029% sales2.7%3.0%3.7%3.0%3.1%3.1%3.1%3.1%3.1%Cost of DebtEBIT9468493628361,1341,3491,6061,9112,274Cost of Debt6.0%Taxes30.0%Taxes (30%) 284 255 109 251 340 405 482 573 682After Tax Cost of Debt4.2%WACC10.9%Capex 800 130 20 140 494 588 700 833 991% sales6.1%1.0%0.2%1.0%3.0%3.0%3.0%3.0%3.0%(1) 10-year Treasury bondIncrease/Decrease in NWC 145 77 18 494 94 112 133 158

Unlevered Free Cash Flow 699 533 844 319 873 1,039 1,237 1,472Discount Period1.02.03.04.05.0Discount Factor0.900.810.730.660.60Present value of free cash flow 287 710 762 817 877

WACC10.9%

Terminal ValueTerminal Year Free Cash Flow 1,472Perpetuity Growth Rate3.0%Terminal Value 19,144Discount Period6.0Discount Factor0.5 Present Value of Terminal Value 10,281

ActualForecast periodNet Working Capital201220132014201520162017201820192020Account receivables 10 14 17 13Inventory 543 749 827 953Prepaid expenses and other 110 42 63 94Total Current Assets 663 804 906 1,060 1,318 1,568 1,866 2,220 2,642% sales5.1%6.4%9.0%7.7%8.0%8.0%8.0%8.0%8.0%Total Current Liabilities 509 505 530 666 0 823 980 1,166 1,388 1,651% sales3.9%4.0%5.2%4.8%5.0%5.0%5.0%5.0%5.0%Net Working Capital 154 300 377 394 0 494 588 700 833 991% sales1%2%4%3%3%3%3%3%3%

Assumptions

Sr. No.Assumptions1Sales growth YoY of 19% from 2016 to 2020 (equivalent to the CAGR of the automobile industry in India)2The cost incurred is 90% of the revenue earned on each product for the period till 20203A tax amount equivalent to 30% of the EBIT is levied for the period till 20204A capital expenditure of 3% of the sales is made for the period till 20205Discount factor is 10% for the period till 20206Perpetuity Growth Rate is assumed to be 3% for the period till 20207Total Current Assets as a percentage of sales is 8% for the period till 20208Total Current Liabilities as a percentage of sales is 3% for the period till 20209Debt to Equity Ratio is assumed to remain the same as in FY 2015 for the period till 2020