Download - Pitchbook for Ashok Leyland

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

GRO

WTH

DRI

VERS

Poised to be thesecond largest

automobile industryby 2016

Market sizeExpected to rise

from US$ 67 bn inFY13 to US$145 bn

In FY16 Domestic salesof commercial

vehicles(CV) are 0.5 million units

AutomobileExports grew at a CAGR of 14.65%During DY10-15

Trucks accountedfor the largest shareof revenue (47.8%)

in 2011An ideal

destination forFDI, as auto firms

save about 10-25% costs vis-à-vis

Europe

AUTOMOBILE INDUSTRY : AN OVERVIEW

introduction

Indian commercial and passenger car

industry now the sixth largest in

the world

Industrial Production has been steady over the last year

MHCV growth rate has been increasing constantly in the last few years

FY 13 FY 14 FY 15 FY 16E0

50000100000150000200000250000300000350000

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

-24.14%

18.18%23.08%

MHCV Sales

Sales (Units) Growth Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15Jul-1

5

Aug-15Sep

-15Oct-

150.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2.8%

4.8%

2.5% 3.0% 2.5%

4.4%4.1%

6.3%

3.8%

9.9%

IIP Growth

100% 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 fund

Better governance leading to kick starting of infrastructure projects

Decreasing commodity prices, leading to cheaper raw materials

Better conditions for small and medium fleet operators

INTRODUCTION : AUTO INDUSTRY• One of the fastest growing segments in India today• Commercial vehicles expected to register a CAGR of 19%

during FY 2014–21• Favorable 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


Rationale for Comparison


Potential Buyers

Introduction

Overview


Executive Summary

ASHOK LEYLAND : AN OVERVIEW

OPPORTUNITIES

SWOT

STRENGTHS WEAKNESS

THREATS

• One of the oldest commercial vehicles manufacturer, with a high brand equity

• Long relationship with the Indian Army along with other defence forces

• Presence across the globe, giving the acquirer access to the world markets

• Still room for the operating margins to grow; this can be achieved through optimised production processes

• Has 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 significantly

• Lower commodity prices rises margins

• After a stagnant 3-4 years, the sales of Ashok Leyland is beginning to pick up

• Government’s aggressive push for Make in India can mean significant competition from foreign players

• Reduced 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 Army

Turnover in excess of US $ 2.3 billion

Eight manufacturing plants across the globe

Joint 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 India1

Fourth largest manufacturer of buses in the world2

3

4

5

6

7

FY 11 FY 12 FY 13 FY 14 FY150

10000200003000040000500006000070000

62,673 60,51251,914

36,867

53,291

Truck Sales for Ashok LeylandSource: Annual Report

FY 14 FY 15 FY 16 FY 170

0.020.040.060.08

0.10.120.14

1.70%

7.60%9.90%

11.50%

EBITDA MarginsSource: JP Morgan Report

OVERVIEW

OVERVIEW : ASHOK LEYLAND• Ashok Leyland is the oldest Indian player in the market

and has immense knowledge of the Indian market• With a large demand by the Indian Army, Ashok Leyland

is liable to get extensive support from the Government in its initiatives

• Widespread manufacturing setup and strong R&D facility


Rationale for Pitching


Potential Buyers

Introduction

Overview


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 vehicles

The 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 period

Ashok Leyland’s 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 people

Replenish depletion of reserve

A

B

C

FACTORS

RATIONALE FOR pitching

Ashok Leyland is primarily dominant in HCV market. They have not yet tapped the potential LCV category has to offer

They have expanded their dealerships partnering with 58 new dealers using its reserves, which now need to be replenished

1

2

3

Jan-12 Jan-13 Jan-14 Jan-150

0.10.20.30.40.50.60.70.8

0.510.56

0.67 0.69

Quick Ratio

Jan-12 Jan-13 Jan-14 Jan-1502468

10121416

10.8811.87 12.3

14.4

Book Value

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 firm’s, 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 this2010-11 2011-12 2012-13 2013-14

0200000400000600000800000

1000000120000014000001600000

1,215,3001,372,081 1,329,856

1,056,085

Revenue (Gross Sales)

Source: www.moneycontrol.com




Potential Buyers

Introduction

Overview


Executive Summary

Mean Ashok Leyland Values Price23.9(P/E) 1.9 (EPS) 45.38.7(P/BV) 14.0(BV) 122.31.7(P/S) 40.8(S) 70.8

Share Price = 79.4020.6(EV/EBITDA) ₹ 289(EBITDA) ₹ 5,948.5

2.3(EV/S) ₹ 11,608.1(S) ₹ 26,118.2Enterprise Value = ₹ 16,033

Price MultiplesValuation Multiples

Trading Multiples Values intrinsic to an organization (internal valuation)

Volvo

DongFen

g

Chrysler

Eicher

Force

Motors

M&M

Averag

e0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

0.000.501.001.502.002.503.003.504.004.505.00

EV/EBITDA EV/S

Volvo

DongFen

g

Chrysler

Eicher

Force

Motors

M&M

Averag

e0

10

20

30

40

50

60

70

80

00.511.522.533.544.55

P/E P/BV P/S

Acquirer Target TV

Book Value (in

crores)Multiple (TV/BV)

Revenues (in crores)

Multiple (TV/R)

2003

Tata Motors

Ltd

Daewoo Commercial Vehicles Co

Ltd₹ 4,650 ₹ 77 60.39 $1,901 2.45

2007 Mahindra Punjab

Tractors ₹ 13,910 ₹ 5,120 2.72 ₹ 991 14.04201

0 Mahindra SYMC ₹ 30,738 ₹ 12,355 2.49 ₹ 14,694 2.09

2002

Amtek Auto

GWK Automotive ₹ 1,700 ₹ 560 3.04 ₹ 714 2.38

Multiple Value Ashok Leyland Valuation Final

Valuation

TV/BV 17.1 ₹ 3,989 ₹ 68,444 ₹ 64,607

TV/R 5.24 ₹ 11,600 ₹ 60,770Removed Outliers

TV/BV 2.75 ₹ 3,989 ₹ 10,957 ₹18,855

TV/R 2.31 ₹ 11,600 ₹ 26,753

Oth

er A

cqui

sitio

ns

InternalValuation

ExternalValuation

Transaction Multiples(in crores)

₹ 16,033 crore ₹18,855 crore

VALUATION BY COMPARABLE

FTGG_Valuation_By_Comparable

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




Potential Buyers

Introduction

Overview


Executive Summary

EstimatingFCF

Estimating growth profile

Calculating Discount rate

CalculatingPV

Estimating sales growth

This is the cash available to bond holders and stock holders after all expense and investments have taken place

We 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 firm’s terminal value

Total PV is the summation of PV of all cash flows and terminal value. This gives the firm’s total value.

DCFValuation ₹ 13,733 crore

Tax amount levied

Discount factor for future value

Debt to Equity ratio

Sales 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 2020

Discount factor is 10% for the period till 2020

Debt to Equity Ratio is assumed to remain the same as in FY 2015 for the period till 2020

ASSUMPTIONS Debt to equity ratio 0.63

Risk free rate 5%

Beta 1.45

Cost of debt 6%

Calculated WACC 10.9%

TV as a percentageof EV

75%

VALUATION BY DCF METHOD

FTGG_DCF_Valuation




Potential Buyers

Introduction

Overview


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 Leyland1

The one area where Eicher lags behind Ashok Leyland is in the production and sale of bus

business2

Eicher could acquire Ashok Leyland in order to have strong footing in the bus business3

The Debt to Equity ratio for Eicher is 0.69. Owing to larger market cap, there is sufficient

scope to get the debt for the acquisition4

Eicher 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 trucks2

To be a major competitor in the industry, Isuzu can benefit by acquiring Ashok

Leyland3

Isuzu has a large market cap, PAT and a low D/E ratio, thus it can acquire Ashok Leyland without major effects on its financial ratios

4

SML Isuzu on being merged (through acquiring) can benefit from a

higher 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 company1

On top of that, it announced investments worth ₹ 500 Cr spread over 3-4 years2

Instead of investing on its failed business , it will be better for M&M to acquire an

established business3

The Debt to Equity ratio for M&M is 0.14, which leaves it with ample scope to take

more debt for the acquisition. 4

M&M can benefit from higher P/E ratio of Ashok Leyland, thus getting better return in

one to one exchange of shares5

M&M Eicher Isuzu Ashok Leyland

0200400600800

10001200

733442

1,025

247

Market Cap (bn. USD)


0.00%

10.00%

20.00%

30.00%

12.76%

26.92%

16.87%

3.15%

Return on Average Equity

M&M Eicher Isuzu Ashok Leyland-4.00

0.00

4.00

8.00

12.00

4.66

8.24

12.01

-1.80

PAT (bn. USD)


-150-100

-500

50100150200 157.21

53.698.14

-135

P/E

POTENTIAL BUYERS

Source: www.moneycontrol.com




Potential Buyers

Introduction

Overview


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 SAVINGS

Due 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 network

DISTRIBUTION NETWORK

Mahindra 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 SYNERGIES

EXECUTIVE SUMMARY

Internal Valuation in Comparable ₹ 16,033 crore

External Valuation in Comparable ₹ 18,855 crore

Valuation through DCF Method ₹ 13,733 crore

AVERAGE ENTERPRISE VALUE ₹ 16,207 crore

Emergence of large automotive clusters in the country in all four regions – North, South, East, West

1

Strong Government support in the setting up of NATRiP centers – an emerging R&D hub

2

With a CAGR of ~19%, India is expected to be the 3rd largest automotive market by 2016

3

Why auto industry?

Strong player in the M&HCV segment with over 35% market share

1

Though with increasing book value, share price is undervalued, making it a good target

2

Oldest player in the segment, with 8 large manufacturing facilities and strong installed R&D capacity

3

Why Ashok Leyland?

Our recommended buyer is Mahindra & Mahindra

Thank you