We downgrade Ashok Leyland to neutral with a target price of Rs 93 a share. We maintain our target EV/Ebitda multiple at 9x FY18F, which is in the middle of its expected trading range of 8-10x during up-cycles. We discount the value to August 2016 @ 12% cost of equity. We also add R7/share as value of investments.
We value the standalone business at ~Rs 6.5/share based on 9x FY18F Ebitda, which is rolled back to Aug-16 at 12% cost of equity. We value the company’s investments at Rs 6.9 a share.
Ashok Leyland’s MHCV volumes were up 47% over April-July15. Consequently, its domestic market share has improved to ~31%FYTD from 28.5% in FY15. This is the highest market share that the company has had in more than the past 10 years.
The company has benefitted from higher growth in higher tonnage segments, where its market share is higher. We estimate that volumes will increase at 26% CAGR over FY15-18F to ~133,000 units by FY18F.
We expect a strong revival in domestic MHCV volumes over the next two years. However, if volumes are weaker than expected, there could be downside risks to our estimates.
We also expect profitability to improve going forward led by 1) lower discounts, 2) operating leverage benefits,and 3) positive impact of higher mix from Pantnagar plant. If margins do not improve, there could be downside risks to our estimates.
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