Ashok Leyland – Outlook Ahead

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Ashok Leyland

Buy

CMP – 25

Stop – 20

Ashok Leyland is the second largest manufacturer of medium and heavy commercial vehicles in India and has 26% market share. It mainly  manufactures buses, trucks, defense & special vehicles and engines. The company also supplies its buses to State Transport Undertakings (STUs) and Defense. It has its operations in more than 40 countries. The company has 58% market share in the bus segment in the domestic market and has seven manufacturing plants. It currently has an installed capacity of 1.5 lakh units across its seven plants.

Ashok Leyland has been performing well. There was a period between 2008 – 2009 when the performance of the company got severely impacted. But, in the last few quarters there are signs of the company beginning to improve on its performance. Net Sales of the company has risen at 16% CAGR over the period of 5 years. During the same period, EPS has grown at a healthy 14% CAGR. ROIC & ROE of the company had seen a dip in 2008 – 2009, but over the past 2 years, this has started to improve gradually.

Despite Economic uncertainties, company has been able to maintain its margin to a large extent. YoY margins (OPM & NPM) have both improved. This is a positive sign as the economy during this period (2010 onwards) struggled a bit due to high interest rate policy by the Reserve bank. One area of concern which the company has to address is that of high debt. Hopefully, this situation will change once the reserve bank decides to cut interest rates. On charts as well, Ashok Leyland is forming a nice base around the 20′s level. Unless the broader market collapses, the odds of this level being breached remain low.