Ashok Leyland

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs43
Current market price: Rs35

March sales not indicative of revival trend

Key points
Ashok Leyland's total vehicle sales during March 2008 grew by 26.7% to 10,698 units from 8,444 units in the same month a year ago. The sales in the domestic market grew by 20%, whereas exports were up by 128% for the month. The surge in sales can be attributed to the year-end push in domestic sales and pending export orders.

For FY2008 sales are at 83,309 vehicles, in line with our estimate of 83,200 units. For the same period, export sales have grown by 21% to 7,286 units whereas the domestic sales have declined by only 1.3% to 76,045 units leading to gain in the market share.

Ashok Leyland had announced a price hike of 2.5% in end February 2008 to offset the input price increase. Also, the management decided to pass on the benefit of a reduction in the excise duty on buses from 16% to 12% and of the cut in the cenvat on trucks from 16% to 14%. So, the effective price increase has been only to the extent of 1%. Ashok Leyland has recently concluded an external commercial borrowing programme of US$200 million. This is the largest ever loan taken by the company in a single transaction till date. The loan will partly fund the requirements of the company to meet its expansion plans and overseas investments.

Ashok Leyland has a huge capital expenditure (capex) plan of ~Rs2,000 crore for the next two to three years. It has planned capex to expand its existing capacity and to set up a new manufacturing facility at Uttarkhand. Further additional investment will be required for its light commercial vehicle joint venture with Nissan.

The stock price has corrected substantially, thereby providing decent upside to our price target of Rs43. However, we would review our recommendation afer the announcement of Q4FY2008 results, clarity on the investment in the joint venture with Nissan and impact of the higher raw material prices. Currently we are maintaining our Hold recommendation on the stock.