Dear Friends,
We are recommending Buy on our Actionable Ideas "Ashok Leyland" as per following:-
CMP: Rs 133 Target: Rs 165 (24% Upside)
Key Points:
Ashok Leyland: Stock Update - Axle load norms unlikely to impact demand; Upgrade to Buy.
· Axle load norms unlikely to impact new truck demand; MHCV sales witness robust growth in July and August 2018: Higher axle load norms for commercial vehicles (CV) announced by the government (norms announced in July 2018) did not have impact on new truck demand. The MHCV industry posted strong growth of 19% and 20%, respectively, in July and August 2018. This is contrary to our and street's expectations of subdued MHCV demand in the near term. We had opined earlier that new trucks would be required to comply with increased axle norms and, hence, production and sales would be impacted in the upcoming months. OEMs statedthat clarity has emerged on the norms and new trucks are being sold without any modification. Since the existing fleet does not require modification and is compliant to carry higher loads, production and sales of new trucks remain unaffected by the norms. Moreover, as per CV players, overloading was already rampant and increased load norms merely legalise the existing practice. As such, CV players do not see any impact on new truck demand.
· MHCV upcycle resumes; Favourable macroeconomic factors to keep demand strong: New axle load norms had impacted sales briefly at the beginning of August 2018 as operators and CV manufacturers lacked clarity. With clarity emerging, MHCV sales started to gain pace and MHCV upcycle has resumed. With favourable macroeconomic factors, we expect MHCV demand to remain strong. On account of pick-up in economic growth, increased infrastructure investment, increased mining and improved fleet operator profitability (due to legalisation of higher load carrying capacity), we expect MHCV demand to remain strong. On YTD basis (April to August 2018), the MHCV industry has grown strongly by 49% y-o-y and we expect the industry to report ~20% growth in FY2019.
· Outlook - ALL to report strong double-digit earnings growth in FY2019 as demand outlook improves: FY2019 is likely to emerge as another strong year for Ashok Leyland Limited (ALL) as MHCV demand is back on the strong growth track. MHCV volumes of ALL grew by 39% YTD FY2019 (April to August 2018). We expect robust demand momentum to continue and expect ALL MHCV volumes to grow by 18% in FY2019. Given the strong volume offtake and consequent margin improvement, we expect profit to grow by 32% y-o-y in FY2019.
· Valuation - Raise estimates as MHCV uptrend recoups; Upgrade to Buy: The MHCV industry is back on its strong growth path post the clarity in axle load norms and strong demand environment. In wake of this, we have sharply raised our volume estimates for ALL. We expect MHCV volumes to grow by 18% in FY2019 as against earlier estimate of 3% growth. We have increased our FY2019 and FY2020 estimates by 36% and 31%, respectively, to factor the upsurge. We upgrade our recommendation on the stock to "Buy" from "Hold" earlier with a price target (PT) of Rs. 165 (earlier PT of Rs. 120).
