Hold Ashok Leyland; target Rs 25: Emkay
Emkay Global Financial Services has recommended hold rating on Ashok Leyland (AL) with a target price of Rs 25, in its July 10, 2013 research report.
July 11, 2013 / 14:48 IST
Emkay's report on Ashok Leyland
- Management expects a challenging demand environment in the M&HCV space to continue. AL is aiming for a higher share through expansion of its service network.
- Strong momentum of Dost LCV to continue due to increasing preference for 2-3.5t vehicles; planned new launches, Stile and Partner, to help gain further traction.
- AL debt levels increased by Rs11bn (Net D/E 0.8x) as it further invested Rs8bn in group companies and Rs 6.5 bn in capex. Combined losses in its JVs increased to Rs2bn.
- We have a Hold rating on the stock with a target price of Rs 25, as we expect the weak demand scenario to continue.
Overhead costs see a sharp rise
"A 27% jump was seen in other overhead costs, which impacted operating margins. These include a 47% increase in AMC costs to Rs1.4bn, a 30% increase in product warranty costs to Rs2.2bn, a 30% jump in packing and forwarding charges, and a 16% rise in selling/administrative expenses. During the year, the company took steps to limit its sales to state transport undertakings and maintain sufficient premium in annual maintenance service, which should offset these cost increases going forward."AL continues to invest in new product development
"AL’s Investment in research and development (R&D) activities declined 14% y-o-y to Rs3bn, which currently stands at around 2.4% of its turnover. The expenditure includes investments in ’Neptune’ engines, OBD-II diagnostics, and a series of new launches planned by the company. AL plans to introduce its ‘Neptune’ engine later this fiscal, besides N-Truck, Dost CNG variant, goods and passenger variants on Dost platform (Partner and Stile), and the firstfront engine, low-floor Janbus during the year. Also, its A-Truck model, with Avia cabin in the ICV space, is slated for launch."Higher debt amidst weak CV cycle a cause of worry
"To fund its capex/investment plans, AL has placed NCDs of Rs6bn and raised an ECB loan of USD110mn, partly to refinance its older debt. The weighted average rate for its long-term loans stood at 6.5% (vs. 6% in FY12). The company’s short-term borrowings increased significantly from Rs1bn to Rs7.7bn, resulting in a higher average rate of 9.5% (vs. 6.9% in FY12). Its total short-term and long-term debts stand at Rs35bn (vs. Rs24bn in FY12), while its current maturities due in FY14 stand at Rs8.5bn," says Emkay Global Financial Services research report.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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