Ashok Leyland

01
ASHOK LEYLAND
AUTO
Story intact; more legs to it than CV cycle
Ashok Leyland’s management, in the concall, reiterated itsFY17 MHCV
industry volume growth guidance of 15-20%. It also highlighted scope
for ramp-up indefense (<5% of sales; possibly a USD 1 bn vertical in 5
years) and exports (~9% of volumes; striving to make it 1/3rd
of
revenue).We see this reducing cyclicality as a re-rating catalyst.
There is no major capex envisaged for the next 2 years; hence AL is
likely to be net debt free next year.We have trimmed our volume
estimates (resulting in a 7% earnings cut) given the sluggish volume
growth in past 2 months, but remain positive on AL given the strong FCF
cycle. Reiterate BUY with TP of Rs 126 – we valuethe core business at
9.5x FY18E EBITDA (at ~10% premium to typical mid-cycle multiple).
25 JUL 2016 Quarterly Update
BUY
Target Price: Rs 126
CMP : Rs 97
Potential Upside : 30%
MARKET DATA
No. of Shares : 2,846 mn
Free Float : 56%
Market Cap : Rs 275 bn
52-week High / Low : Rs 113 / Rs 78
Avg. Daily vol. (6mth) : 12.9 mn shares
Bloomberg Code : AL IB Equity
Promoters Holding : 44%
FII / DII : 19% / 11%
Key takeaways from conference call
♦ Volume outlook:After two years of strong ~25% p.a. growth for the industry (even higher growth for AL), the low
base effect is behind. However, from a cycle point of view, we are far from peaking-out. The industry is yet to cross
its previous peak (in FY12) of 350k. It is likely to be crossed in FY17
♦ Guidance maintained:Industrial activity is picking up with uptick in infra, road and mining sectors. With pre-buying
expected to kick in by Q4FY17 (before the pan-India emission norm change), the management maintains its volume
outlook of 15-20% growth for the MHCV industry in FY17
♦ Pricing and discounts: Discount per vehicle remains high, but AL continues to take price hikes periodically; hence,
net discount has been tapering. AL took a price hike of 1-1.5% in April 2016. This coupled with heavy cost-cutting
has offset the recent uptick in commodity prices
(Continued on page 2…)
Financial summary (Standalone)
Y/E March FY15 FY16 FY17E FY18E
Sales (Rs mn) 133,111 188,216 228,465 269,166
Adj PAT (Rs mn) 2,339 11,112 16,424 21,957
Con. EPS* (Rs) - - 5.3 6.4
EPS (Rs) 0.8 3.9 5.8 7.7
Change YOY (%) (145.9) 375.1 47.8 33.7
P/E (x) 117.7 24.8 16.8 12.5
RoE (%) 4.9 20.9 26.6 28.5
RoCE (%) 7.9 20.6 28.3 34.5
EV/E (x) 29.3 13.2 9.8 7.5
DPS (Rs) 0.5 1.0 1.1 1.3
Source: ^Consensus broker estimates, Company, Axis Capital
Key drivers
(%) FY16 FY17E FY18E
Volume growth 33.9 16.4 14.6
ASP growth 5.6 4.3 2.8
EBITDA margin 11.5 12.3 13.0
Price performance
60
100
140
180
Jul-15 Oct-15 Jan-16 Apr-16 Jul-16
Sensex Ashok Leyland

02
ASHOK LEYLAND
AUTO
(…Continued from page 1)
♦ Net debt:Rs 16 bn vs. Rs 36 bn YoY. Leverage down to 0.3x vs. 2.3x a couple
of years back. From a peak of Rs 62 bn over the past 2 years, debt has
reduced sharply on the back of uptick in cash from operations, tight leash on
capex/investment, and divestment of non-core businesses. This has reflected in
lower interest outgo this quarter (down 52% YoY/44% QoQ)
♦ Defense: AL has won 11 tenders it applied for in the mobility solutions (it is the
largest logistic suppliers to military troops). Management indicated there could
be exponential growth from defense – revenue from the segment stood at ~Rs 5
bn in FY16 (<5% of revenue) and, the management expects defense to
eventually grow to USD750mn – USD 1 bn over the next 5 years. This would
drive revenue and improve margins
♦ Exports: Shipment to key export markets were impacted this quarter due to
delay in invoicing. This is expected to reverse next quarter onwards. Overall,
exports account for ~9% of volumes and, the company targets export to
eventually account for 1/3rd of its business. This coupled with rising share of
defense will reduce AL’s exposure to cyclical businesses (India trucks), hopefully
before the Indian CV cycle peaks
♦ Capex and investments: Management guided for FY17 capex (including
investments) of Rs 5 bn. AL is operating at ~70% utilization (on a 2 shift basis).
It could add another shift and do further bottlenecking, and as a result, there is
no heavy capexrequirement for another 2 years. For most key areas (engine,
transmission and chassis), AL is already well-equipped
♦ Regional growth: South (AL’s key market) has lagged other markets in terms of
growth. However, given the company’s focus to become a strong pan-India
player, it is relatively de-risked from this. For example, East forms now 21% of
sales vs. 10% few years back
♦ GST impact: The economy as a whole will benefit from GST due to seamless
movement of goods within the country. With most tolls being done away with,
the movement of trucks will be freed up. While this could reduce freight rates, it
would lead to better profitability for truckers and thereby further investments into
fleet replacement/addition
♦ New launches: Two upcoming launches in the ICV space: (1) Sunshine school
bus (well-received by the market) and (2) Guru trucks. Both will plug gaps in
AL’s product portfolio

03
ASHOK LEYLAND
AUTO
Exhibit 1: Results update
Quarter ended 12 months ended
Standalone (Rs mn) Jun-16 Jun-15 YoY (%) Mar-16 QoQ (%) FY17E FY16 YoY (%)
Net sales 42,588 38,831 9.7 59,553 (28.5) 228,465 188,216 21.4
- Raw material 29,305 26,572 10.3 42,255 (30.6) 162,210 132,620 22.3
(% of net sales) 68.8 68.4 38 71.0 (214) 71.0 70.5 54
- Staff expenditure 3,581 3,287 8.9 3,408 5.1 16,785 13,988 20.0
(% of net sales) 8.4 8.5 (6) 5.7 269 7.3 7.4 (8)
- Other expenditure 4,939 5,047 (2.1) 6,358 (22.3) 21,437 19,949 7.5
(% of net sales) 11.6 13.0 (140) 10.7 92 9.4 10.6 (122)
Total expenditure 37,826 34,906 8.4 52,022 (27.3) 200,432 166,556 20.3
EBITDA 4,763 3,925 21.3 7,531 (36.8) 28,033 21,660 29.4
EBITDA Margin (%) 11.2 10.1 108 12.6 (146) 12.3 11.5 76
Depreciation 1,210 1,138 6.3 1,177 2.8 4,557 4,437 2.7
EBIT 3,553 2,787 27.5 6,354 (44.1) 23,477 17,223 36.3
Interest 338 701 (51.8) 602 (43.8) 1,233 2,735 (54.9)
Other income 443 259 71.1 320 38.5 1,279 1,099 16.4
PBT 3,658 2,345 56.0 6,071 (39.8) 23,523 15,586 50.9
Tax 1,097 774 41.8 1,508 (27.2) 7,099 4,474 58.7
Reported PAT 2,908 1,445 101.2 770 277.5 16,772 7,218 132.4
Adjusted PAT 2,560 1,571 62.9 4,563 (43.9) 16,424 11,112 47.8
EPS (Rs) 1.0 0.5 101.2 0.3 277.5 5.8 3.9 47.8
Adjusted EPS (Rs) 0.9 0.6 62.9 1.6 (43.9) 5.8 3.9 47.8
Total volumes (Nos) 31,163 28,190 10.5 43,991 (29.2) 163,507 140,502 16.4
Net realisation (Rs) 1,366,633 1,377,485 (0.8) 1,353,750 1.0 1,397,280 1,339,597 4.3
EBITDA / Vehicle (Rs) 152,832 139,234 9.8 171,196 (10.7) 171,449 154,160 11.2
Source: Company, Axis Capital
Exhibit 2: EBITDA margin related to volumes
-8%
-4%
0%
4%
8%
12%
16%
0
10,000
20,000
30,000
40,000
50,000
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
(Nos)
Vol EBIDTA margins (RHS)
Exhibit 3: Realizations up 10% YoY/3% QoQ
-10%
0%
10%
20%
30%
0
400
800
1,200
1,600
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
(000' Rs)
Net Realisations YoY Growth (RHS)
QoQ Growth (RHS)

04
ASHOK LEYLAND
AUTO
Exhibit 4: Quarterly volume trend
0
10
20
30
40
50
Q1 Q2 Q3 Q4
(000's)
FY12 FY13 FY14 FY15 FY16 FY17
Exhibit 5: EBITDA margin trend
-8%
-4%
0%
4%
8%
12%
16%
Q1 Q2 Q3 Q4
FY12 FY13 FY14 FY15 FY16 FY17
Exhibit 6: FY17 Sensitivity analysis
5.8 12% 14% 16.4% 18% 20%
10.3% 4.5 4.6 4.7 4.7 4.8
11.3% 5.0 5.1 5.2 5.3 5.4
12.3% 5.5 5.7 5.8 5.9 6.0
13.3% 6.1 6.2 6.3 6.5 6.6
14.3% 6.6 6.8 6.9 7.0 7.2
(Rs) Volume growth
EBITDA
margin
Exhibit 7: FY18 Sensitivity analysis
7.7 11% 13% 14.6% 17% 19%
11.0% 6.1 6.3 6.4 6.5 6.6
12.0% 6.8 6.9 7.1 7.2 7.3
13.0% 7.4 7.6 7.7 7.9 8.0
14.0% 8.1 8.2 8.4 8.5 8.7
15.0% 8.7 8.9 9.0 9.2 9.4
EBITDA
margin
(Rs) Volume growth
Expect volume growth to
remain strong in FY17
on the back of
replacement demand,
revival in MHCV industry
& pre buying on BS-IV
emission norms.
Margin would improve
on the back of positive
operating leverage,
further reduction in
discounts and better mix.
Earnings growth is
further aided by a
reduction in interest
outgo

05
ASHOK LEYLAND
AUTO
Financial summary (Standalone)
Profit &loss (Rs mn)
Net sales 133,111 188,216 228,465 269,166
Other operating income - - - -
Total operating income 133,111 188,216 228,465 269,166
Cost of goods sold (99,652) (132,620) (162,210) (190,973)
Gross profit 33,459 55,597 66,255 78,193
Gross margin (%) 25.1 29.5 29.0 29.1
Total operating expenses (23,193) (33,937) (38,222) (43,101)
EBITDA 10,266 21,660 28,033 35,092
EBITDA margin (%) 7.7 11.5 12.3 13.0
Depreciation (4,163) (4,437) (4,557) (4,652)
EBIT 6,103 17,223 23,477 30,440
Net interest (3,935) (2,735) (1,233) (481)
Other income 1,245 1,099 1,279 1,494
Profit before tax 3,413 15,586 23,523 31,452
Total taxation (1,074) (4,474) (7,099) (9,495)
Tax rate (%) 31.5 28.7 30.2 30.2
Profit after tax 2,339 11,112 16,424 21,957
Minorities - - - -
Profit/ Loss associate co(s) - - - -
Adjusted net profit 2,339 11,112 16,424 21,957
Adj. PAT margin (%) 1.8 5.9 7.2 8.2
Net non-recurring items 1,009 (3,894) 348 -
Reported net profit 3,348 7,218 16,772 21,957
Balance sheet (Rs mn)
Paid-up capital 2,846 2,846 2,846 2,846
Reserves & surplus 48,341 52,296 65,405 83,033
Net worth 51,187 55,141 68,251 85,879
Borrowing 33,497 27,344 13,672 6,836
Other non-current liabilities 5,103 5,356 5,356 5,356
Total liabilities 133,115 133,855 144,130 161,056
Gross fixed assets 85,554 87,469 89,969 92,469
Less: Depreciation (32,998) (36,932) (41,489) (46,141)
Net fixed assets 52,556 50,537 48,480 46,328
Add: Capital WIP 1,201 757 757 757
Total fixed assets 53,757 51,293 49,237 47,085
Total Investment 26,488 19,179 21,679 24,179
Inventory 13,985 17,306 23,159 29,498
Debtors 12,577 12,509 17,526 22,123
Cash & bank 7,513 15,681 12,854 18,497
Loans & advances 15,517 16,583 18,241 18,241
Current liabilities 43,328 46,014 56,852 62,985
Net current assets 9,542 17,369 16,363 26,807
Other non-current assets - - - -
Total assets 133,115 133,855 144,130 161,056
Cash flow (Rs mn)
Profit before tax 3,413 15,586 23,523 31,452
Depreciation & Amortisation (4,163) (4,437) (4,557) (4,652)
Chg in working capital 7,049 (1,239) (1,821) (4,802)
Cash flow from operations 17,767 16,756 19,461 20,794
Capital expenditure (2,059) (1,425) (2,500) (2,500)
Cash flow from investing 1,015 3,876 (3,721) (3,506)
Equity raised/ (repaid) 6,667 - - -
Debt raised/ (repaid) (14,523) (8,059) (13,672) (6,836)
Dividend paid - (1,536) (3,663) (4,329)
Cash flow from financing (11,791) (12,331) (18,567) (11,646)
Net chg in cash 6,991 8,301 (2,827) 5,642
Key ratios
OPERATIONAL
FDEPS (Rs) 0.8 3.9 5.8 7.7
CEPS (Rs) 2.6 4.1 7.5 9.4
DPS (Rs) 0.5 1.0 1.1 1.3
Dividend payout ratio (%) 38.2 37.5 18.7 16.8
GROWTH
Net sales (%) 33.9 41.4 21.4 17.8
EBITDA (%) 515.7 111.0 29.4 25.2
Adj net profit (%) (149.1) 375.1 47.8 33.7
FDEPS (%) (145.9) 375.1 47.8 33.7
PERFORMANCE
RoE (%) 4.9 20.9 26.6 28.5
RoCE (%) 7.9 20.6 28.3 34.5
EFFICIENCY
Asset turnover (x) 1.6 2.6 3.4 3.8
Sales/ total assets (x) 1.0 1.4 1.6 1.8
Working capital/ sales (x) - - - -
Receivable days 34.5 24.3 28.0 30.0
Inventory days 41.6 37.9 42.2 46.0
Payable days 84.0 56.2 62.7 63.2
FINANCIAL STABILITY
Total debt/ equity (x) 0.7 0.5 0.2 0.1
Net debt/ equity (x) 0.5 0.2 - (0.2)
Current ratio (x) 1.2 1.4 1.3 1.4
Interest cover (x) 1.6 6.3 19.0 63.3
VALUATION
PE (x) 117.7 24.8 16.8 12.5
EV/ EBITDA (x) 29.3 13.2 9.8 7.5
EV/ Net sales (x) 2.3 1.5 1.2 1.0
PB (x) 5.4 5.0 4.0 3.2
Dividend yield (%) 0.5 1.0 1.1 1.3
Free cash flow yield (%) 5.7 5.6 6.2 6.6

06
ASHOK LEYLAND
AUTO
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07
ASHOK LEYLAND
AUTO
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