Ashok leyland-Stock Analysis

18 May 2019 Read 416 Views

Ashok Leyland is an Indian automobile company headquartered in Chennai, India and is owned by the Hinduja Group. It is the 2nd largest manufacturer of commercial vehicles in India, the 4th largest manufacturer of buses in the world, and the 10th largest manufacturers of trucks. It is engaged in the manufacturing of medium and heavy commercial vehicles, defense vehicles also engaged in the power solutions business. The company has 9 manufacturing plants out of which 7 plants are situated in India.

What’s Good?

Ashok Leyland has a strong market share in the M&HCV segment almost 33.5%. The company has a wider customer base which gives it positive brand equity. With Strong manufacturing capabilities, growing market share and international presence, the company has a good potential of future growth. The company has made deliberate efforts to a de-risk the business models with a focus on exports, defense, and spares. This strategic shift will help the company in improving its margins from the non-cyclical business. 

Industry Analysis 

Indian auto industry is the 4th largest in the world in terms of sales volume and is the 7th largest manufacturer of a commercial vehicles. The Government’ s push towards infrastructure development, road construction and mining activities, restrictions on overloading is likely to accelerate the industry demand. The CV industry faces intense competition from big players like Eicher Motors, Tata Motors and M&M.

Business Analysis 

  • The strong market position in different segments gives the company a better brand image and access to wider customer base.
  • The company has wider distribution network. 
  • The company currently has 23 subsidiaries, 6 associates and 2 joint ventures. 
  • Ashok Leyland’s core business is cyclical in nature as M&HCV is based on economic activity, factors like GDP growth, industry growth, regulatory policies, mining, construction, road & highways.  
  • The Company’s wide-spread customer base is served through an all-India sales and service network, supplemented by close to 3000 touchpoints.

Management Analysis 

The company is owned by the well-known Hinduja Group. Over the 70 years, the management has successfully positioned the company with its vast experience and innovative policies.

Valuation Analysis

  • The automobile industry requires high initial investment thus the books of accounts shows considerable depreciation. 
  • So,I am valuating the company by EV/EBITDA as it measures the return a company generates on its initial investment and strips out the effect of fixed cost like depreciation.

So, by taking 15% EBITDA and 20% MOS, the company looks slightly over-valued to me, but this is purely and personal opinion

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Disclaimer- The article is for educational purpose only. Nothing in this article should be interpreted as investing advice.
Disclosure- We might have recommended this stock to our advisory clients.

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