Valuation of Ashok Leyland

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After withstanding the 2008 crisis, the Indian economy managed to sustain its resistance for another two fiscal years. It registered a growth rate of 8.6% for 2009-10 and 9.3% for 2010-11. It then started to decline for the periods 2011-12 and 2012-13, registering a growth rate of 6.2% and 5.0% respectively. It was estimated that the Cumulative Annual Growth Rate (CAGR) of the Gross Domestic Product (GDP) for over a decade stood at 7.9%. The decline in the economic performance was attributed to the weak performance of different components of the GDP. For the Fiscal Year (FY) 2013, the growth rates for the agriculture, industry, and services sectors were 1.8%, 3.1%, and 6.6% respectively and their contribution to the overall GDP stood at 8%, 27%, and 65% respectively. With a contribution of 27% to the overall GDP, the industrial sector and its various components had registered reduced growth rates for FY2013 in comparison with FY2012. Besides, the inflation rate stood at 9.08% in comparison with the previous fiscal year’s rate of 7.91% . There was a constant increase in the prices of animal products, cereals, vegetables, international prices of fertilizers, petrol, and diesel.

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Until the economic reforms were introduced in the year 1992, the scope of the Automobile Industry was very limited (Refer to Exhibit-V for Automobile Industry Structure in India). The introduction of liberalized norms and policies gave scope for expansion of the Industry. According to a report released by India Brand Equity Foundation at the end of March, 2013, it was estimated that the Commerical Vehicle (CV) segment contributed around 4% of the total industry volume . It was expected to grow at a CAGR of 15.02% over the years 2012-2016 . Out of the total production volume, LCVs led the segment in the year 2013 with a production of around 55.9%, whereas the remaining 44.1% was contributed by the Medium & Heavy Commercial Vehicle segment (M&HCV) segment......

Operating in a dynamic business environment, it was not only important for AL to improve its business prospects, but also essential for it to better its operational performance. During the fiscal year 2013, AL hired McKinsey and Co. and Boston Consulting Group (BCG) in a bid to improve its operational performance. Though it was able to increase its market share by 3% during the fiscal in the M&HCV segment, it faced a setback in maintaining its Earnings before Interest Tax and Depreciation (EBITDA) margins . This was against the backdrop of total industry volume, which declined by 2% and the M&HCV segment by 25% . Though, AL saw some ups and downs due to the uncertainties in the business environment, it had maintained a consistency in generating year-to-year revenues since its inception....

AL’s long-term borrowings included secured non-convertible debentures to the tune of Rs. 6,000 million which were issued in sets of Rs. 3,500 million and Rs. 2,500 million with a maturity period of 3 years and 5 years respectively. During the year, there were no redemptions in terms of debentures but the company repaid its External Commercial Borrowings (ECBs) loan installment obtained from Japanese banks which were equivalent to $81.66 million and $16.66 million, availed of during 2011-12 and 2012-13 respectively.....

The long-run slowdown of India’s mining industry and slower growth of industrial output were expected to impact the performance of the CV segment during the first half of FY2014 “It continues to be down and the situation is likely to continue till the first half of next fiscal. It may pick up in the second half but it is too early to say anything now” said, Vinod K. Dasari, Managing Director, Ashok Leyland . On the other side, the global markets were also expected to perform moderately during the upcoming fiscal year. As a result, expecting a decline in the demand for commercial vehicles, the management of AL focused on expanding its business within the country and planned to reach for alternative international markets.....

Exhibit I: Actuals vs. Estimates of AL for Q1-FY2014
Exhibit II: Market Prices of AL’s Stock at Bombay Stock Exchange (BSE)
Exhibit III: AL’s Product Range
Exhibit IV: Capital Expenditure Details of AL
Exhibit V: Automobile Industry Structure in India
Exhibit VI: CV Industry Sales Volumes (in units) for 2011-12 and 2012-13
Exhibit VII:Operating Performance of Market Players
Exhibit VIII:Market Shares of Market Players
Exhibit IX:Revenue Details of AL
Exhibit X:AL’s Profit and Loss Account Details
Exhibit XI:AL’s Balance Sheet Details
Exhibit XII:AL’s Cash Flow Details
Exhibit XIII:AL’s Dividend Pay-out Details