We assume Ashok Leyland at Hold with price target of Rs 130. We expect 10-15% growth in M&HCV industry over FY18-20e, but this is priced, in our view. A pause in market share gain and high volatility in monthly/quarterly growth figures are potential headwinds. Growth in LCVs, exports and defence is likely to accelerate but is unlikely to be material enough. Early introduction of fleet modernisation policy is a key upside risk not factored into our estimates. M&HCV up cycle until FY20E — we expect 10-15% growth but with volatility Pick-up in GDP growth and infrastructure-related activity ahead of 2019 elections, stricter implementation of overloading norms, low base of last 10 years, shift to higher tonnage trucks and pre-buying in 2HFY20 ahead of BS-VI implementation are catalysts for M&HCV industry over the next 2-3 years. Improvement in fleet efficiency post e-way bill in 2018 and continued weak truck operator economics are headwinds. On the balance, we expect 10-15% industry growth over FY18-20E but with high volatility in monthly/quarterly growth figures. Introduction of fleet modernisation policy is a key upside trigger not factored into our estimates as timing remains uncertain. DFC is a significant risk beyond FY20E.
Market share gains have played out for now Ashok Leyland gained significant market share in M&HCV goods over FY13-17 (23 to 33%) helped by network expansion outside of South India, better product-market fit, low competitive intensity and better pricing levers. However, with many of the factors above beginning to reverse, we do not expect much market share gain by Ashok Leyland in the near-term.
LCV, exports, defence upside may not be material enough
LCVs, exports and defence are other potential triggers as the company’s penetration in these businesses is still low and diversifying away from “domestic trucks” to reduce cyclicality is key to management strategy. However, these may still not be material enough for AL in the near-term in our view.
Fairly valued — risk-reward balanced: We value Ashok Leyland at Rs 130/share, on 1-year forward basis, at 19x 12m forward P/E. We believe risk-reward is balanced and fresh triggers are needed to justify meaningful upside from here.
Our fair value of Rs 130 implies 19x 12m forward P/E, in line with historic median, which we believe is fair given stage of the cycle. Key risks: (i) Stronger/weaker industry growth (ii) better/worse market share for AL (iii) beat/miss in margins (iv) beat/miss in LCV, exports, defence (v) regulations.