Maintain sell on Ashok Leyland (AL) due to expensive valuations but revise our target price to R57 (earlier R44) on roll-over to March 2017 and increase in EPS estimates of 6-11% for FY16/17 on higher volume assumptions. The stock trades at 12.7x EV/ebitda multiple on our FY17 ebitda estimate, expensive for a low RoCE business profile (10% average RoCE over the past 10 years) and modest growth profile—likely to remain sub-10% over the long term.
Our channel checks indicate that large fleet operators have replaced their old fleets, which have driven demand for heavy tonnage trucks in FY15. This could pose a risk to volume growth assumptions for the industry in the next couple of years as road freight is unlikely to grow beyond 6-7% annually. We have built in 15% y-o-y growth in domestic truck volumes in FY16 and 13% y-o-y growth in FY17 even as consensus estimates are significantly higher than that of us.
Ashok Leyland has gained 450 bps market share in the domestic truck industry in FY15 mainly led by 600 bps gain in market share in the >25-tonne truck segment. The product mix of the company has likely been the best ever in the past six years. This is likely to result in 16% y-o-y improvement in average selling price for the company in FY15. We expect gross margin of 26% in FY15 for the company, which is lower than the best-ever gross margin of 28% in the past 10 years.