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Ashok Leyland: Conference call extracts - Views on News from Equitymaster

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Ashok Leyland: Conference call extracts
May 12, 2006

The management of Ashok Leyland held a conference call post its FY06 results to give an insight into the performance of the company and its future plans. Following are the key extracts of the same.

Company background
Ashok Leyland is the second largest manufacturer of medium and heavy commercial vehicles (M&HCV) in India. It ended FY06 with a 27% market share in the M&HCV segment (24% in FY05) and a marginal presence in the LCV segment (light commercial vehicles). Apart from CVs, it is also a key player in the passenger bus segment with almost 50% to 55% market share. Land Rover Leyland Investment Holdings (LRLIH) has 51% stake in the company.

The key extracts…
Demand outlook for FY07: The company expects the demand for commercial vehicles to be in good stead in FY07. Overall, it expects the industry to grow by around 10% YoY in volumes. This is on account of robust industrial activity in the country, resulting in continued demand for transportation in wake of higher freight movement. Also the Supreme Court order of banning overloading of trucks will play its role in accelerating the demand for CVs. The management opined that the order has been largely implemented, except for few pockets in the country.

The management expects the demand for tractor-trailer and tipper to increase significantly. This is mainly on account of improving road infrastructure, as higher tonnage vehicles provide better fuel efficiency. In order to meet the demand, company is introducing new HCV products. Also it is increasing its production capacity of tractor-trailer and tipper from 200 units per month to 1,000 units per month.

The company has set a target of 75,000 units in FY07, which is around 20% higher than FY06 sales. The key contributor to this will be domestic sales. As the economic environment in Sri Lanka, one of the key markets for Ashok Leyland, is uncertain, the company expects the exports to be flat.

In FY06, on the volumes front, the company outperformed our projections by 3%. For FY07, while we are yet to revisit our projections, we do not foresee a significant change. We expect the volumes to growth in the range of 8% to 10%. Thus, in our view, the target of 75,000 units may not be achieved in FY07.

Freight rate scenario: The fixed freight rates have increased significantly. However, the quantum of increase is not the same across zones. The highest increase has been in the Eastern and North Eastern regions, as these were the regions where overloading was the maximum.

Capital expansion plans: In FY07, the company has planned a capital outlay of Rs 3.5 bn primarily for increasing the capacity of engines and gearboxes. In FY08, the company has allocated around Rs 2.5 bn for increasing its assembling capacity.

Light commercial vehicle (LCV) foray: Traditionally, the company did not have any significant presence in the LCV segment. This restricted its scope of operation, as LCVs account for around 40% of the CV volumes in the country. In order to increase its presence in this segment, the company is contemplating inorganic route for growth. While the company did not disclose the name of the target company, the management is in advanced stages of negotiation with some companies. The primary objective of the acquisition would be to acquire technology, as it would not be cost-effective for Ashok Leyland to set up the plant and develop the technology.

What to expect?
At Rs 49, the stock is trading at a price to cash flow of 8.7 times our FY08 estimates. The company has outperformed our volume estimates by 3%, largely due to improved performance in the domestic arena. What is also heartening is the fact that operating margins expanded, as against our estimates of a marginal contraction in the same. While we will have to revise our estimates upwards, we do not foresee any significant change.

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