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Ashok Leyland: Analyst meet extracts
Jun 3, 2005

In furtherance to the conference call organized by the Ashok Leyland post its FY05 results, the company also organized an analyst meet, the extracts of which are stated below. Breakup of the sales target:  In the conference call held earlier, the management had set a target of 70,000 units of sales in FY06 (including all segments), which is almost 30% higher than the current year volumes (approx. 54,000 units). This target is in the backdrop of the expected industry growth of 10%. The management further stated that the target is achievable, as in FY05 the sales of the company were on the lower side by at least 5,000 units due to the strike at one of its plant and also due to supply constraints. The company expects to sell 66,000 units of trucks and around 3,500 units of ‘Ecomet’ (LCV). The management expects mutli-axle vehicles and tippers to account for 50% of the total vehicle sales in FY06.

Defense and exports outlook:  Apart from the demand from the Indian government, the management is also positive on rising demand from foreign governments of its defense and other vehicles. In fact, as per the management, the company’s products are already undergoing trials in three countries. The management has intention of exploring ‘second hemisphere’ markets like China, Iran and South East Asian countries. The exports targets are likely to be achieved either through direct sales, indirect sales and also sale of aggregates. Exports in FY05 stood at 7,134 units representing 13% of sales and are expected to remain at these levels in FY06.

Steel price impact on margins:  As per the management, a 10% hike in steel prices will result in around 0.7% erosion of the margins (after passing on some element of the cost to the consumer). As per the management, the proportion of the element of steel as a percentage of sales is around 50%.

FCCN-dilution of equity:  Ashok Leyland had borrowed money in FY05 by issuing Foreign Currency Convertible Notes (FCCN) to meet its capex requirements. The management has specified that the conversion of FCCN will be at Rs 30 per share including the premium (at the current price of Rs 24, the conversion is at a premium of 25%). Further, the average cost of borrowing for the company is less than 5%. The management has also clarified that it has no further plans to borrow additional loans.

Investment of Surplus:  The management has specified that the company was sitting on a cash surplus of Rs 6 bn at the end of FY05, of which approximately 80% is invested in foreign currencies. The management has also clarified that the company is adequately hedged against the risk of currency volatility.

Sale of Duncan casting unit to Ennore Foundries Limited (EFL):  The management has already sold the casting unit to EFL in which the company holds a 21% stake. The profit on sale of Rs 300 m will be reflected in the 1QFY06 results of the company. The turnover of the casting unit is approximately worth Rs 1 bn, out of which around 60% is consumed by Ashok Leyland. It should be noted that EFL is planning to increase its capacity from current levels of around 50,000 units to 1,50,000 units and to enable EFL to finance that, Ashok Leyland is planning to participate in the rights issue, involving a total outlay of Rs 210 m.

What to expect?

As stated earlier, though the FY06 volume target seems to be achievable, the first two quarters of the fiscal will set the tone for the rest of the year. This assumes importance especially when the sales performance in the month of April 2005 was disappointing, mainly due to legislative and regulatory issues (especially those relating to VAT). Although, as per the management, the demand has picked up since the second week of May 2005, the sustainability is required to be monitored, as the company will directly feel the effect of any pre-monsoon jitters. Thus, in our opinion, at the current price, the risk-reward ratio is equally balanced and to that extent, investors need to exercise caution.

Company background

Ashok Leyland is the second largest manufacturer of medium and heavy commercial vehicles (M/HCV) in India. It has a 28% market share in the domestic CV segment and a marginal presence of 1% in the LCV segment (light commercial vehicles). Apart from CVs, Ashok Leyland is also a key player in the passenger bus segment with almost 50% to 55% market share in FY05. CVs and passenger vehicles contributed to 91% of revenues in FY05 while engines, sale of completely knocked down (CKD) units, castings and spare parts contributed to the balance. Land Rover Leyland Investment Holdings (LRLIH) owns 51% stake in the company.

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