>ASHOK LEYLAND (EDELWEISS)

■ CV cycle on an uptrend; Ashok Leyland poised to benefit
With a strong macroeconomic recovery, the commercial vehicle (CV) cycle is clearly on an uptrend. We expect M&HCV volumes to rise 10% and 25% in FY10 and FY11, respectively, with the strong underlying growth. The recovery is already visible in South and West India where Ashok Leyland (ALL) previously lagged. The recovery is likely to be further aided by an increase in bus volumes by virtue of the JNNURM scheme

■ Uttaranchal plant offers strong strategic advantage
ALL’s Uttaranchal plant, to be operational in Q4FY10/ Q1FY11, will have an initial capacity of 30,000 units per annum (to be scaled up to 50,000 units). It is expected to have an initial localization level of 65-70% in the first year, offering ALL a benefit of INR 60,000 per vehicle (~6% the cost of the vehicle). Considering the other key player, Tata Motors (TTMT), does not have a plant in an excise-free zone, ALL enjoys the liberty to either improve margins or to push aggressively for market share gains. The cost advantage will increase in case excise duties are
hiked in the coming quarters.

STRONG RECOVERY

■ Strong pricing and operating leverage to benefit margins
The CV space has witnessed strong pricing action in the past year (prices have been raised 7-8%), whilst discounts have been on the decline. Considering cash flow concerns in case of TTMT, we expect pricing discipline to be maintained in the next few quarters. This implies that the current high margin could sustain, despite a potential hike in raw material costs. Further, the operating leverage could play out in FY11 as volumes increase.

■ Outlook and valuations: Recovery underway; Upgrade to ‘BUY’
Recovery in the CV cycle continues to be strong. We upgrade our estimates for FY10 and FY11, to INR 2.8 and INR 4.0, respectively, to factor in the higher growth rate. ALL is the only pure CV manufacturer in India and, in our view, should trade at a premium to the industry. We upgrade the stock from ‘REDUCE’ to ‘BUY’ with a target price of INR 64, implying 16x P/E in FY11E (in line with the automobile space).

To read the full report: ASHOK LEYLAND