August 31

Ashok
Leyland

2015

Prepared by:

Sayantan Mukherjee
Bikash Majumdar
Sheersh Srivastava
Vivek Murarka

PGDM (2014-16)

Submitted to: Prof. Surendra Poddar, Faculty, IMI K

Disclaimer: The information, analysis and estimates

contained herein are based on our assessment and have
been obtained from sources believed to be reliable. This
document is meant for the use of the intended recipient
only. This document, at best, represents our opinion and is
meant for general information only. The authors shall not in
any way be responsible for the contents stated herein. This
document is not to be considered as an offer to sell, or a
solicitation to buy any securities.

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EXECUTIVE SUMMARY
Demographically and economically, Indias automotive industry is wellpositioned for growth, servicing both domestic demand and,
increasingly, export opportunities. A predicted increase in Indias
working-age population is likely to help stimulate the burgeoning
market for private vehicles. Rising prosperity, easier access to finance
and increasing affordability is expected to see four-wheelers gaining
volumes, although two wheelers will remain the primary choice for the
majority of purchasers, buoyed by greater appetite from rural areas,
the youth market and women.
Domestically, some consolidation or alliances might be expected,
driven by the need for access to better technology, manufacturing
facilities, service and distribution networks. The components sector is
in a strong position to cash-in on Indias cost-effectiveness, profitability
and globally-recognized engineering capabilities. As the benefits of
collaborations become more apparent, super-specialists may emerge in
which the automobile is treated as a system, with each specialist
focusing on a sub-system, akin to the IT industry. Though this approach
is radical, it could prove an important step in reducing complexity and
investment requirements, while promoting standardization and
meeting customer demands.
Manufacturers are already planning for the future: early advocates of
technological and distribution alliances have yielded generally positive
results, enabling domestic OEMs to access global technology and
experience, and permitting them to grow their ranges with fewer
financial risks.

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Indian Auto Sector

India is home to a vibrant automobile of more than 40 million vehicles.
It has been one of the few worldwide which saw growing passenger car
sales during the recession of the past two years. In fact, in 2009-10 it
has recorded its highest volumes ever. It is believed this upward trend
will be sustained in the foreseeable future due to a strong domestic
market and increased thrust on exports.
The Indian economy has grown at an average rate of around 9 percent
over the past five years and is expected to continue this growth in the
medium term. This is predicted to drive an increase in the percentage
of the Indian population able to afford vehicles. Indias car per capita
ratio (expressed in cars per 1,000 population) is currently among the
lowest in the worlds top 10 auto markets. The twin phenomena of low
car penetration and rising incomes, when combined with increasing
affordability of cars, are expected to contribute to an increase in Indias
automobile demand.

Indian auto Industry: Among the top 10 in World

Two Wheelers

2nd

Small Cars

3rd

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Commercial Vehicles

5th

Automobile Industry A Global Hub

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 15 manufacturers of passenger cars and multi-utility vehicles,

9 manufacturers of commercial vehicles,
16 manufacturers two/ three wheelers,
14 manufacturers tractors,
5 manufacturers of engines.

Growth Forecasts for Indian Auto Industry

The Passenger Vehicle market of India will even cross Japan by se 5
million Vehicles by 2017-18.
Indias share in global auto exports may also triple by 2016.
Indias passenger vehicle production projections :
In 2010 2.6 million Vehicles
By 2015 5.1 million Vehicles
By 2020 9.7 million Vehicles

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Share in GDP
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000

12%
10%
8%
6%
4%

2%
0%
1

3
year

GDP

Demand and Supply

AUTOMOBILE EXPORTS TRENDS

3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

Passenger Vehicles

446,145

444,326

508,783

559,414

596,142

622,470

Commercial Vehicles

45,009

74,043

92,258

80,027

77,050

85,782

Three Wheelers
Two Wheelers

173,214

269,968

361,753

303,088

353,392

407,957

1,140,058

1,531,619

1,975,111

1,956,378

2,084,000

2,457,597

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 Export performance of the Indian Automobile Industry has also

exhibited steady growth for the period 2004-2005 to 2014-2015.
Exports of commercial vehicles and three wheelers have declined
the exports during the period 2012-2013. The Government has
decided to implement the National Automobile Testing and
Research and Development infrastructure project to improve the
export potential.

Category-wise sales of automobiles in India (No. of Vehicles)

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

Passenger
Vehicles

1,061,572

1,143,076

1,379,979

1,549,882

1,551,880

1,951,333

2,501,542

2,618,072

Commercial
Vehicles

318,430

351,041

467,765

490,494

384,122

532,721

684,905

809,532

793,150

307,862

359,920

403,910

364,781

349,719

440,392

526,024

513,251

538,291

6,209,765

7,052,391

7,872,334

7,249,278

7,437,670

9,370,951

11,768,910

13,435,769 13,797,748 14,805,481

7,897,629

8,906,428

10,123,988

9,654,435

9,723,391

12,295,397

15,481,381

17,376,624

Type of Vehicle

Three Wheelers
Two Wheelers
Total

2013-14
2,686,429

2014-15
2,503,685

632,738

479,634

17,815,618 18,421,538

It Depicts that overall sales of automobile has been increased. The

sale of passenger vehicle has been increased 1,061,572 vehicles to
2,503,685 vehicles for the year 2005-2006 to 2014-2015.
There is an enormous sale of passenger vehicle and two wheelers
in the said period. The sale of passenger vehicles almost increased
from the year 2005-2006 to 2014-2015.

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Category-Wise Production of Automobiles in India (No. of Vehicles)

Automobile Production Trends
Category

2009-10

Passenger Vehicles

2010-11

2011-12

2012-13

2013-14

2014-15

2,357,411

2,982,772

3,146,069

3,231,058

3,087,973

3,220,172

Commercial Vehicles

567,556

760,735

929,136

832,649

699,035

697,083

Three Wheelers

619,194

799,553

879,289

839,748

830,108

949,021

Two Wheelers

10,512,903

13,349,349

15,427,532

15,744,156

16,883,049

18,499,970

Grand Total

14,057,064

17,892,409

20,382,026

20,647,611

21,500,165

23,366,246

During 2009-2010 14,057,064vehicles were produced in the

automobile industry. The production has increased almost
23,366,246 vehicles. In recent years India had an upgrade market
potential for automobiles due to a rise in demand. As a result
there is an increased production to tap the growing demand both
at home and in the foreign markets.
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 There is an enormous production of passenger vehicle and two

wheeler in the said period. The production of passenger vehicles
almost increased from the year 2009 - 2010 to 2014 2015. Overall,
the production of automobile industry has increased quite
significantly during this period.

PRODUCTION TREND
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000

10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
Passenger Vehicles
Commercial Vehicles
Three Wheelers
Two Wheelers

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2,357,411

2,982,772

3,146,069

3,231,058

3,087,973

3,220,172

567,556

760,735

929,136

832,649

699,035

697,083

619,194

799,553

879,289

839,748

830,108

949,021

10,512,903

13,349,349

15,427,532

15,744,156

16,883,049

18,499,970

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Automobile Manufacturers
11

Ashok Leyland
Force Motors
8

VE-CVs Eicher
Swaraj Mazda

Ashok Leyland
JCBL

Hindustan Motors

Ashok Leyland

Premier Automobiles Force Motors

2
1

Force Motors

Force Motors

Hindustan Motors

Hindustan Motors

Premier Automobiles Premier Automobiles

Tata Motors

Hindustan Motors

M&M

Premier Automobiles Premier Automobiles

Hindustan Motors

Tata Motors

Tata Motors

Tata Motors

M&M

M&M

M&M

M&M

Standard

Maruti Suzuki India

Standard

Standard

Sipani

Sipani

General Motors India Tata Motors

Standard

Fiat India

Ashok Leyland

Fiat India
Fiat India General Motors India
1900

1920

1940

API
1

1950

1960

1970

1980

Royal Enfield

Ideal Java

LML India

Kinetic Motor Company

Bajaj Auto

Mopeds Indias

Ideal Java

LML India

API

TVS Suzuki

Mopeds Indias

Ideal Java

Escorts Group

TVS Suzuki

Mopeds India

Royal Enfield

Escorts Group

Hero Honda Motors

Bajaj Auto

Royal Enfield

TVS Suzuki

API

Bajaj Auto

Escorts Group

API

Royal Enfield

7
Bajaj Auto
Atul Auto
API
Scooters India

10

Atul Auto
Scooters India

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Domestic Vehicle Volumes (Annual) vs. Year-on-Year

Growth Rates

The Indian automobile industry has seen interesting dynamics in recent

times with the effect of the global downturn, followed by recovery in
domestic demand. The future of the industry in the medium term
based on current trends, is analyzed here along two broad themes in
the global automobile industry.

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Growth Factors

Fuel economy and demand for greater fuel efficiency is a major

factor that affects consumer decision.
Increased affordability, heightened demand in the small car
segment and the surging income of the Indian population
The Government technology modernization fund is concentrating
on establishing India as an auto-manufacturing hub.
Availability of inexpensive skilled workers.
Market segmentation and product innovation.
Industry is perusing to elevate sales by knocking on doors of
women, youth, rural and luxury segments.
Growth in Indias emerging and middle class segments.

Growth Drivers
Passenger vehicle are to increase at a CAGR of 16% between
2013-20.
Two Wheelers & three wheelers are projected to expand at a
CAGR of 9% between 2013-20.
A growing working population & an expanding middle class are
expected to remain key demand drivers. GDP per capita has
grown from USD 1432.25 in 2010 to USD 1500.76 in 2012, & is
expected to reach USD 1869.34 by 2018.

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 India has the worlds 12th largest number of high net worth
individuals, with a growth of 20.8%, the highest among the top 12
countries.
Increase disposable incomes in the rural agri-sector.
The presence of a large pool of skilled & semi-skilled workers& a
strong educational system.
A large number of products are available to consumers across
various segments. With the entry of a number of foreign players &
reduced overall product lifecycle, quicker product launches have
become the order of the day.
The availability of a variety of vehicle models meet diverse needs
& preferences.
Easy finance schemes, owing to which the finance industry has
grown at the rate of 13% between 2008-13. Car finance
penetration has increased from 68% to 70% between 2008-10 &
between 70% to 72% in 2014-15.
Favourable government polieces like lower excise duties
automotive mission plans, the constitution of NATRiP etc.

Risk

The regulatory regime in India increased reporting requirements

making it easier to uncover travel products, and hence product
recalls.
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Demand is linked to economic growth and rise in income levels.

Per Capita penetration is around 9 cars per 1000 people.
Many foreign players have entered the Indian market especially in
passenger cars segment.
The industry performance is highly affected by increase is loan
rates.
Supply bottlenecks offer a major hurdle in path of growth.
Fuel price hike has direct impact on the sale margin of the
industry.

India is home to around 1.2 billion people and the standard of

living is increasing day by day. This is in response to the increase
in the disposable income of the citizens and improved financial
structure in the industry.
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 As there is a stabilized Central government in power which

pitches for sustainable growth than anything else, it is only fair to
fancy the chances of the automobile industry in India. The
transportation infrastructure has got a big boost from the
government which has further brighten the prospects of the
industry.
Most of the companies in India has managed to create economies
of scale in their production line, thus reducing the overall cost and
increasing their bottom line. The margins have improved
significantly over the years in midst of intense competition. This is
the most exciting period of this industry and something very
commendable.
India has pioneered the production of small cars / hatchbacks,
both in terms of cost of production and technology involved.
Indian companies are no more dependent on foreign companies
for capital and most importantly technological know-how. Indian
government is stressing on retaining knowledge and talent in
India and thus prevent brain drain. This way the companies have
the best of talents to their exposure, some of the benefit could be
passed to the customers in terms of quality product and cost
advantage.

SWOT
STRENGTH

Investment by foreign car manufacturers

Increase in the export level
Low cost and cheap labor
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15

Rise in the working and middle class income

Expert skills in producing small cars- good for environment
Large pool of skilled, educated potential employees

OPPORTUNITIES

Growing population in the country

Focus from the govt. in developing the road infrastructure
Rising living standards
Increase in income level
Rising rural demand
The car is a status symbol
Women drivers have increased
Finance system available for buying cars

WEAKNESS

Low quality compared to other automotive countries

High interest rate and overhead level
Production cost is generally higher than some other Asian countries
like China
Low investment in R&D area
Local demand is still towards low cost vehicles

THREATS

Lack of technologies for Indian companies

Increase in the import tariff and the technology cost
Increased congestion in the urban areas
Industry is highly driven by macro-economic variables
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Cut throat competition

High interest rates

PORTERS 5 Forces

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Ashok Leyland

Price: Rs. 92.30

Target Price: Rs. 73

Recommendation: Not to Buy

About Company
2nd largest commercial vehicle manufacturer in India, 4th largest
manufacturer of buses in the world and 16th largest manufacturer
of trucks globally.
Ashok Leyland also makes spare parts and engines for industrial
and marine applications.
The company claims to carry more than 60 million passengers a
day, more people than the entire Indian rail network.
With a joint venture with Nissan Motors of Japan the company
made its presence in the Light Commercial Vehicle (LCV) segment
(<7.5 tons).
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 In the journey towards global standards of quality, Ashok Leyland

reached a major milestone in 1993 when it became the first in
India's automobile history to obtain the ISO 9002 certification.
In 2006, Ashok Leyland became the first automobile company in
India to receive the TS16949 Corporate Certification.
Hinduja Group flagship company Ashok Leyland has been awarded
the first overseas order worth $6 million for its vestibule buses
from Bangladesh Road Transport Corporation (BRTC).

Recent price-Rs.92.15 Source-Money Control

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DCF VALUATION
Discounted cash flow (DCF) analysis is a method of valuing a project,
company, or asset using the concepts of the time value of money. All
future cash flows are estimated and discounted by using cost of capital
to give their present values (PVs). The sum of all future cash flows, both
incoming and outgoing, is the net present value (NPV), which is taken
as the value or price of the cash flows.
Cost of Equity
Ashok Leyland is having a beta of 0.8 with a Risk Premium of 5.50%. The
Risk free rate is 7.80%. Hence cost of equity is calculated to be 12.20%
for the current year. We believe free cash flow to equity (FCFE) is the
best way to capture value as the companys capital structure is quite
stable.

Risk Free Rate

7.80%

Risk Premium

5.50%

Beta

0.8

Cost of Equity

12.20%

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FCFE Calculation
Years

Growth
Rate

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

7%

8%

8%

8%

8%

8%

6%

6%

5%

5%

4%

16642.01

17973

19411

20964

22641

24453

25920

27475

28849

30291

31503

16307

17611

19020

20542

22185

23960

25397

26921

28267

29681

30868

228
580

246
626

266
676

287
731

310
789

335
852

355
903

376
957

395
1005

414
1056

Working
Capital
Change

1853

2001

2161

2334

2521

2723

2886

3059

3212

3373

Net
Borrowings

6020

6502

7022

7584

8191

8846

9377

9939

10436

10958

8785

9488

10247

11067

11952

12909

13683

14504

15229

15991

Net Sales
Net Income
CapEx
Depr

FCFE
Terminal
value
Present
Value

333660

8456

Value of Equity
Value per Share

8140

182714

7835

7542

7260

6858

No. of Shares
2493

6479

6064

124079

millions

73

Based on FCFE valuations, we expect the share price of Ashok Leyland

to be Rs.73 per share.
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3508

27360

Ashok Leyland Share Value

Current price: 92.30
Value per share using FCFE: 73
Therefore Ashok Leyland shares are Overvalued by:
(92.30 - 73)/73=26.4%

Sensitivity Analysis
COST OF EQUITY
73

12.0%

11.5%

11.0%

10.5%

10.0%

9.5%

9.0%

8.5%

8.0%

129

149

176

213

270

365

554

1124

7.5%

117

133

154

182

221

280

378

575

7.0%

107

121

137

159

188

229

290

392

6.5%

100

111

125

142

165

194

237

300

6.0%

93

103

115

129

147

170

201

245

5.5%

88

96

106

118

133

152

176

208

5.0%

83

91

99

110

122

138

157

182

4.5%

79

86

93

103

113

126

142

163

4.0%

75

82

88

96

106

117

131

147

3.5%

72

78

84

91

100

109

121

135

3.0%

70

75

80

87

94

103

113

125

The above table shows the sensitivity analysis of varied stable growth rates and their effect on
the share prices.

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Relative Valuation
In Relative Valuation, the worth of a share of a company is found out
from comparing it against a benchmark or its peers. It can be also done
with respect to time. We derive the buy price from a few sources: we
can compare the price against what was sold previously adjusted for
inflation; we can also compare the price against the houses with similar
characteristics and features, lastly, we can compare it against prices in
the neighborhood.
Relative Valuation is different from Cash flow valuation where the value
of an asset is the sum of the future cash flows that is generated from the
asset discounted to the present. In the example of the house buying, the
buy price using the cash flow method could be calculated as the sum of
all the monthly rental income that could be derived discounted back to
the present.
Here we will be concentrating on Price to earnings ratio and price to book
value ratio of Ashok Leyland and its peer companies, because these are
suitable for most type of companies and especially industrial companies
which are asset heavy and brand heavy.

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To get a more comprehensive insight into the shares situation, we will

be comparing the competitors with Ashok Leyland in two matrices one
of which is a relation between P/BV, EV/EBIT , and ROCE.

First, a look at the P/E ratios of Ashok Leyland and its peers for the last 5 years from April 2009
to March 2015

P/E
600.00
500.00
400.00
300.00
200.00
100.00
0.00
-100.00
-200.00

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

From the graph, we can see that the P/E ratio of Ashok Leyland have
been highest in 2013. At the same time, the shares P/E is moving
(increasing/decreasing) in tandem with the industry. So historically, has
highest P/E ratio with respect to the industry average as well as its peers.
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Axis Title

Price/Book Value
3500.00
3000.00
2500.00
2000.00
1500.00
1000.00
500.00
0.00
EICHER
MARUT
BAJAJ
MOTO
I
RS

TATA

Hero
motoc
hop

TVS
46.10

MAHIN
ASHOK
FORCE MAH.
DRA & ESCOR
LEYLAN
MOTO SCOOT
MAHIN
TS
D
RS
ERS
DRA

TUBE
INV.

2009-10 98.23

100.26

19.63

33.50

228.80

243.82 319.08

10.35

2.69

2.63

63.13

2010-11 110.16

55.27

20.08

56.94

257.00 117.42 152.04 255.51

4.13

2.43

1.86

37.29

2011-12 271.38

81.89

33.69

35.56

176.66

659.06 293.78

4.44

0.57

3.33

61.80

2012-13 295.39

80.79

86.64

44.29 1983.03 165.30 139.96 386.66 242.99

12.48

1.62

2.39

46.33

2013-14 211.98 144.84

89.78 3067.09 221.22 428.12 1111.86 279.05

10.19

3.91

5.50

105.23

2014-15 198.55 175.15

0.00

0.00

0.00

5.53

107.67

2485.23 161.56 315.88 1811.28 270.82

The P/BV ratio of Ashok Leyland has been historically highest compared
to its peers and industry average. Only in 2013, this ratio became high
accounting to an sudden increase in price of the share.
The latest P/BV ratio comparison (of the year 2014) reveals that the P/BV
of Ashok Leyland is the second highest.

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ROCE
80
70
60
50
40
30
20
10
0
-10

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

ROCE of Ashok Leyland is low with respect to its peer group.

EV/EBIT
120.00
100.00
80.00
60.00
40.00
20.00
0.00
-20.00
-40.00

2015

2014

2013

2012

2011

2010

So, by looking at the E/V and EBIT ratios, we get an idea that the stock
could be overvalued as it has both the ratios lower than the industry
average and most of its peers.
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FINANCIAL INSIGHTS

Operating Profit gives an indication of the current operational

profitability of the business and allows a comparison of profitability
between different companies after removing out expenses that can
obscure how the company is really performing.
Interest cost depends on the management's choice of financing, tax can
vary widely depending on acquisitions and losses in prior years, and
depreciation and amortization policies may differ from company to
company.
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EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation,

and Amortization. PBT stands for Profit Before Tax, and PAT stands for
Profit After Tax.
The graph visually shows how the net profit of the company stand
reduced due to the impact of Interest, Depreciation, and Tax.

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It can be seen Ashok Leyland Net Sales is increasing moderately.

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Total Assets is the sum of all assets, current and fixed. The asset
turnover ratio measures the ability of a company to use its assets to
efficiently generate sales. The higher the ratio indicates that the
company is utilizing all its assets efficiently to generate sales.
Companies with low profit margins tend to have high asset turnover.

Future Perspectives
Automobile industry expert predicts that by 2050 every 6th car in
the world will be for Indians.
India's light vehicle market will grow to 5.4 million units by 2020,
close to doubling in a little more than five years
India have already taken over Germany and Japan in sales volume
and by 2020, is expected to take over other major European and
Asian markets.
It is said that for every Re. 1 spent, the auto sector returns Rs. 3.04
to the Indian economy.

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CONCLUSION
From the relative valuation we came to understand that the share of
Ashok Leyland is relatively overvalued with respect to its peers and the
industry. So our opinion would be a Not to BUY on Ashok Leyland.
The Indian Automotive Industry is expected to be among the top three
globally sometime after 2020; it is expected to provide significant
opportunities to industry participants, provided they are able to
manage the challenges this industry poses. While India provides unique
opportunities to industry participants, it calls for a tailored approach to
doing business here. Companies will have to adapt existing product
portfolio/design products ground-up to make them relevant for Indian
customers. Companies need to commit themselves fully to the Indian
market and be prepared to be here for the long haul. In the short term,
global players will have to closely integrate India operations with their
overall global operations to derive maximum advantage. Thrust needs
to be given to original research that will yield breakthrough results.

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