Ashok Leyland Fundamental Analysis and Future Outlook

Ashok Leyland was founded in 1948 and it is the second-largest commercial vehicle manufacturer in India, fourth largest manufacturer of buses in the world and 14th largest manufacturer of trucks globally. It is promoted by the Hinduja Group.

The company’s shares have seen a sharp correction since 2018 due to the auto sector slowdown and management issues. It is down by 55% from its 52 weeks high of Rs. 97.57.

Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.

1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
7. Efficiency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects

(All units are INR Millions except ratios and per share data)

You can also get the complete excel model for learning fundamental analysis by clicking the link here: Ashok Leyland Excel Model

1.Economic Moat (★ ★ ☆ ☆ ☆)

The company has a past record of 67 years of continuous profitability. It’s the 4th largest manufacturer of buses and 14th largest truck manufacturer in the world. Ashok Leyland has an established after-sales service network and a good footing in the truck resale business. It has many other competitors like TATA Motors, Eicher and M&M already taking away the market share. So it does not have any significant economic moat. Therefore this category gets only 2 stars in Ashok Leyland shares fundamental analysis.

2. Business Model and Management (★ ☆ ☆ ☆ ☆)

The company operates in an asset-heavy industry which is also cyclic. Therefore it will have lower profitability, high leverage, less efficiency and high Inventory. These are the characteristics of an average business model where it is hard to achieve significant economic profits. Also, the company is facing severe management issues because of its former CEO Mr Vinod Dasari who left the company and joined the competitor Eicher Motors. Therefore this category gets only 1 star in Ashok Leyland shares fundamental analysis.

3. Growth Ratios (★ ★ ★ ☆ ☆)

Consider the analysis from the Excel model which can be downloaded from the above link. The company has seen good growth in revenue over the years (18% CAGR) but has shown negative operating income, high-interest expense and volatile net income margin. Also, the working capital has been negative over the few years as shown. Therefore this category gets 3 stars in Ashok Leyland shares fundamental analysis.

4. Profitability Ratios (★ ★ ☆ ☆ ☆)

The company’s leverage is increasing continuously which means the company is taking a lot of debt. This increases the interest expense and also puts downward pressure on the Net Income. The net income and operating margin is almost constant over the years and haven’t improved. This is mainly due to the asset-heavy nature of the business. Therefore this category gets only 2 stars in Ashok Leyland shares fundamental analysis.

5. Cash Flow Ratios (★ ★ ★ ☆ ☆)

The net income margin and capital expenditure as a percentage of sales have remained constant over the years. The free cash flow growth rate is very volatile mainly due to the cyclic nature of the business and high investments in PPE. Also, there is no significant growth in the free cash flow as a percentage of net income. Therefore this category gets 3 stars in Ashok Leyland shares fundamental analysis.

6.Liquidity and Solvency Ratios (★ ★ ☆ ☆ ☆)

The debt to equity ratio has been increasing which shows that the company is increasingly borrowing more debt. This increases the leverage and also has a negative effect on solvency. The interest burden increases and net income reduces which again affects the shareholder’s wealth. The current ratio and quick ratio is also close to 1 and 0.5 respectively which signifies less liquidity. Therefore this category gets only 2 stars in Ashok Leyland shares fundamental analysis.

7. Efficiency Ratios (★ ★ ★ ★ ☆)

All the indicators show that efficiency is improving. The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.

The cash conversion cycle is negative which means the company have bargaining power over its supplies (usually the auto ancillary industry). The receivable period has also gone down from 55 to 26 days which shows a faster collection of credit sales which is a good indicator for the company. The inventory days has also reduced from 135 days to 50 days which shows faster selling of manufactured vehicles. Therefore this category gets 4 stars in Ashok Leyland shares fundamental analysis.

8. Valuation Ratios (★ ☆ ☆ ☆ ☆)

The enterprise value EV has been fluctuating because of the volatility of the stock price. The overall increase in the EV is due to the large amount of debt which the company is taking for expansion. This is not sustainable and can erode shareholders wealth in the future. Also, the ratio of market value to EBIT has been declining which shows some correction in the stock price in the coming years. Therefore this category gets only 1 star in Ashok Leyland shares fundamental analysis.

9. ROE 5 way Du Pont Analysis ( ★ ☆ ☆ ☆ ☆ )

The ROE is negative because the interest expense in the years is exceeding the operating profits. Additional debt is required just to finance the existing debt which places the company on the path of insolvency. This will also deteriorate shareholders wealth significantly. Also, the asset turnover is constant over the years along with the operating margin which shows unimproved efficiency in operations. Therefore this category gets only 1 star in Ashok Leyland shares fundamental analysis.

10. Future Prospects (★ ★ ★ ☆ ☆)

Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.

• Exports are likely to grow 20% due to revival in Bangladesh, Sri Lanka and Africa (new tender coming in).
• Company level inventory reduced by 5,500 units Quarter on Quarter in DEC19 Quarter
• Cost-cutting program K54–2 is on track to result in savings of INR 5 billion in FY20. For FY21, it is targeting savings of INR 6 billion.
• Staff cost reduction for the reversal of bonus provisioning of 1HFY20. Also, 250 people opted for VRS.
• Hinduja Leyland Finance (HLFL): Ashok Leyland and Hinduja family to acquire a 7% stake of Everstone in multiple tranches over the next year.
• Delinquencies in HLFL have gone up but there is nothing alarming yet.

The industry is also going to get impacted due to the coronavirus outbreak and the lockdown so the revival is not on the horizon yet. Therefore this category gets 3 stars in Ashok Leyland shares fundamental analysis.

The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above or equal to 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating:

ASHOK LEYLAND SHARES (2.2/5)

Therefore it is a 2-star stock

★ ★ ☆ ☆ ☆