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Ashok Leyland

By Rohit Chauhan
In Company analysis, Investment ideas, Uncategorized
August 27, 2007
4 Min read
4 comments
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About
Ashok leyland is a 7500 Cr company in the automobile industry. It is the no.2 manufacturer of commercial vehicles in india. It has a 28% market share in commerical vehicle and is no.1 in the bus segment. It has a current capacity of around 80000 vehicles which would be expanded to 100000 vehicles in the next 1-2 years. The company has 6 plants at Ennore, hosur, Alwar and Bhandar and is putting a new plant in Uttaranchal.
The company has the following product segment – Buses, trucks, defence, spares, services and now the company is entering into design and other OEM services.

Financials
The company has doing well inline with the commerical vehicle industry. The turnaround in the sector performance has happened from 2002 and the industry has seen good growth since then. ALL (ashok leyland Ltd) has seen its revenue increase by 23% per annum since then and profits increase by 25%+. The company has become more efficient as its return on capital has increased from 15% to 25%+. The net margins have gone up from 3.8% to 5.2% during this period. The increase in ROC has come from better utilization of assets which have increased from 1.9 turns to 3.6 turns.
The company has used the free cash flows to reduce debt from a ratio of 0.75 in 2003 to 0.36 currently. Net of cash and cash equivalents the company is a zero debt company.

Positives
The financials of the company has improved a lot during the last 5 years. The company has used the upcycle to improve the balance sheet and make a few strategic acquisitions.

The company has acquired the truck Business of Avia in Europe and would be selling around 1000 trucks per annum (not sure of the exact number). In addition the company has agreed to purchase DTE in the US which provides testing services to OE manufacturers in the US. The company also has a JV with in UAE to build bus bodies in the UAE. The above acquisitions and other service initiatives should add value to the company and reduce the cyclical nature of the business.

In addition the company has been a good allocator of capital in the last 5 years and has a resonable dividend payout of almost 50%.The current management team seems to be more aggressive and focussed on doing well. The company has managed to increase its market share in the last 2-3 years too.

Risks
The business is cylical and during the down cycle there is considerable margin pressure. In addition the company has turnaround its performance during the last 5 years of boyant demand. However it still remains to be seen how the company will do during the down cycle.
Competition in the Commercial vehicle segment is now increasing due to the entry of foreign players and this could increase the pressure on the margins, especially during a down cycle.
The management is currently expanding capacity. However a drop in overall demand could depress profits in the short to medium term due to this excess capacity. However this risk is on the lower side and could be mitigated by increasing exports.

Valuation
The company sells at a PE of 12. The current EPS is around 3.3 per share. The company can be expected to grow at 10-12% over the next few years. In addition the company has some competitive advantage such as a known brand name (especially in the south), long operating history and experience in the market, rational management and a decent distrubution/ service network.
The company can be valued at around 16-18 times PE and given an intrinsic value of around 60 Rs/ share.

Conclusion
The company seems to be undervalued, but it is still not a screaming buy. A 10% drop in stock price could make it a good buy. In addition the company is selling close to its 52 week lows due to the slowdown in the CV sector. A further drop in the share price could present an attractive opportunity.

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My Brief Notes on the Auto industry

By Rohit Chauhan
In Industry analysis, Uncategorized
August 22, 2007
3 Min read
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The Auto industry consists of the following products segment and key companies

4 Wheelers (cars, UV etc) – Maruti, Hyundai, Tata motors, Ford etc. This is a fast growing sector of the market with the most action. Rising incomes and easier credit has resulted in growth in the industry. India is also developing into a Hub for exports especially for small and compact cars. This sub-sector is characterised by high competition and aggressive marketing. The key player is maruti with around 51% market share. The last 3-4 years have seen growths in excess of 15-20%. In addition competition is increasing in this segment with aggressive growth plans from Maruti, Tata motors and other foreign majors such as Toyota, GM, Hyundai etc. I have been looking at some of the companies in this sector and there are some good ideas. I will be posting on a few later.

2 wheelers (scooters, Bikes etc) – This has been a growth sector for the last decade. The annual volume is almost 8 Mn units making india one of the largest markets in the world. Bikes account for the majority (around 70 %??) of the demand with the rest taken by scooters and mopeds. The bike segment consists of the entry level bikes which are price sensitive, the mid-segment called the deluxe segment which is dominated by hero honda’s splendour and the top segment. The top segment has high growth currently, lower pricing pressure and shared between bajaj auto and hero honda. This sector has seen slowing down of growth recently and pressure on margins due to increase in raw material costs and increased competition.

Commercial vehicles ( LCV, MCV and HCV) – This sector is dominated by tata motors followed by Ashok leyland. The LCV and HCV sectors are seeing good growth due to development of infrastructure and the transportation model moving towards hub and spoke. The less than 16 ton segment is however seeing its share of the pie shrink. Competition is expected to increase due to foreign players such as Iveco and others. The latest quarter has been weak for the commerical vehicles sector. . The commerical vehicle industry is quite cyclical in nature and the companies in that sector are making an effort to reduce the impact by increasing the service, spares and export component of the business. The two companies in this sector Tata motors and ALL seem to be fairly priced. I will be posting on Ashok leyland soon.

Basic financials of the industry
The industry is characterised by economies of scale. The net margins are low (4-5%) and not likely to increase much due to competition and raw material pressures. The industry has a ROC of 20%+ and moderate compeititive advantages due to Entry barriers from scale, brands and first mover advantage. Rivalrly is not intense as yet, however competition is likely to increase when demand slows and foreign competition intensifies.

A more detailed Analysis of auto industry is updated in the worksheet (Business analysis_working_aug 2007) under ‘AUTO AND ANCILLARIES’

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The Subprime mess and opportunity

By Rohit Chauhan
In General thoughts, Uncategorized
August 19, 2007
2 Min read
4 comments
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Only when the tide goes out do you discover who’s been swimming naked – warren buffett

It is diffcult to avoid reading on the subprime mess in the US. I have an oversimplified explaination –
‘Losses being incurred by individual and institutions for overpaying for financial assets like CDO, MBS (mortage backed security) and other debt due to greed (for higher yields), ignorance (not knowing what was behind these assets) and overconfidence (too much faith on models)’. So what we are seeing is repricing (or correct pricing ?) of these assets.

Well for a much better understanding on what is happening and what may happen in the months to follow , read this article on fortune.

In a nutshell the opinion is that this bubble will take some time to unwind, there could be volatility in the markets due to that and there could be steep losses for some.

I think india is not going to be affected much directly. However we could see second order effects. With a liquidity crunch, it is quite possible that the excess liquidity which is driving our stock and real estate markets may dry up. This could cause some volatility and short term drops. How much and when ? …who knows. I think the equity markets are already reacting and there maybe be some anecdotal evidence of the same happening in the real estate market too.

If, like me, you have also been tracking some stocks or have surplus cash to invest , the next few months may provide a few good opportunities. For ex: the auto sector, oil and gas and several mid-cap, microcaps are now selling at much lower prices and could soon be great bragains.

The most common cause of low prices is pessimism. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer – warren buffett

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Passive v/s Active investing

By Rohit Chauhan
In General thoughts, Portfolio management, Uncategorized
August 16, 2007
3 Min read
5 comments
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There is an interesting post by prem sagar on passive v/s active interesting. In response to the post deepak has posted a response on his blog

If I have understand it correctly, prem’s position is that one should calculate the delta returns one would get by investing actively and compare it with other sources of income such as a job and decide if it is worth the effort. For ex: an extra 3-4 % return on a portfolio of 10 lacs could mean 30-40 K extra money. Not enough to make active investing worth your while.

In contrast deepak’s position is that if the returns are around 50% then the delta would be 3-4 lacs (for a 10 lac portfolio). With these kind of returns, active investing can be looked at seriously.

I have thought long and hard on this above issue. My take is as follows

I think prem’s position is perfectly valid for a new investor. I really doubt if it is possible to earn 50% annual returns for a long period of time (atleast 5 years or more) by spending 1-2 hours per day on the side. However if you are one of those guys (I am definitely not) who has earned 50% per annum (from 2001-2006, which covers a bear and bull market) then you are an exceptional investor. If I were you, I would seriously look at investing as a career. I would get my returns audited (no one is going to believe unaudited claims) and then look at the publicizing the returns. For a person capable of earnings such returns, attracting capital would not be diffcult. One can start an investment partnership and become really rich.

However I am definitely not such a guy. My final objective is to reach that level referred to by deepak. So what I do in the interimn?

This is my thought process (which mirrors prem’s approach partly)

a. save money and increase the amount of investible capital
b. learn and improve my skills to improve my returns
c. When the investible capital becomes high and my returns (for atleast 5 years rolling) cross a threshold, it maybe time to look at investing as profession (assuming you love to do this, I do)
For ex: passive investing returns are 15% (long term index returns). Active investing returns are say 30%.Investible capital is say 100 lacs. Then a net extra return of 15 lacs may be worth the effort.

BTW, to give you an idea of what 30% long term returns mean, consider the following – superinvestor ‘warren buffett’ has made 26% per annum for last 50 years, george soros has made 30-35% per annum (may be a bit more) for around 30 years and rakesh jhunjunwala around 70% (assuming he started with 5000 rs and has 4000 crs or 1 bn dollars now). So if you can make 30%+ for more than 10 years, you are an exceptional investor and can really do well.

For lesser mortals (it is easy to think that you are exceptional based on 1-2 years returns, I did that myself in 1999-2000), I think prem sagar’s approach is a valid one to start with, learn as you go along and deepak’s is the one to aspire for.

As an aside, I completely agree with deepak’s concept of leverage which is also referred to by several other authors.

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