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Ashok Leyland a mkt performer with negative bias: HDFC

Friday, August 31, 2007

Ashok Leyland and Nissan Motor Co Ltd, signed a Heads of Agreement (HoA) for the formation of three joint venture companies to produce Light Commercial Vehicles (LCVs).

The vehicle manufacturing JV will have exclusive rights to manufacture LCV products in India for both the partners. While manufacturing facilities will be located in India, ALL will have a majority stake in the venture. In the medium term, production volume for both Indian and export markets, is expected to be over 1,00,000 units per annum.

The joint venture company for powertrain manufacturing will produce and assemble engines and other drivertrain components to be fitted in the LCVs and for exports. The majority stake will be with Nissan Motor Company.

The technology development venture will be responsible for the development of LCV products and related powertrains, destined for the Indian and the other identified emerging markets. This company will be owned 50:50 by the two partners and the products developed will be sold under both ALL and Nissan brands.

Following the signing of the HoA, both companies will now embark on a detailed feasibility study covering all proposed areas of cooperation. This study is expected to conclude by October 2007 and will lead to the signing of an MoU.

The partnership with NISSAN is a positive for the company as currently it has a negligible presence in the LCV segment, which is dominated by Tata Motors. This is a win-win situation for both the entities. On the one hand, Nissan will provide its engineering expertise in developing vehicles and on the other, ALL will share its knowledge of the Indian market and distribution network.

YTD FY08, the company’s market share of MHCVs increased to 29.6% from 27.0% in FY07. For the same period, the Market Share of the company in the Goods MHCV segment was 25.5%.

Outlook and Valuation

The JV will start contributing to the profitability of the company only by FY10. Meanwhile, ALL announced an aggressive Capex plan of Rs.10 billion for FY08. This will increase both the interest and depreciation expenses and impact its earnings. At the CMP of Rs.37.9, the stock trades at 11.4x and 11.2x its FY07 and FY08E earnings.

Though the valuations of ALL are tad below that of TAMO, we maintain a “Market Performer” rating on the stock with a negative bias. We prefer TAMO over ALL due to its diversified business segments. Better than expected performance from TAMO’s passenger car business and the potential unlocking from its various subsidiaries could be positive catalysts for TAMO in the future.


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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.