BSE SENSEX
28,413
S&P CNX
8,743
Ashok Leyland
CMP: INR82
TP: INR105 (+29%)
Board approves merger of Hinduja Foundries
See marginal impact on EPS in FY17/18 due to tax shield
15 September 2016
Update
| Sector:
Automobiles
Buy
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INR m
Free float (%)
AL IN
2,845.9
113/78
-7/-30/-17
232.1
3.5
1,356
49.6
Financials Snapshot (INR b)
Y/E March
2016 2017E 2018E
Sales
188.2 231.7 275.9
EBITDA
21.7
30.5
35.7
NP
11.1
18.5
24.1
Adj. EPS (INR)
3.9
6.5
8.5
EPS Gr. (%)
375.1
66.4
30.2
BV/Sh. (INR)
19.4
24.2
30.3
RoE (%)
20.9
29.8
31.0
RoCE (%)
12.8
21.9
25.2
P/E (x)
20.9
12.6
9.6
P/BV (x)
4.2
3.4
2.7
Shareholding pattern (%)
As On
Jun-16 Mar-16 Jun-15
Promoter
50.4
50.4
38.8
DII
9.6
10.0
12.4
FII
10.6
6.4
32.6
Others
29.4
33.3
16.2
FII Includes depository receipts
Stock Performance (1-year)
Ashok Leyland
Sensex - Rebased
120
105
90
75
60
Merger of HFL to result in ~2.8% dilution, increase promoters stake to 51.3%
(+90bp)
Swap ratio implies discount of ~38% to HFL's closing price of ~INR54.5 on
14/Sep/16.
Though materiality of this deal might be low, it deviates from the
managements stated objective of streamlining AL's balance sheet.
While we are yet to factor in for HFL in our AL's estimates, given tax shield on
accumulated losses we see limited change in FY17/18 EPS.
We now value AL at ~8x EV/EBITDA (v/s 9x earlier), to factor in for potential
impact of this deal on capital efficiencies.
Contours of the deal
AL's board has approved merger of Hinduja Foundries (HFL), the group
company supplying cylinder blocks and heads to AL.
Share swap ratio approved is at 40 shares of AL for every 100 shares of HFL,
resulting in dilution of ~2.8% for AL. This would result in increase in promoters
stake in AL to 51.3% (from 50.4%).
AL has ~2.6% equity stake in HFL and preference share investment of
~INR3.25b, which would get canceled on merger.
This deal is subject to various regulatory approval and approval of shareholders
(approval from ~75% of minority shareholders).
Swap ratio implies discount of ~62% to HFL's closing price of ~INR54.5 on
14/Sep/16.
About Hinduja Foundries
HFL is one of the largest producers of cylinder blocks and heads in India. In
FY16 (12m), it had revenues of INR5.8b (-7% YoY), adj EBITDA loss of ~INR312m
(-6% margins) and adj PAT loss of ~INR1.7b. It has net debt of ~INR4.5b as of
Mar-16.
It currently has 2 manufacturing plants, with total capacity of ~132k tons and
operates at 60-65% utilization.
For HFL, AL contributes ~35% of its revenues, with ~55% coming from tractor
segment and balance from other CVs and non-auto segment.
Promoters (incl AL) own 18.4% stake in HFL and GDR holders owning ~65.5%
(owners not disclosed).
Jinesh Gandhi
(Jinesh@MotilalOswal.com); +91 22 3982 5416
Venil Shah
(Venil.Shah@MotilalOswal.com); +91 22 3982 5445
/Aditya Vora
(Aditya.Vora@MotilalOswal.com); +91 22 3078 4701
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Ashok Leyland
Rationale for the deal
HFL is a very critical vendor for AL, as it sources 80% of its requirement for
cylinder blocks and heads from HFL. Considering weak financials, there was
threat on sustenance of HFL's operation, which would jeopardize AL's
operations.
It has taken various cost cutting measures by giving VRS to employees at Ennore
unit and closure of Hyderabad casting unit, cost impact of which is fully reflected
in FY16. Since Sep-14, it has given VRS to over 1,025 people.
HFL has accumulated losses of ~INR10.6b, which would give tax shield of
~INR3.3b to AL.
Turnaround strategy
HFL has new management team new CEO (Mr D M Reddy) and CFO (Mr
P.K.Ranganathan).
Management sees following synergies from the merger:
Common purchase giving economies of scale and higher bargaining power with
vendors
Benefitting from best practices of AL, driving improvement in operational
efficiencies.
Further reduction in overheads in both employees cost (~17% of sales v/s 10-
12% for similar sized foundry) and fixed overheads.
Further rightsizing of manufacturing facilities.
Reduction in interest rates with AL's balance sheet (HFL interest rate of 12.5-
13% v/s 9-9.5% for AL).
While it might take couple years before it becomes PAT accretive to AL, it has
already turned EBITDA positive in last 2-3 months since AL has been working
with HFL.
The management believes gross margins of HFL business are good enough to
drive positive net margins as well.
Our view on the deal
While we understand criticality of HFL's product for AL's operations, we believe
merger of HFL with AL might not be the most optimum solution from minority
shareholders perspective. However, promoters has significantly sweetened the
deal for AL' minority shareholders by offering ~38% discount to closing valuation
of HFL (as of 14/Sep/16).
Though materiality of this deal might be low, it deviates from the managements
stated objective of streamlining AL's balance sheet and focused capital
deployment strategy. We believe this might be one of case, rather than reversal
in managements' intent of leaner and meaner AL.
Under AL, HFL should attain EBITDA break-even in short period of time, PAT
break-even would be dependent on further rightsizing of operations and/or
fund infusion.
Based on 1QFY17 performance of HFL (EBITDA loss of ~INR113m and PAT loss of
~INR366m), without any improvement AL's EBITDA would see downgrade of
~1.3% and EPS would see cut of ~8.5% (including equity dilution).
15 September 2016
2

Ashok Leyland
Valuation and view
We are yet to factor in for HFL in our AL's estimates pending regulatory and
shareholders' approval. However, given tax shield of ~INR3.25b on accumulated
losses of ~INR10.5b, we see limited change in FY17/18 EPS.
For long term perspective, we are hopeful of continuance of focused capital
allocation and positive on strategy of broad basing revenue stream to reduce
cyclicality.
Short term volatility in volumes notwithstanding, we believe CV cycle has more
legs to it and would grow at 12-15% CAGR over next 3 years.
Management's focused approach is paying-off in a) market share gains, b) rising
ASPs, c) controlled cost, d) reducing working capital, e) significant control on
capex and f) debt reduction.
ALs valuations at 9.6xFY18E EPS and EV/EBITDA of 6.1x are very attractive,
considering strong EPS growth of ~47% CAGR over FY16-18E.
We now value AL at ~8x EV/EBITDA (v/s 9x earlier), to factor in for potential
impact of this deal on capital efficiencies due to increase in capital employed
without commensurate improvement in operating performance.
Maintain
Buy
with target price of ~INR105 (~8x FY18 EV/EBITDA).
Exhibit 1: HFL – Snapshot of financials
INR(M)
Net Revenues
Gross margins (%)
EBITDA
EBITDA Margins (%)
PAT
FY10
3,915
55.5
486
12.4
3
FY11
5,512
52.6
601
10.9
75
FY12
7,418
53.5
312
4.2
-590
FY13
5,971
31.2
-2,100
-35.2
-3,364
FY14
6,453
48.8
-477
-7.4
-1,578
FY15
6,200
49.9
-499
-8.1
-1,771
FY16
5,790
54.6
-312
-5.4
-1,705
Source: Company, MOSL
Exhibit 2: HFL - Recent GDR issues drives down debt
INR(M)
Debt
Cash
Net Debt
Sep-12
6,734
206
6,527
Mar-13
5,758
123
5,635
Sep-14
5,983
49
5,934
Mar-16
4,603
115
4,488
Source: Company, MOSL
15 September 2016
3

Ashok Leyland
Story in charts
Exhibit 3: Gross margins remain healthy but higher fixed costs Exhibit 4: Weak tractor demand coupled with increased
leads to negative EBITDA margins
competitive intensity led to revenue decline in FY16
Gross margins (%)
44.0
53.4
47.6
EBITDA margins (%)
59.3
44.3
8
41
Revenues (INR M)
7,418
5,971
35
5,512
3,915
FY10
FY11
FY12
-20
6,453
8
-4
-7
6,200
5,790
Growth (%)
54.8 52.2 55.4 51.4
3.7
-9.8 -8.4 -6.3 -7.2 -6.7
1QFY15
3QFY15
1QFY16
-4.9 -14.8 -6.8
3QFY16
1QFY17
Source: Company, MOSL
FY13
FY14
FY15
FY16
Source: Company, MOSL
Exhibit 5: Tractor revenues account for more than half of HFL’s business mix
Others
10
AL
35
Tractors
55
Source: Company, MOSL
Exhibit 6: HFL’s recent GDR was issued at ~INR30/share
Time line
22/03/2016
29/01/2014
3/2/2010
25/04/2008
14/06/2005
No of shares(m)
134.4
17.8
10.1
2.4
9.5
Price
29.8
34.2
50
252.3
60
Total Amount
3,998
608
503
601
570
Type
GDR
Preferential issue
Rights Issue
GDR
Rights issue
Source: Company, MOSL
Exhibit 7: Deal valuation of HFL at discount to market valuation *
Swap ratio (for 1 share of HFL, no. of AL shares)
Market price of ALL(INR)
Implied value of HFL shares @ CMP of AL* (INR)
Discount to HFL closing price* (%)
0.4
84.4
33.8
38.0
Source: Company, MOSL
15 September 2016
4

Ashok Leyland
Financials and Valuations
Income Statement
Y/E March
Volumes ('000 units)
Growth (%)
Net Sales
Change (%)
EBITDA
Change (%)
EBITDA Margins (%)
Depreciation
EBIT
Interest & Fin. Charges
Other Income
PBT
Tax
Effective Rate (%)
Rep. PAT
Change (%)
% of Net Sales
Adjusted PAT
Change (%)
2012
103
9.2
129,034
15.4
13,175
8.6
9.6
3,528
9,647
2,553
404
7,514
1,240
16.5
6,274
-0.6
-0.6
6,258
-0.9
2013
115
11.5
124,812
-3.3
8,765
-33.5
6.6
3,808
4,957
3,769
624
4,707
370
7.9
4,337
-30.9
-30.9
1,669
-73.3
2014
89
-22.1
99,434
-20.3
1,666
-81.0
1.6
3,770
-2,105
4,529
665
-912
(1,206)
132.2
294
-93.2
-93.2
-4,763
-385.4
2015
105
17.4
135,622
36.4
10,266
516.4
7.1
4,163
6,103
3,935
1,245
4,422
1,074
24.3
3,348
1,039.6
1,039.6
2,339
-149.1
2016
140
33.9
188,216
38.8
21,660
111.0
10.9
4,437
17,223
2,735
1,099
11,692
4,474
38.3
7,218
115.6
115.6
11,112
375.1
2017E
166
18.5
231,744
23.1
30,521
40.9
12.4
4,880
25,641
1,802
1,856
25,695
7,203
28.0
18,492
156.2
156.2
18,492
66.4
(INR Million)
2018E
193
16.1
275,913
19.1
35,727
17.1
12.1
4,874
30,854
1,199
2,460
32,114
8,029
25.0
24,086
30.2
30.2
24,086
30.2
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deferred Tax Liability
Foreign currency translation
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr.Assets, L & Adv.
Inventory
Sundry Debtors
Cash & Bank Balances
Loans & Advances
Current Liab. & Prov.
Sundry Creditors
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2012
2,661
39,421
42,082
32,630
4,904
42
79,657
72,564
23,429
49,135
5,482
15,345
49,195
22,306
12,302
326
14,261
39,501
27,725
6,807
4,969
9,695
79,657
2013
2,661
41,890
44,551
43,554
5,274
-
93,379
83,796
25,588
58,208
6,889
23,376
47,883
18,960
14,194
139
14,589
37,588
24,854
8,862
3,872
10,295
98,769
2014
2,661
41,818
44,479
46,903
4,068
-
95,450
86,723
30,124
56,599
1,815
27,897
41,769
11,887
12,990
117
16,775
32,630
22,142
8,929
1,560
9,139
95,450
2015
2,846
48,341
51,187
32,913
5,103
-
89,203
85,553
32,997
52,556
1,201
26,488
49,592
13,985
12,577
7,513
15,517
40,635
28,283
9,005
3,347
8,958
89,203
2016
2,846
52,296
55,141
26,360
5,356
-
86,857
87,469
36,932
50,537
757
19,179
62,080
17,306
12,509
15,681
16,583
46,999
25,627
14,903
6,469
15,081
85,553
2017E
2,846
66,149
68,995
17,860
6,665
-
93,520
89,976
41,812
48,164
1,250
21,179
80,761
21,308
22,222
18,183
19,047
57,833
34,920
15,873
7,040
22,928
93,520
(INR Million)
2018E
2,846
83,388
86,234
10,360
8,271
-
104,864
97,476
46,686
50,790
1,250
23,179
99,235
25,369
26,457
24,730
22,678
69,589
41,576
18,898
9,115
29,646
104,864
15 September 2016
5

Ashok Leyland
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
EPS Fully Diluted
EPS Growth (%)
Cash EPS
Book Value per Share
DPS
Payout (Excl. Div. Tax) %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price to Book Value
Dividend Yield (%)
Profitability Ratios (%)
ROE
RoCE
RoIC
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors (Days)
Working Capital (Days)
Fixed-Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
Cash flow Statement
Y/E March
OP/(Loss) before Tax
Interest/Dividends Received
Depreciation & Amortization
Direct Taxes Paid
(Inc)/Dec in Working Capital
Other Items
CF from Oper. Activity
CF after EO Items
(Inc)/Dec in FA+CWIP
Free Cash Flow
CF from Inv. Activity
Inc/(Dec) in Debt
Interest Rec./(Paid)
Dividends Paid
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2012
2.4
2.4
-0.9
3.7
15.8
0.1
0.0
2013
0.6
0.6
-73.3
2.1
16.7
0.6
95.6
2014
-1.8
-1.8
-385.4
-0.4
16.7
0.0
0.0
2015
0.8
0.8
-145.9
2.3
18.0
0.45
54.8
99.2
35.7
24.9
1.9
4.5
0.6
15.3
11.2
14.4
35
63
78
19
2.6
0.8
3.9
5.9
7.5
42
55
73
24
2.1
1.0
-10.7
0.5
1.1
48
44
81
10
1.8
1.1
4.9
6.0
7.7
34
38
76
-5
2.6
0.6
2016
3.9
3.9
375.1
5.5
19.4
1.0
25.6
20.9
14.9
11.2
1.3
4.2
1.2
20.9
12.8
20.2
24
34
50
8
3.7
0.5
2017E
6.5
6.5
66.4
8.2
24.2
1.5
23.1
12.6
9.9
7.6
1.0
3.4
1.8
29.8
21.9
35.4
35
34
55
14
4.8
0.3
2018E
8.5
8.5
30.2
10.2
30.3
2.0
23.6
9.6
8.0
6.1
0.8
2.7
2.5
31.0
25.2
42.6
35
34
55
14
5.4
0.1
(INR Million)
2018E
30,854
2,460
4,874
-6,423
-171
0
31,593
31,593
-7,500
24,093
-9,500
-7,500
-1,199
-6,847
-15,547
6,547
19,315
25,862
2012
6,900
168
3,528
-1,500
218
2,024
11,338
11,338
-6,906
4,432
-10,743
3,239
-2,256
-3,092
-2,109
-1,513
1,755
241
2013
4,707
264
3,808
-1,100
-350
218
7,547
7,547
-6,438
1,109
-11,907
11,004
-3,742
-3,092
4,170
-190
241
52
2014
-912
220
3,789
-297
3,701
-495
6,005
6,005
-2,071
3,935
-1,102
1,827
-4,446
-1,868
-4,486
417
52
469
2015
4,422
290
4,182
-502
7,049
2,906
18,347
18,347
-2,059
16,288
1,015
-14,239
-4,219
0
-11,791
7,571
469
8,040
2016
11,692
485
4,489
-4,409
-1,276
6,744
17,726
17,726
-1,425
16,301
3,876
-7,834
-2,962
-1,536
-12,332
9,270
8,040
17,310
2017E
25,641
1,856
4,880
-5,893
-4,041
0
22,443
22,443
-3,000
19,443
-5,000
-8,500
-1,802
-5,135
-15,437
2,005
17,310
19,315
15 September 2016
6

Ashok Leyland
NOTES
15 September 2016
7

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Research Analysis in Hong Kong.
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Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is
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For Singapore
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subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
Kadambari Balachandran
kadambari.balachandran@motilaloswal.com
(+65) 68189233 / 65249115
15 September 2016
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd
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