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Equity Valuation of Ashok Leyland

Submitted by
Bharath N D-13DM051
Seshi Kiran Reddy-13DM168
Rayapalli Bhargav Avinash-13DM148
Sanjay Davis Tony-13DM161
Table of Contents
Abstract ...................................................................................................................................... 3
Automobile Industry in India ..................................................................................................... 3
Present scenario of commercial vehicles ................................................................................... 4
Future prospects of commercial vehicles ................................................................................... 5
Ashok Leyland ........................................................................................................................... 5
Financial Statements of Ashok Leyland .................................................................................... 6
Financial Ratios Year Wise: ...................................................................................................... 8
Comparing the Ratios of the Year 2012-13 with the Competitors ratios ................................ 10
Historical Averages .................................................................................................................. 11
Undervalued or overvalued ...................................................................................................... 12
Comparing Multiplier Ratios of AL and its Competitors ........................................................ 13
Conclusion ............................................................................................................................... 16


The growth of a country depends on the abilities of the domestic companies to compete with
global companies. It is a continuous process and companies should continuously improve in
order to stay competitive. One of the prime industries contributing almost about 4% of the
GDP of our country is the Automobile Industry. In this report we are trying to understand one
of the companies operating in this industry i.e. ASHOK LEYLANDs performance and
future prospects by calculating the financial ratios and the free cash flows to the firm.
Automobile Industry in India

Demographically and economically, Indias automotive industry is well positioned 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
automobile industry can be classified into a) passenger vehicles, b) commercial vehicles, c)
three wheelers and d) two wheelers.

The automotive industry is one of the key drivers of Indias economy, accounting for around
4 percent of Indias GDP1 and over 200,000 jobs.

The Indian automobile industry has seen interesting dynamics in recent times with the effect
of the global downturn, followed by recovery in domestic demand. There are several other
factors that can lead to the growth in the Indian Automobile Industry:
The rising per capita income of people will also be a strong demand driver for auto
growth. Evidence shows that as income increases, the amount of discretionary
spending increases. This should augur well for the auto sector, as rising per capita
income should result in more consumption.
The middle class is expected to grow from 50 to 500 million by 2025. Thus as middle
class grows and continues to increase domestic demand, the economy also will grow.
One of the main growth drivers of the auto sector has been the availability of easy and
simple financing. Banks and other financial institutions finance over 80% of cars sold
in India. With all the loans and financial assistance many consumers have been able to
purchase a car.

Present scenario of commercial vehicles

The automobile industry produced a total of 1,861,849 vehicles including passenger
vehicles, commercial vehicles, three-wheelers and two-wheelers in April 2014 as against
1,687,243 in April 2013, registering a growth of 10.35 percent over the corresponding month
of 2013. The growth is mostly attributed to the rise in two-wheeler production.

The cumulative foreign direct investment (FDI) inflows into the Indian automobile industry
during the period April 2000 -May 2014 was recorded at US$ 9,885.21 million, according to
data published by Department of Industrial Policy and Promotion (DIPP).
The sales volume of the CV sector, over the years, has been growing however there has been
decline in the growth rate of the CV sector over the period. From the numbers below it can be
deciphered that the domestic market forms the major chunk of the total CV market with share
of exports being minimal. However, sale of commercial vehicles in the FY 2012/ 13 has
recorded a year-on-year (Y-o-Y) decline of 2% and on the year-to-date basis there has been
de-growth of 5.2% in the sale of commercial vehicles.

Domestic Market Share 2012-13
Cars including hatchback,
sedan, MPV, SUV.
Commercial Vehicles
Three Wheelers
Two Wheelers
Future prospects of commercial vehicles

According to a report by Ernst and Young, Indian commercial vehicle (CV) sales were
expected to grow at a CAGR of 15% in the next five years - from 0.8 million in 2011-12 to
reach 1.6 million units by 2016-17.8 the improving road infrastructure in rural and semi-
urban areas will be one of the main drivers of this development. The growth of commercial
vehicle industry has been linked to the countrys industrial activities and the overall GDP. In
the short term the CV volumes and financing has got impacted due to the macro factors, but
considering the huge infrastructural demand in the country and the strong fundamentals, we
are bullish on the long term prospects of the CV industry in general and higher penetration
for CV financing in particular.

Ashok Leyland

Ashok Leyland is the 2nd largest manufacturer of commercial vehicles in India, the 4th
largest manufacturer of buses in the world and the 16th largest manufacturer of trucks
With a turnover in excess of US $ 2.3 billion (2012-13) and a footprint that extends across 50
countries, it is one of the most fully integrated manufacturing companies.

Market share of Ashok Leyland and its competitors:


Financial Statements of Ashok Leyland


2009-10 2010-11 2011-12 2012-13
Sales 7,315.16 11,133.04 12,882.34 12,543.55

Cost of Goods Sold 5,217.52 8,121.17 9,461.84 9,123.13

Gross Profit 2,097.64 3,011.87 3,420.50 3,420.42

Selling and Administrative
1,264.35 1,778.98 2,124.05 2,481.60
Earnings before Interest Tax and
Depreciation [EBITA]
833.29 1,232.89 1,296.45 938.82
Depreciation 204.11 267.43 352.81 380.78
Earnings Before Interest and
Tax [EBIT]
629.18 965.46 943.64 558.04
Interest 81.13 163.66 255.25 376.89
Profit Before Tax and Exceptional
548.05 801.80 688.39 181.15
AMW Motors Ltd
Ashok Leyland Ltd
Force Motors Ltd
Hindustan Motors
Mahindra &
Mahindra Ltd
Mahindra Trucks
and Buses Ltd
Piaggio Vehicles
Pvt Ltd
SML Isuzu Ltd
Tata Motors Ltd
VECVs - Eicher
VECVs - Volvo
Volvo Buses India
Pvt. Ltd*
Commercial Vehicles market share
Exceptional Items -3.27 0.00 1.60 289.56

Profit Before Tax [PBT] 544.78 801.80 689.99 470.71
Tax 121.10 170.50 124.00 37.00
Profit After Tax [PAT] 423.68 631.30 565.99 433.71
Basic earnings per share 3.18 2.37 2.13 1.63
Dividends Per Share 1.5 2 1 0.6

Share Capital 133.03 133.03 266.07 266.07
Reserves and surplus 3523.27 3829.93 3946.26 4189.03
Share holders' funds 3656.3 3962.96 4212.33 4455.1
Long term borrowings 2118.19 2348.13 2293.35 2737.84
Long term Provisions and Liabilities
& Deferred tax liability -Net
498.75 522.35 566.93 607.66
Non-Current Liabilities 2616.94 2870.48 2860.28 3345.5
Short term Borrowings 0 0 101.75 766.98
Trade Payables 2331.68 2308.51 2570.97 2485.37
Other Current liabilities 422.64 1034.42 1750.05 1735.07
Short-term provisions 254.48 416.94 420.37 308.68
Current liabilities 3008.8 3759.87 4843.14 5296.1
Total 9282.04 10593.31 11915.75 13096.7

Fixed Assets (Net Block) 4811.03 4991.76 5461.71 5970.81
Non-Current Investments 326.15 1230 1534.48 2337.63
Long-Term Loans & Advances 201.45 384.63 608.24 499.34
Other Non-Current Assets 3.63 3.16 7.43 12.03
Non-current Assets 5342.26 6609.55 7611.86 8819.81
Current Investments 0 0 0 0
Inventories 1638.24 2208.9 2230.63 1896.02
Trade Receivables 1022.06 1164.5 1230.76 1419.41
Cash and Bank Balances 518.92 179.53 32.56 13.94
Short term loans and advances 759.01 334.39 726.57 871.34
Other Current assets 1.55 96.44 83.37 76.18
Current Assets 3939.78 3983.76 4303.89 4276.89
Total 9282.04 10593.31 11915.75 13096.7

Financial Ratios Year Wise:

2009-10 2010-11 2011-12 2012-13
Liquidity ratios
Current ratio 1.30 1.06 0.89 0.81
Quick ratio 0.76 0.47 0.43 0.45
Cash ratio 0.17 0.05 0.01 0.00
Net working capital 930.98 223.89 -539.25 -1019.21
Net Working Capital to Total Assets 0.10 0.02 -0.05 -0.08

Asset management ratios
Account receivables turnover 7.16 9.56 10.47 8.84
Account Receivables Turnover in Days 51.00 38.18 34.87 41.30
Inventory turn over 3.18 3.68 4.24 4.81
Inventory Turn Over in Days 114.61 99.28 86.05 75.86
Operating cycle 165.60 137.46 120.92 117.16
Account Payable Turn over 2.24 3.52 3.68 3.67
Account Payable Turnover in Days 163.12 103.75 99.18 99.44
Cash conversion cycle 2.49 33.70 21.74 17.72
Nwc turnover 7.86 49.73 -23.89 -12.31
Fixed asset turnover 1.52 2.23 2.36 2.10
Total asset turnover 0.79 1.05 1.08 0.96

Long term debt paying ability
Long Term Debt to Total Capitalization 0.42 0.42 0.40 0.43
Debt ratio 0.61 0.63 0.65 0.66
Debt to Equity Ratio 42.29 49.84 28.95 32.48
Coverage ratios
Times interest earned 7.76 5.90 3.70 1.48
Profitability ratios
Gross profit margin 29% 27% 27% 27%
Net profit margin 6% 6% 4% 3%
Operating income /net sales 11% 11% 10% 7%

In Relation to Investment
Operating Income Return on Investment 6.78% 9.11% 7.92% 4.26%
Return on Assets 5.61% 7.55% 6.56% 3.53%
Return on Equity 11.59% 15.93% 13.44% 9.74%

Net income/pretax income 77.77% 78.74% 82.03% 92.14%
Pretax income/ebit 86.59% 83.05% 73.12% 84.35%
Ebit/sales 8.60% 8.67% 7.33% 4.45%
Sales/total assets 78.81% 105.10% 108.11% 95.78%
Total assets/equity 2.54 2.67 2.828 2.94

Looking at each one of the financial ratios

The current ratio for the period under consideration has been continuously declining from
1.31 to 0.81 this is primarily due the increase in the current liabilities in much bigger
proportion than the increase in current assets this hampers the liquidity of the company an in
long run can face a cash crunch.

This is another measure of the liquidity of the firm. It measures the immediate ability of the
firm to clear of its current liabilities. This ratio has been decreasing from 0.172 to 0.0026
almost 0% cash and marketable securities. This represents that AL is not in a position to cater
the current liabilities with the cash available with them.

This is one of the asset management ratio which gives us some inputs on how good is the
company in terms of converting it credit sales in to cash in terms of days. This ratio has been
decreased for a short period but in the year 2012-13 it increased slightly from 35 days in
previous year to 41 days. However we cant make a comment on whether it is good or bad
until compared with the industry, which we shall do in Comparative analysis with industry

This is one of the asset management ratios which gives us some inputs on how good is the
company in terms of Inventory management in terms of days. This ratio has been decreased
from 115 days in year 2009-10 to 76 days in year 2012-13. However we cant make a
comment on whether it is good or bad until compared with the industry, which we shall do in
Comparative analysis with industry averages.

This is one of the asset management ratios which gives us some inputs on how good is the
company in paying it suppliers in terms of days. This ratio has been decreased from 163 days
in year 2009-10 to 100 days in year 2012-13. However we cant make a comment on whether
it is good or bad until compared with the industry, which we shall do in Comparative analysis
with industry averages.

Debt ratio of Ashok Leyland has been increasing every year. Most of its debt is invested in
fixed assets and in increasing the working capital.

The ability of the company to cover its interest expense by generating income has been
decreasing every year it fell from so much as 7.75% to 1.48% in the period 2009-13.

The Gross profit margin for the period under consideration for the Ashok Leyland remained

A dramatic fall in the interest margin has been observed from the period 2009-13 i.e. from
6% to 3% this was mainly due to the increase in the interest expenses and the tax burden.

The operating profit margin remained same almost for all years except for the period 2012-13
this was primarily due to the decrease in sales and increase in cost of goods sold.

This improved in the period between 2009 and 2012 but in the year 2012-13 there was a
decrease because they werent able to generate the amount of sales they anticipated due to the
global downturn.

This improved in the period between 2009 and 2012 but in the year 2012-13 there was a
decrease because they werent able to generate the amount of sales they anticipated due to the
global downturn.

Comparing the Ratios of the Year 2012-13 with the Competitors

Competitors: Tata Motors and SML Isuzu
Company Name Ashok
Current Ratio 0.81 0.41 1.41 0.87
Cash Ratio 0.0026 0.03 0.21 0.08
Inv. Turnover in Days 76.00 38.00 115.00 76.33
Acc. Receivable in days 41.00 15.00 51.00 35.67
Acc. Payable in days 100.00 45.00 56.00 67.00
Cash Conversion Period 17.72 8.00 109.73 45.15
Fixed Asset Turnover 2.10 2.22 6.77 3.70
Total Asset Turnover 0.96 1.34 1.53 1.28
Debt ratio 0.66 0.43 0.60 0.56
Times Interest Earned 1.48 1.13 1.61 1.41
Gross Profit Margin 0.27 0.08 0.27 0.21
Operating Profit Margin 0.08 0.04 0.07 0.06
Net Profit Margin 0.03 0.01 0.04 0.03
Return on Assets 0.03 0.01 0.06 0.03
Return on Equity 9.73 1.58 13.80 8.37

Ashok Leyland has been in line with the industry standards in most of the ratios but however
there were few ratios in which it was performing drastically bad.

Cash ratio maintained by AL is way too less than the industry standards, this may lead
to a liquidity issue in 2-3 years time.
Account Receivables turnover in days have to be improved still.
Accounts payable turnover in days is way more deviating from the industry standards
because it shows that it is not doing well in repaying its current liabilities. It might
hamper the relationships with the suppliers in long run.
Cash conversion period is good but the scope for improvement is there since Tata
motors has even less cash conversion cycle.
The efficiency in using the fixed assets to generate revenue is way less than industry
averages there is a scope for Improvement.
Historical Averages

Cost of sales/Sales 71.32% 72.95% 73.45% 72.73% 72.61%
SG&A/Sales 17.28% 15.98% 16.49% 19.78% 17.38%
Depreciation/Last year net block 4.64% 5.56% 7.07% 6.97% 6.06%
Tax Rate 22.23% 21.26% 17.97% 7.86% 17.33%
Receivables/Sales 13.97% 10.46% 9.55% 11.32% 11.33%
Payable/Sales 31.87% 20.74% 19.96% 19.81% 23.10%
Inventories/sales 22.40% 19.84% 17.32% 15.12% 18.67%
Cash and bank balance/sales 7.09% 1.61% 0.25% 0.11% 2.27%
Net Fixed Assets/Sales 65.77% 44.84% 42.40% 47.60% 50.15%
Short loans and Advantages/Sales 10.38% 3.00% 5.64% 6.95% 6.49%
Non-current investment/Sales 4.46% 11.05% 11.91% 18.64% 11.51%
long term loans and Advantages/Sales 2.75% 3.45% 4.72% 3.98% 3.73%
Other non-current Assets/Sales 0.05% 0.03% 0.06% 0.10% 0.06%
Current investment/Sales 0.00% 0.00% 0.00% 0.00% 0.00%
Other Current Assets/sales 0.02% 0.87% 0.65% 0.61% 0.54%
Long term Provisions and Liabilities &
Deferred tax liability -Net/Sales
6.82% 4.69% 4.40% 4.84% 5.19%
Dividends/Net income 0.35% 0.32% 0.18% 0.14% 0.25%
Short term borrowing/Sales 0.00% 0.00% 0.79% 6.11% 1.73%
Other current Liabilities/Sales 5.78% 9.29% 13.58% 13.83% 10.62%
Short-term provision/sales 3.48% 3.75% 3.26% 2.46% 3.24%
Interest paid on Debt/long term debt of
previous year
4.37% 7.73% 10.87% 16.43% 9.85%
Expected item/Sales 0.04% 0.00% 0.01% 2.31% 0.59%
Reserves and surplus/sales 48% 34% 31% 33% 36.65%
Dividend corporate tax/Dividends 17% 16% 16% 17% 16.51%

a) Forecasting Financial Statements for the period 2014-2019
b) Calculating weighted average cost of capital.
c) Calculating the FCFF and FCFE.

Note: The above calculations are provided in the excel sheet attached.

Understandings from FCFF and FCFE:
1) The free cash flow to Firm is 8246.37 Crores with a cost of capital of 14.53%.
2) The free cash flow to equity is 5508.53 with a cost of equity of 17.36%.
Undervalued or overvalued

Equity: 20.70 / Share however the market price of the Ashok Leyland is 33.95 this stock is
particularly overvalued.

FCFE valuation - a low or negative valuation implies that a firm is in the early stage of a
growth spurt. A firm with large startup capital needs (especially in an industry with a serious
reliance on equipment or plant expenses) is going to have a low FCFE valuation because they
will have a relatively high debt load or high capital expenditures or large increases in
working capital or low net income or all of the above. This does not necessarily make it a bad
firm. If an investor has faith that the firm is dominating their market and is expanding
judiciously, they will invest in that firm even if (because) its FCFE valuation is negative in
the expectation that the firm's stock will be worth much more in the future.

Comparing Multiplier Ratios of AL and its competitors:

Multiplier Ratios
Tata Motors SML Isuzu
P/E Ratio 13.47 283.32 11.88
EPS 1.63 0.95 25.30
EV/EBITDA 16.72 22.82 7.72
P/BV 0.46 5.38 0.02
P/Sales 0.47 1.77 0.43
ROCE (%) 10.87 6.40 21.80
ROE 9.73 1.58 13.80

Comparing Multiplier Ratios of AL and its Competitors

1. P/E Ratio

Ashok Leyland Tata Motors SML Isuzu
P/E Ratio 13.47 283.32 11.88

P/E ratio = MPS/ EPS

There is a huge difference in the PE ratio of Tata Motors while compared to Ashok Leyland
& SML Isuzu. Tata Motors shows a PE of 282.32, which is much higher than that of the other
two which ranges between 10-15. Even though it is said that higher P/E ratios are often
associated with 'growth stocks or companies that are growing faster than average and
investors believe that such a company's earnings will be higher in future, it is not the same in
all cases.

P/Es are a lot like golf scores--the lower the better. Most established blue chip stocks have
P/Es in the range of 10 to 30. In comparing P/Es, you might think of buying a stock in much
the same way as you would buy a business. If you can buy a business that earns $1 a year for
$10, (10 P/E), that would seem to be a much better value than to buy a business with that
same $1 of earnings for $30 (30 P/E).

This is what makes the difference here. Companies like Ashok Leyland and SML Isuzu are
trading fairly with PEs of around 13 and 12. But Tata Motors on the other hand is overpriced.

If you want to own the stock of a fast-rising company, you`ll have to pay a premium. Just be
careful not to pay too much. The higher the stock`s price/earnings ratio, the more you stand
to lose if the earnings suddenly go down. If you want to own some of the market`s fastest-
growing companies, you`ll have to accept a fairly high P/E. But be sure the P/E isn`t
completely out of whack, because the higher the P/E the greater the chance of a dramatic
decline in the stock price if the company`s earnings growth suddenly starts to slide.

2. EPS:

Ashok Leyland Tata Motors SML Isuzu
EPS 1.63 0.95 25.30

The higher the EPS figure, the better it is. A higher EPS is the sign of higher earnings, strong
financial position and, therefore, a reliable company to invest money.
Here SML Isuzu is providing higher EPS which is comparatively much higher than both
Ashok Leyland and Tata Motors.
An important aspect of EPS that's often ignored is the capital that is required to generate the
earnings (net income) in the calculation. Two companies could generate the same EPS
number, but one could do so with less equity (investment) - that company would be more
efficient at using its capital to generate income and, all other things being equal, would be a
"better" company.
In this case, SML Isuzu is a very efficient company at using its capital in generating more
income, which provides higher earnings per share to investors. Whereas Tata Motors seems
to be inefficient in generating better earnings which uses huge equity by providing the least
EPS among the three.


Ashok Leyland Tata Motors SML Isuzu
EV/EBITDA 16.72 22.82 7.72

Enterprise Value = Market Capitalization + Minority Interest + Total Debt - Cash and Cash

Like the P/E ratio, the EV / EBITDA ratio is a measure of how expensive a stock is. It
measures the price (in the form of enterprise value) an investor pays for the benefit of the
company's cash flow (in the form of EBITDA).
SML Isuzu has the lowest EV/EBITDA ratio compared to the other two companies. This
means SML Isuzu has stronger cash flows and could be undervalued.

4. Price / Book Value:

Ashok Leyland Tata Motors SML Isuzu
P/BV 0.46 5.38 0.02

Book Value = Total Assets - Intangible assets and liabilities

SML Isuzu has very low P/B ratio while Tata Motors shows very high P/B ratio.
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that
something is fundamentally wrong with the company. If a company is trading for less than its
book value (or has a P/B less than one), it normally tells investors one of two things: either
the market believes the asset value is overstated, or the company is earning a very poor (even
negative) return on its assets.
P/B provides a valuable reality check for investors seeking growth at a reasonable
price. Overvalued growth stocks frequently show a combination of low ROE and high P/B
ratios. If a company's ROE is growing, its P/B ratio should be doing the same.
The stocks of Tata Motors are overvalued as it shows a decline in ROE over the last few
years and high P/B ratio.

5. Price/ Sales:

Ashok Leyland Tata Motors SML Isuzu
P/Sales 0.47 1.77 0.43

P/S = Market Capitalization/ Net sales
The P/S ratios of all three companies are not showing high figures. Tata Motors show
comparatively higher P/S value compared to others. Still they are showing attractiveness to

6. Return on Capital Employed:

Ashok Leyland Tata Motors SML Isuzu
ROCE (%) 10.87 6.40 21.80

ROCE = Earnings before Interest and Tax (EBIT) / Capital Employed
SML Isuzu has quite a high ROCE among the three companies. SML Isuzu operates in a
small scale compared to the other two. SML Isuzus capital employed is only around 10% of
that of Tata Motors. But the company generates more earnings per dollar of capital
employed. While Tata Motors shows a very low ROCE that indicates lower profitability.

7. Return on Equity:

Ashok Leyland Tata Motors SML Isuzu
ROE 1.63 1.58 13.80

Widely used by investors, the ROE ratio is an important measure of a company's earnings
performance. The ROE tells common shareholders how effectively their money is being
SML Isuzu gives the highest return with efficient management in utilizing its equity base and
providing better return to investors. While Tata Motors stand way behind with only 1.58%
return to investors.

order to get better understanding, ROE has broken down with the help of DuPont analysis.
ROE = (net profit margin) * (asset turnover) * (equity multiplier)

Here, it is visible that ROE of SML Isuzu goes up due to an increase in asset turnover, which
is a very positive sign for the company.
Tata Motors ROE is low as it has been showing declining trend in the net profit margin over
the past few years.
After analyzing the financial ratios for a period of 2009-13 we have observed that the
company is facing a severe liquidity risks with low cash and quick ratios. It should try to stop
giving dividends and should first clear of its debts. Also they have to improve the account

Net Profit Margin

Tata Motors

SML Isuzu

Total Asset Turnover 0.96 0.90 1.53
Equity Multiplier 2.94 2.73 2.49
ROE (%)


payables turnover in days so that the relationships with the supplier can be improved and
credit terms can be negotiated. The free cash flow to firm has been positive however the
value doesnt suit the company, which is competing with a giant like Tata motor. In short run
it has to try to minimize its debt so that the shareholder can have something to cheer about.
Currently in the market the price of the Ashok Leyland stock is overvalued due to sheer trust
of its shareholders because of the growth prospects of the Commercial vehicles sector in
automobile industry.