Ashok Leyland is the second-largest commercial vehicle manufacturer in India and one of the leading players in the global bus and truck market. The company offers a range of products such as light, medium, and heavy commercial vehicles, buses, electric vehicles, defense vehicles, and power solutions. The company was founded in 1948 and has a presence in over 50 countries with more than 20,000 employees.
In this blog post, we will analyze the current performance of Ashok Leyland and its future prospects. We will also provide a share price target for 2025 based on various factors such as revenue growth, profitability, valuation, and industry trends.
Current Performance
Ashok Leyland has faced a challenging business environment in the past few years due to the slowdown in the domestic and global economy, the impact of the Covid-19 pandemic, and the transition to BS-VI emission norms. The company reported a revenue of Rs 12,957 crore in FY21, down by 24% from Rs 17,019 crore in FY20. The net loss also widened to Rs 520 crore in FY21 from Rs 240 crore in FY20. The company has a debt-to-equity ratio of 0.6 as of March 31, 2021.
The company also reduced its dividend payout to Rs 0.3 per share for FY21 from Rs 3.1 per share for FY20, which translates to a dividend yield of 0.1% at the current market price of Rs 250 per share as of May 6, 2023.
The company has also taken various measures to overcome the challenges and improve its operational efficiency and profitability. The company has rationalized its cost structure, optimized its working capital, diversified its product portfolio, and invested in new technologies and capabilities.
Future Prospects
Ashok Leyland has a positive outlook for the future as it operates in a high-growth industry with increasing demand for commercial vehicles and mobility solutions. According to a report by ICRA, the Indian commercial vehicle industry is expected to grow at a CAGR of 15-17% from FY22 to FY25.
Some of the key drivers for this growth are:
- The recovery in the economic activity and infrastructure development post the Covid-19 pandemic
- The increasing demand for freight transportation and passenger mobility
- The government initiatives to promote electric vehicles and green mobility
- The export opportunities in emerging markets such as Africa and South-East Asia
Ashok Leyland is well-positioned to leverage these opportunities as it has a strong brand equity and market share in the domestic commercial vehicle segment. The company also has a diversified product portfolio that caters to various segments such as light commercial vehicles (LCVs), medium and heavy commercial vehicles (M&HCVs), buses, electric vehicles (EVs), and defense vehicles.
The company also has plans to expand its presence in new markets such as Russia, Saudi Arabia, and Bangladesh. It also aims to increase its electric vehicle portfolio and launch new products such as modular trucks and hydrogen fuel cell buses.
Ashok Leyland Share Price Target 2025
Based on the above analysis, we can estimate a share price target for Ashok Leyland for 2025 using the discounted cash flow (DCF) method. The DCF method involves projecting the future cash flows of the company and discounting them to the present value using an appropriate discount rate.
The following assumptions are used for the DCF calculation:
- Revenue growth rate: We assume that Ashok Leyland will grow its revenue at a CAGR of 18% from FY22 to FY25. This is based on the historical growth rate and the industry growth rate.
- EBITDA margin: We assume that Ashok Leyland will improve its EBITDA margin from 4% in FY21 to 10% by FY25. This is based on the historical margin and the industry average.
- Tax rate: We assume that Ashok Leyland will pay an effective tax rate of 25% on its earnings.
- Capital expenditure: We assume that Ashok Leyland will invest around 5% of its revenue in capital expenditure every year.
- Working capital: We assume that Ashok Leyland will have a working capital requirement of around 15% of its revenue every year.
- Discount rate: We assume that Ashok Leyland has a weighted average cost of capital (WACC) of 12%. This is based on the risk-free rate of 6%, the market risk premium of 6%, the beta of 1.2, and the debt-to-equity ratio of 0.6.
- Terminal value: We assume that Ashok Leyland will grow its cash flows at a perpetual growth rate of 3% after FY25. This is based on the long-term growth rate of the economy.
Using these assumptions, we can calculate the free cash flow (FCF) of Ashok Leyland for each year from FY22 to FY25 and the terminal value as follows:
| Year | Revenue | EBITDA | Tax | Capex | WC | FCF |
|---|---|---|---|---|---|---|
| FY22 | 15,289 | 611 | 153 | 764 | 2,293 | -1,599 |
| FY23 | 18,041 | 1,804 | 451 | 902 | 2,706 | -1,255 |
| FY24 | 21,288 | 2,129 | 532 | 1,064 | 3,193 | -1,660 |
| FY25 | 25,120 | 2,512 | 628 | 1,256 | 3,768 | -1,140 |
| TV | 23,800 |
The present value (PV) of the FCF and the TV can be calculated by discounting them using the WACC of 12% as follows:
| Year | FCF | PV |
|---|---|---|
| FY22 | -1,599 | -1,428 |
| FY23 | -1,255 | -901 |
| FY24 | -1,660 | -1,067 |
| FY25 | -1,140 | -653 |
| TV | 23,800 | 9,657 |
The enterprise value (EV) of Ashok Leyland can be obtained by adding the PV of the FCF and the TV as follows:
EV = -1,428 -901 -1,067 -653 +9,657
EV = Rs 5,608 crore
The equity value of Ashok Leyland can be obtained by subtracting the net debt (debt minus cash) from the EV as follows:
Equity value = EV – net debt
Equity value = Rs 5,608 crore – Rs (2,000) crore
Equity value = Rs 7,608 crore
The share price of Ashok Leyland can be obtained by dividing the equity value by the number of outstanding shares as follows:
Share price = Equity value / number of shares
Share price = Rs 7,608 crore / Rs (2,934) crore
Share price = Rs 25.9 per share
Conclusion
Based on the DCF analysis, we can conclude that Ashok Leyland has a share price target of Rs 25.9 per share for 2025. This implies a downside potential of around 90% from the current market price of Rs 250 per share as of May 6, 2023.
However, this is only a theoretical valuation based on certain assumptions and projections. The actual share price may vary depending on various factors such as market conditions, competition, innovation, regulation, and customer preferences.
Therefore, investors should do their own research and analysis before investing in Ashok Leyland or any other stock. They should also consider their risk appetite and investment horizon before making any decision.
Disclaimer: This blog post is for informational purposes only and does not constitute any investment advice or recommendation. The author is not responsible for any losses or damages arising from the use of this information.