Buy Ashok Leyland, target Rs 186: Emkay Global Financial Services

Emkay Global Financial Services has a buy call on Ashok Leyland with a target price of Rs 186.

The current market price of Ashok Leyland is Rs 159.35.

Time period given by the brokerage is one year when Ashok Leyland price can reach the defined target.

Investment rationale by Emkay Global Financial Services
Ashok Leyland (AL IN) is working towards strengthening position in Commercial Vehicles (CV) in both domestic as well as overseas markets, led by a slew of product launches (over 20 models) and network expansion. We believe these initiatives will secure its position in a rising competition scenario.

With an objective to insulate itself from the cyclicality of domestic M&HCVs, the company has increased its focus on Exports, LCVs, Spares and Defense segments.

Our channel checks indicate robust demand outlook for M&HCVs, led by restrictions on overloading, strong sales of construction tippers, proliferation of hub & spoke model (due to GST/Eway Bill implementation) and improvement in industrial production. Also, improvement in net-pricing over the few months, would result in better margins going ahead.

We increase FY18/19/20E EPS estimates by 8%/9%/15% to Rs5.5/Rs7.4/Rs9.2 due to upgrade in volume and margin assumptions. We have built in revenue/earnings CAGR of 17%/30% over FY18-20E with ROE of nearly 28% and average free cash flow of about Rs 21bn.

Maintain BUY with TP of Rs 186 (earlier Rs 160), based on 12x FY20E EV/EBITDA and value of investment in Hinduja Leyland Finance at Rs 5/share.

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