Ashok Leyland: The Charts are becoming Hot

CMP: Rs.27.05

Accumulation Going On: Delivery Volume (40% approximately)

THIS WAS THE CALL GIVEN ON 10 th FEBRUARY, 2010:  On Monday buy Ashok Leyland Ltd at Rs.26.5-26.80, T--Rs.29.5, SL--Rs.25.5. The Commercial Vehicles industry is witnessing a strong  growth on the back of adequate freight availability and higher capacity  utilization. With the above background, Ashok Leyland Ltd recorded highest ever sales for  the year ended March 31, 2011 supported by a record performance in exports. My recommendation basically based on two simple parameters:

(i) In line with the Company's strategy, it acquired 26% in the  equity share capital of Optare plc, U.K., a leading bus manufacturer in  U.K., which will benefit the Company in its endeavour to address new  markets, and to accelerate technology development. This vertical is expected to generate good revenues and EBDITA in the coming days in view of the improvement in the situation in the EU. 

(ii) In order to continue to participate in the defense business of the Company and to exploit opportunities available in the said industry, it has made a strategic investment of 26% of the equity  shares capital in Ashok Leyland Defence Systems Limited.

Besides this the company came out with good set of numbers for the Q3FY12, when the net sales jumped to Rs.2879.80 Cr as against Rs.2227.25 Cr in the same period previous year. The gross profit of the company jumped to Rs.158.59 Cr as against Rs.120.22 Cr in the same period previous year. The net profit of the company for Q3FY12 came out to be Rs.66.90 Cr as against Rs.43.37 Cr in the same period previous year. This superb performance is inspite of higher: depreciation, employee  and raw material cost. Moreover, the P/E of the shares of the company is only 11.69 against the Industry P/E of 34.57. Since, it is among the blue chip Auto Companies, hence we can have a reasonable P/E of 25. Considering this and giving proper discounts, the scrip should not trade below Rs.50 (Remember Tata Motors Ltd which is one the favorites in this sector, command a P/E of 54.94), which is almost double the current price of Rs.26.65. Some of my Paid Clients have already taken good position in the counter in the  F & O segment too (Mainly Options).