{LONGTERMINVESTORS} Stock Update-Ashok Leyland, Cadila Healthcare

March 23, 2016   Stock Update Ashok Leyland Reco: Buy PT: Rs120 CMP: Rs106 Demand momentum to sustain; reiterate Buy   Key points ALL outpacing industry growth; expect strong show in Q4: Over the past few quarters, Ashok Leyland Ltd (ALL) has consistently outperformed the domestic medium and heavy commercial vehicle (MHCV) industry, registering a growth of 43% in year-to-date (YTD) FY2016 (April 2015 to February 2016) as against a 31% growth for the industry. ALL's market share in the MHCV segment has increased from 28.2% in FY2015 to 32.7% in YTD FY2016 period. The market share gains have been primarily driven by increasing network presence in the non-south markets. We expect ALL to maintain a robust growth momentum by reporting industry leading 30% volume growth in March 2016 in the MHCV space. We estimate ALL to deliver robust Q4 results given a sharp 24% overall volume growth (led by 33% growth in the MHCV segment) and consequent operating leverage. We estimate ALL's operating profit margin (OPM) to expand by 300 basis points (BPS) to 13.1% and net profit to almost double to Rs454 crore for Q4FY2016. Macro-economic indicators strong; MHCV volume growth to sustain in double digits: The demand for the MHCV industry (which constitutes about 85% of ALL's revenues) is expected to remain robust growing at a healthy rate of 15% over the next two years. A huge pent-up demand on the back of low base of the earlier years (MHCV industry is still ~10% below the pre-downcycle levels witnessed in FY2012) is likely to drive the demand going ahead. Further, on likelihood of a favourable macro-economic environment in the form of better economic growth (FY2017 GDP growth estimated at 7.8% as against 7.5% growth estimated in FY2016) and further easing of interest rates are likely to help maintain strong growth momentum. Also, the improvement in the fleet operator's profitability on the back of firm freight rates and steep reduction in diesel prices (diesel costs have come down by about 15% in the last one year) would lead to continued fleet expansion by the operators. Defence identified core business area; to benefit from government's focus on indigenisation: The government has recently introduced the new Defence Procurement Policy 2016, which emphasizes on indigenously designed, developed and manufactured products (IDDM). IDDM has been created as a new category for Indian companies to design and develop technologically advanced products aimed at the armed forces. This development augurs well for companies like ALL, which has identified defence as one of the core areas for growth going ahead. Apart from augmenting supplies of existing products (vehicles for armed forces mobility), it aims to manufacture new products (vehicles for defence equipment mobility) in collaboration with foreign players, such as Lockheed Martin. ALL aims to increase the revenue contribution from the defence business from the current level of around 4% to 10% over the next four years. Increased defence contribution would enable ALL to reduce exposure to the highly cyclical MHCV segment and also aid margin expansion (defence supplies fetch relatively higher margins). Reiterate Buy with a revised PT of Rs120: ALL's revenues are expected to grow by a strong 17% compounded annual growth rate (CAGR) over FY2016-18E given the continued robust demand in the MHCV segment and increased supplies to the defence sector. ALL's earnings are likely to improve by 32% over the next two years given the operating leverage and an improved product mix. ALL is a pure commercial vehicle (CV) play and is likely to continue to reap benefits of the upsurge in the MHCV cycle. We have rolled over our target multiple on FY2018E earnings and upgraded our price target to Rs120, while retaining our Buy rating on the stock.     Cadila Healthcare Reco: Hold PT: Rs352 CMP: Rs320 WHO issues Notice of Concern (NoC); downgrade PT to Rs352   Key points Event: WHO issues notice of concern at Moriya Vaccine Unit; cites data integrity issues: Cadila Healthcare Ltd (Cadila) has received a Notice of Concern (NoC) from the World Health Organization (WHO) relating to its Moraiya vaccine facility. While the Moraiya plant had received 483 observations and was under USFDA scanner, the NoC letter for Moraiya facility has come as a negative surprise though it contributes insignificantly to US sales (WHO tender business is ~Rs35 crore). Initiated site transfers but rising risk of delays in launch of key products: Cadila has so far successfully completed nine site transfers from Moraiya. However, we believe that the four key pending product approvals are still to be transferred by the company to other manufacturing sites. Filing of these key products is expected to be in H1FY2017 either from the Baddi or the SEZ plant. The key products like gAsacol HD, gPrevacid, gNexium and gTporol are under process for site transfers and would be future key triggers as these products are limited competition products. Thereby, it raises risk of delay in approval of key products and their launch timelines. Downgrade to Hold with revised price target of Rs352: Overall we believe that the news is negative for the company as product approval timelines could be further delayed and hence we have reduced valuation multiple to 16x vs 18x earlier. We have cut our price target to Rs352 per share (from Rs396 earlier), valuing the stock at 16x average of FY2017E and FY2018E earnings.     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

--
You received this message because you are subscribed to the Google Groups "LONGTERMINVESTORSRESEARCH" group.
To unsubscribe from this group and stop receiving emails from it, send an email to longterminvestorsresearch+unsubscribe@googlegroups.com.
Visit this group at https://groups.google.com/group/longterminvestorsresearch.
For more options, visit https://groups.google.com/d/optout.