Ashok Leyland

Edelweiss recommended Ashok Leyland to me so I decided to have a closer look. I think it looks promising.

Economic Story & Risks

- Ashok Leyland has increased its Market Share from 17% in Q1-FY2010 to 27% in Q1-FY2011.

- The main sources of revenue for AshLey is the fact that infrastructure development and agricultural growth continue to be strong. 

- According to the Edelweiss report, the sales of medium and heavy commercial vehicles (M&HCV) have historically shown a good correlation with growth in the index of industrial production (IIP) with a lag of six months. 

- In terms of valuation it looks quite attractive compare to its peers, especially in light of ROE and DE stats vs. low P/B ratios. 

EDELWEISS RATIOS - COMPARATIVE VALUATIONS

Company Ashok Leyland Ltd Eicher Motors Force Motors Mahindra & Mahindra Tata Motors Swaraj Mazda 1 Wk Price performance (%) 5.2 4.7 26.8 4.7 2.7 23.5 3 M Price performance (%) 12.5 35.1 144.3 16.8 50 10.8 PE (x) 18.7 23.9 22.8 18.8 12.7 22.6 Price to Book Value (x) 2.7 3.2 4.5 4.1 8.0 2.9 Return on Equity (%) 19.1 7.9 23.7 25.3 19 15 Debt to Equity Ratio (x) 1.0 0.1 0.6 1.2 4.9 1.1

Source: Edelweiss

- One cause of concern is the fact that AshLey has large CAPEX investments to be made.

According to the report they are planning to introduce new products based on the U-Truck platform with a more powerful Neptune engine by October 2010 (I will try and understand consequences of this from Gupta and put it in as comments - but basically the company is shifting towards vehicles with a higher body to weight ratio and apparently that's why these new engines will be critical.)

Is today a good entry point?

Of course, long term, the growth story should play out but has this already been priced on or is AshLey currently trading at ridiculous levels. Thanks to Damani again, I have been looking at the technicals for current price movements:

1.    3 months daily frequency period

Analysis looked at:

    -  SMA 20 band

    -  Donchian Channel Width

    -  MACD Ghata Crossover

   -   RSI - 14 period

Source: icharts.in

On a short term basis it looks like a bullish indicator by my interpretation. Again, please let me know if you agree. There seems to be some "fade-out" risk looking at the MACD crossover, and the Donchian Channel Width seems to have stabalized around its period mean. 

2. 1 year, weekly frequency technicals

Same analysis done except have swapped SMA 20 bands with Bollinger bands.

This seems to be suggesting that AshLey is fairly if not slightly overpriced.

Source: icharts.in

What do you guys reckon?

Also, Damani, you mentioned you like to look at Price and MACD divergence. Could you explain a bit more what that means?

Thanks a lot chaps. Asher, looking forward to something more constructive from you...

Fine!!! - I will Paint the First Picture!

I am looking at Asian Paints as a holding. I wanted to share my thoughts and also learn from your opinions:

1. Themes:
Monsoon season end: Most people do their refurbishment work post monsoons. Looking at the last 5 quarters of all their competitors, apart from Berger, all of them go through cyclical turnover patterns. Last Sep quarter end results were significantly higher than Jun09. Still, a chunk of that can be attributed to Other Income and not turnover so do not know whether that is a valid statistic. That being said, the QoQ turnover was also up signficantly.

Renewed advertising: You may have noticed the aggressive advertisement campaign with the catchline "Bhaiya, Aise nahin hai". I assume that the reason they are making this push is because they anticipate even more turnover growth than they have currently achieved.

2. Fundamentals
Compared to its peers, it seems to be trading at a median PE value (I am using the Edelweiss website which I presume posts trailing numbers). It is trading at an inflated P/BV of 14x where all its peers range between 1-7x. Based on June data, the EPS of 90 is about three times more than any of its competitors. The next closest is 36.

My assumption is that it may be trading at a premium to book value due to available liquidity. It has a market cap of 25,500 cr - 5x more than its closest competitors.

3. Technicals: Now as an entry point?

Firstly, the stock hit an all-time high after June earnings. It has since gone up 14% since before retreating recently.

Secondly, I have recently learnt about chart reading from Damani and have done some reading of my own too. I have plotted two charts, both from the start of the year. The first one is based on Daily data, the second is based on Weekly data.

On the daily data perspective, the data is touching the lower bollinger band and seems to have come off a position of excessive buying based on RSI. The Dorochian Index is currently above its period mean, which would also provide a buy signal. However the MACD line seems to be weak (unless I have misinterpreted it!).

 Still, this changes completely if you change the data to a weekly frequency. Pretty much all signs point to 'Don't buy at these levels'. Would be interested in hearing your thoughts on this.

Conclusion

Given the above, I would imagine that September profitability has been priced in already. If this is not the case, then it may be a good holding from a technical, cyclical point of view. Looking at past data for them and a few other companies, QoQ December sales growth tends to be negative and then returns to positive for the March quarter.

So in essence, from a fundamental perspective, I should have bought this in July, and if I want consider buying this again, should look for some signs of price multiples retreating. Do you'll agree, or do you think there could be a short-term trade done on this based on technical data?

Charts source:
www.icharts.in