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...