Ashok Leyland, Cement Sector, Telecommunications

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs42
Current market price: Rs38

In tie up with Nissan

Key points

• Ashok Leyland and Nissan Motor Company, Japan have agreed to form three joint venture companies in India to develop, manufacture and market light commercial vehicle (LCV) products.
• Both companies are also examining ways to tap each other's dealer networks in India and elsewhere. A final agreement would be signed after the feasibility study concludes by October 2007.
• The tie up should aid Ashok Leyland to expand its product offerings and introduce products in the sub-6 tonne category, where it currently lacks presence. However, the setting up of the plant would take at least 18-24 months and hence the first roll out of the new products is expected only in FY2010.
• The commercial vehicle segment is currently witnessing a slowdown, which is impacting Ashok Leyland as well. We continue to watch keenly the commercial vehicle segment in India to determine any signs of revival. We expect things to improve in the second half of the fiscal with the advent of the festive season.
• For FY2008 we expect the company to report a sales volume growth of 3.2%.
• At current levels, the stock discounts its FY2009E earnings by 9.7x and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Hold on the stock.

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SECTOR UPDATE

Telecommunications

TRAI recommendations on licensing policy and spectrum
The Telecom Regulatory Authority of India (TRAI) has recommended certain measures in the licensing policy ranging from issues like the entry limit and spectrum allocation, merger & acquisition (M&A) guidelines, usage of technologies and rollout obligations. The recent policy initiatives are favourable for Reliance Communication as it sets the framework for its proposed rollout of services under the GSM technology. On the other hand, the large GSM operators would be adversely impacted due to the enhanced subscriber criteria for additional spectrum (as it would result in higher capital expenditure [capex] requirement) and increased cost of services (due to the increase in the annual usage charges and the levy of one-time charge on additional spectrum). However, it should be noted that these are only recommendations and have not been notified by the concerned government department yet. We expect the GSM operators to strongly oppose some of the recommendations.

Cement

Two companies from Pakistan get BIS approval
Two cement companies from Pakistan namely Pakistan Lucky Cement and Maple Leaf Cement have received the Bureau of Indian Standards (BIS) approval for exporting cement to India. Six other firms from Pakistan are awaiting final approval from the BIS. The approval allows these companies to directly export cement to private players in India. But we understand that the logistical bottlenecks at the ports as well as constraints in exporting cement through road will limit the total cement imports from Pakistan to about 2 million metric tonne (MMT). We also learn that the local cement prices in northern Pakistan (a potential region of exports) have gone up by Rs20 per bag to Rs215 per bag. Though we agree that the cement imports via the ports should impact the players in the western region namely Ambuja Cements, Sanghi Cement et al, but by and large the impact on the industry would not be significant. We maintain our positive outlook on the sector with Grasim and Jaiprakash as our top picks.