Investor's Eye: Update - Ashok Leyland; Viewpoint - Strides Arcolab

 

Investor's Eye [September 30, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE     Ashok Leyland Recommendation: Buy Price target: Rs55 Current market price: Rs41   Play on CV recovery; maintain Buy with revised price target of Rs55   Key points  The severely battered commercial vehicle (CV) industry has shown the first signs of recovery with a 20% growth in August 2014. Given the highly cyclical nature of the industry and the sharp fall in volumes in the current down cycle, we expect the recovery to be also sharp once the economy picks up. Ashok Leyland (AL) being a pure CV play would be a key beneficiary of the recovery. Over FY2011-14, AL has made significant investments in its business including the Pantnagar greenfield facility, joint venture with Nissan for light commercial vehicles and R&D expenditure for complete overhaul of its vehicle and engine platform. Increased expenditure coinciding with the CV down cycle led to a negative free cash flow of Rs1,800 crore over FY2011-14 leading to a debt spiral. The sale of non-core assets (land, IndusInd Bank shares and investment in some subsidiaries) and reduction in working capital have enabled the company to reduce its debt burden. With no significant capital expenditure going forward, improving business prospects should enable AL to generate positive free cash flow of Rs1,500 crore over FY2015-17E which will further aid in debt reduction.  An expected pick-up in CV volumes, reduction in the elevated discounts in the system, efforts of the management to curb the debt levels along with a better capacity utilisation would give an impetus to the overall financial performance. The de-leveraging of the balance sheet and improving return ratios are positive triggers. We remain positive on the stock and roll forward our valuation to FY2017 estimates. We recommend a Buy rating on the stock with a revised price target of Rs55, discounting the FY2017E earnings 14x.       VIEWPOINT       Strides Arcolab Current market price: Rs716 View: Positive     Merger with Shasun to be value accretive     Key points Strides Arcolab (Strides) has approved the scheme of merger with Shasun Pharmaceuticals (Shasun) under a share swap deal. As per the deal, the shareholders of Shasun will get five shares of Strides for every 16 shares held. As a result, the equity of Strides would expand by 31.5% (excluding the share warrants issued by Shasun, which would be transferred to Strides).  The merger would help Strides to expand its product portfolio and manufacturing base, carry out a higher degree of vertical integration and enter the CRAMS space. The profit margin of Shasun will affect the profitability of the combined entity initially, though the management expects a 20% cost synergy in a couple of years.  Apart from the merger deal, Strides has also struck a deal to sell 25.1% stake in its biotech arm, Stelis Biopharma, for $21.9 million to GSM Holdings at a premium of 50% which showcases the underlying value in the biotech business.  Strides is likely to give a special dividend out of the $150 million received from Mylan which would be favourably looked upon by investors.  As per our rough estimates for the combined entity, the Strides stock is currently trading at 14x FY2016E EPS (without considering the special dividend); this leaves scope for an 18-20% upside from here in the next three to four months.  Click here to read report: Investor's Eye      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,  The Sharekhan Research Team

 

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