The Hindu Business Line : Ashok Leyland: Buy

Investors looking for a stock with minimal downside in the current market can consider Ashok Leyland for investment. However, such investment should be made with a medium-to-long-term perspective. At the current market price of Rs 36.90, the stock appears reasonably valued at 15 times its diluted FY06 earnings and the fundamental underpinnings appear strong enough to inspire confidence.

The first two months of this fiscal were good for the company with sales of commercial vehicles growing by 34 per cent compared to the same period last year. The company appears set to declare a good earnings card for the first quarter of this fiscal.

Ashok Leyland's decision to enter the ultra-low tonnage segment consisting of vehicles for intra-city movement of goods and people augurs well for its prospects. The outstanding success of the sub-1 tonne Tata Ace shows the latent demand in that segment where the company is not present now. The company has said that it is weighing its options of a technical tie-up or a joint venture with a player who has the expertise in this area.

The proposals to raise fresh funds of $150 million, probably through the FCCB route, and the decision to set up a sixth plant to push up total capacity to the 1 lakh vehicles per annum mark, reflect the confidence of the company on the growth potential in the market.

Offtake of commercial vehicles is likely to continue to grow at a very healthy pace thanks to the continued investment in infrastructure and the strict implementation of the Supreme Court order on overloading of vehicles by most States.

There are a couple of points to worry about though in the near term. First, the rising interest rate environment and its possible impact on purchase of new vehicles by fleet operators. Second, the recent fuel price hike and its impact on freight rates, which in turn, affects offtake of vehicles.

The stock's valuation is also likely to improve following the increase in FII limit from 24 per cent to 40 per cent recently. Investors can accumulate the stock in small lots taking advantage of any dip in the overall market.

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