Ashok Leyland hits over 5-year low on HLFL stake purchase proposal

Shares of Ashok Leyland were under pressure for the second straight day on Friday, plunging 15 per cent to hit an over five-year low of Rs 41.10, on the BSE, after the company announced acquisition of around 19 per cent stake in its subsidiary Hinduja Leyland Finance (HLFL). The stock has tanked 36 per cent in the past two trading days, and was quoting at its lowest level since September 2014.

Ashok Leyland on Wednesday announced that it would acquire around 7 per cent stake from the existing private equity investor Everstone and around 12 per cent from promoter owned entity. This would entail an investment of Rs 1,100-Rs 1,200 crore.

"The agreement(s) to acquire the equity shares in HLFL from the existing shareholders will be entered by the company in due course. As and when the company completes acquiring shares in tranche(s), and if the said acquisition exceeds 2 per cent or more of the equity shares of HLFL, the company will inform the stock exchanges, as required," Ashok Leyland said in exchange filing post market hours.

This stake purchase from the promoters does raise questions on dilution in tight discipline on capital allocation practiced since FY14, analysts at Motilal Oswal Financial Services said in a note.

"There was need to simplify shareholding structure of HLFL for it to pursue future growth opportunities like getting another PE investor, acquisition/merger and going global. Also, Ashok Leyland having sizeable stake is important because, at some point in time, HLFL will go for initial public offering (IPO) and at that point it would like to show some value release for Ashok Leyland," the brokerage firm said in management meet update.

The brokerage, however, lowered FY21/22 S/A EPS estimate by 25 per cent/20 per cent to factor in the near-term volume weakness due to the impact of BS-VI transition and coronavirus, as well as higher debt on account of HLFL stake purchase.

At 12:04 pm, Ashok Leyland was trading 7 per cent lower at Rs 44.80 on the BSE, as against a 3 per cent rise in the S&P BSE Sensex. The counter saw huge trading volumes with a combined 54 million shares changing hands on the NSE and BSE till the time of writing of this report.