Merger of HFL to result in ~2.8% dilution, increase promoters stake to 51.3% (+90bp) Swap ratio implies discount of ~38% to HFL's closing price of ~INR54.5 on 14/Sep/16. Though materiality of this deal might be low, it deviates from the managements stated objective of streamlining AL's balance sheet. While we are yet to factor in for HFL in our AL's estimates, given tax shield on accumulated losses we see limited change in FY17/18 EPS. We now value AL at ~8x EV/EBITDA (v/s 9x earlier), to factor in for potential impact of this deal on capital efficiencies.
Short term volatility in volumes notwithstanding, we believe CV cycle has more legs to it and would grow at 12-15% CAGR over next 3 years. Management's focused approach is paying-off in a) market share gains, b) rising ASPs, c) controlled cost, d) reducing working capital, e) significant control on capex and f) debt reduction. ALs valuations at 9.6xFY18E EPS and EV/EBITDA of 6.1x are very attractive, considering strong EPS growth of ~47% CAGR over FY16-18E. We now value AL at ~8x EV/EBITDA (v/s 9x earlier), to factor in for potential impact of this deal on capital efficiencies due to increase in capital employed without commensurate improvement in operating performance. Maintain Buy with target price of ~INR105 (~8x FY18 EV/EBITDA).