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F2Q11 Results: Mixed Bag,
OW on Positive Outlook
In-line at Operating Level: Ashok Leyland (AL) posted
72%, 84% and 87% YoY growth in revenues, EBITDA
and net income. The results were in line with
expectations at the EBITDA but higher-than-expected
interest expense and higher tax rate drove net income
about 9% below expectations. We cut our earnings by
4/5% across FY11/12 but remain OW given our positive
view on CV cycle and supportive valuations; AL trades
at 12x FY12 e with 40% FY10-12 earnings CAGR.
Earnings Cut by about 3.6-4.2%, Maintain OW: We
are lowering our earnings by 3.6-4.2% over FY11/12 on
account of higher interest and depreciation charge but
maintain OW on account of our positive view on CV
cycle. We are building about 90k volumes in FY11
whereas management believes that if volumes
momentum maintains than FY11 volumes can touch
100k, if that plays out than our current earnings could
have 20% upside. Further in our price target we don’t
attribute any value to Ashok Leyland’s stake in Indusind
Bank (4% stake valued at Rs4 per share for AL) and
investments in Nissan and John Deere JV (at one time
price to book it comes to R2 per share). Given
structurally strong long-term story with potential upside
from stake sales and JV earnings we remain OW on AL.
Q3 could give good entry points: F2Q11 results
disappointment and weak Q3 (seasonality and CV
volume slowdown post pre-emission change buying)
could result in stock price weakness in the near term and
we would be buyers of that dip.
Margins meet expectations, softer raw material
costs and lower staff costs help margins: Raw
material costs as a % of sales came in almost in-line with
expectations, down 30bps qoq owing to softer raw
material prices in Q1/Q2 coupled with lower staff costs
(down 80 bps %age of sales QoQ) helped AL post
margins at 11% in-line with expectations.
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