Ashok Leyland: Raising earnings and price target after Sept 2010 results; retain IN-LINE:: Standard Chartered

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 Ashok Leyland reported strong 2Q results, with net profit
growing 87% yoy and revenue rising 72% yoy to Rs27bn.
EBITDA margin rose to 11.3%.
 Management increased volume guidance to ~98,000 units
for FY11E, and lowered margin guidance to ~10.5%, which,
we believe, is aggressive.
 We revise our volume estimate and revise EPS to Rs4.7 for
FY11E and Rs5.9 for FY12E. Reiterate IN-LINE



2Q FY11 results: strong growth – Total income grew 72% yoy
and 15.6% qoq to Rs27.1bn, driven by 72% yoy growth in
volume. Net profit grew 87% yoy to Rs1.67bn and EBITDA
margin rose 80bps yoy to 11.3% (above our estimate of 10.7%)
given the increase in stock. Interest expense was higher qoq
and yoy at Rs395m, indicating higher borrowings and higher
production in 2Q; moreover, interest cost is not being
capitalised as operations commenced at its Pantnagar plant in
March.
Management FY11 volume guidance is ~98,000 units –
Management has increased volume guidance for FY11E to
~98,000 units, implying 52,000 units in 2H, given 1H volume
was ~46,000 units. We believe this guidance is slightly
aggressive. Management has lowered EBITDA margin
guidance to ~10.5% (earlier ~11%).
Raising volume and EPS estimates – In line with
management guidance, we raise volume estimate for FY11 from
~84,700 units to ~91,600 units; but we lower 2H engine sales
estimate based on 1H figures. We marginally downgrade
EBITDA margin to 10.9% (earlier 11.1%) and 11.1% (earlier
11.6%) for FY11E and FY12E, respectively. We revise our EPS
estimate to Rs4.7 (Rs4.4 earlier) and Rs5.9 (Rs5.7 earlier) for
the two years.
Valuation: Maintain IN-LINE – We continue to assign it a price
target multiple of 14x FY12e earnings, which is in line with its
long-term historical PE multiple of 13.3x, and arrive at a revised
price target of Rs83 (Rs79 earlier, set on 2 Sep 2010).
Reiterate IN-LINE.