Ashok Leyland : Strong margin performance. ADD rating:: Kotak Sec

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Ashok Leyland (AL)
Automobiles
Strong margin performance. Ashok Leyland’s 2QY11 margins improved 130 bps
sequentially and drove the earnings upside for the quarter. We are raising our FY2011E
and FY2012E EPS estimates by 10-15% to Rs4.9 and Rs6.5 to reflect stronger volume
and margin assumptions. Our target goes to Rs85 from Rs78. We are maintaining our
ADD rating as we expect the company to benefit from the strong CV demand
environment in FY2011E and higher production from its plant in an excise-free zone in
FY20102E


Ashok Leyland reported a strong margin quarter
Ashok Leyland reported PAT of Rs1.67 bn, compared to our estimate of Rs1.57 bn. The upside
was driven by stronger-than-expected EBITDA margin of 11.3% versus our 10.5% expectation.
The EBITDA margin upside was driven by lower than expected raw material and labor costs. Raw
material as a percentage of sales declined by 30 bps qoq as the company managed to better
manage the tire price increase. Labor costs as a percentage of sales declined by 80 bps qoq.
EBITDA for the quarter totaled Rs3.1 bn. The higher-than-expected EBITDA for the quarter was
partly offset by higher interest expense of Rs395 mn, which saw a 25% increase from the June
quarter, largely driven by a seasonal increase in working capital debt.

Raising EPS estimates by 15% for FY2011E and 10% for FY2012E on higher volume and margin
assumptions
We are raising our FY2011E EPS estimate to Rs4.9 from Rs4.3 alongside our increased volume
growth assumption of 50%, up from 41% prior. Volumes were about 46,000 units in 1HFY11
and we are assuming a 9% improvement in 2HFY11E. We typically see 20% improvement in 2H
volumes from the 1H. We expect the increase to be muted this year because of the emissionregulation-
related surge in sales seen in 2QFY11. However, if conditions remain conducive for CV
demand, there could be upside to our estimates. We also raise our margin assumption to 11.2%
from 10.7% prior to reflect year-to-date margin performance and operating leverage benefits.
We are raising our FY2012E EPS estimate to Rs6.5 from Rs5.9 prior. Our Rs6.5 EPS estimate is
based on a 13.5% volume growth estimate and a 100 bps improvement in margins. The 100 bps
margin improvement is driven by increasing production in the excise-free zone.

Raising target to Rs85, maintain ADD
Our target goes to Rs85 from Rs78 prior to reflect the 10% improvement in FY2012E earnings
estimates. Our target is based on our 8.5X FY2012E EBITDA estimate of Rs14.9 bn. We maintain
our ADD rating as we expect Ashok Leyland to benefit from a strong CV demand, higher market
share and benefits of production in an excise-free zone.