Visit http://indiaer.blogspot.com/ for complete details ASHOK LEYLAND 2QFY11: Margins up 130bp QoQ (80bp YoY); FY11 volume guidance up at 95,000 units
Ashok Leyland’s (AL IN, Mkt Cap US$2.3b, CMP Rs75.5, Not rated) 2QFY11 sales are up 72% YoY and PAT up 87% YoY. Key highlights:
Impressive performance with 130bp QoQ improvement to 11.3%
- Volumes grew by ~72% YoY (~15% QoQ) to 24,590 units. The price hike of 2.5% in Jun-10 was negated by the product mix change in favor of buses (contribution of buses to volumes increased to 26.4% v/s 23.8% in 1QFY11) and marginal revenues from sale of defense kit resulted in blended realizations improving just by 0.6% QoQ (flat YoY). Net sales grew by 72% YoY (~15.6% QoQ decline) to Rs27.1b.
- EBITDA margins improved ~130bp QoQ (~80bp YoY) to 11.3% due to 30bp QoQ decline in RM costs (full impact of commodity cost inflation reflected in 1QFY11) and 80bp QoQ decline in staff costs.
- EBITDA improved by 30.1% QoQ (~11.3% YoY) to Rs3.06b further boosting Adj PAT to Rs1.67b a growth of 36.3% QoQ (~87% YoY).
Volume outlook remains positive
- The management continues to remain positive on the CV volume growth driven by strong industry activity and equally strong agricultural growth (driven by above average monsoon).
- It has increased its FY11 volume guidance from 90,000 units to 95,000 units (84,000 M&HCVs, 1,500 LCVs and 9,500 exports), implying growth of 48.6%. For FY12 it expects 15-18% growth for the industry.
- Pantnagar plant is expected to contribute ~15,000 vehicles in FY11.
RM costs to remain stable in 2HFY11; margins to remain above 10.5% levels in FY11
- The management expects costs to remain stable in 2HFY11 with full impact of commodity cost inflation reflected in 1QFY11 and the cost inflation due to BS-III norm implementation in Oct-10.
- It has taken three round of price increases (~1.5% in Apr-10, 2.5% in Jun-10 and ~3% in Oct-10) covering 100% of RM cost inflation due to increase in commodity prices. Further, it has also increased prices for BS-III compliant vehicle by another 3%. As a result, cost of BS-III compliant vehicle has gone up ~10% since Apr-10.
- Margins are likely to remain above 10.5% for FY11, due to flat growth in volumes (supply constraints for BS III vehicles) and stable RM costs in 2HFY11.
- It expects EBITDA margin for FY11 at 10.5-11% (v/s 10.7% in 1HFY11 v/s earlier guidance of 10.5%).
Maintains capex guidance of Rs12b over FY11-12; Investments increased to Rs9b
- It expects to invest Rs21b in capacity addition, R&D and investments in JVs for FY11-12.
- Capex would be Rs12b (~Rs7b in FY11 and Rs5b in FY12) for Neptune engine, next-gen cab and R&D for new platform (U-Truck).
- Investment guidance saw an increase from Rs8b to Rs9b due to 26% stake purchase in UK Optare (specializing in low floor buses) and increased investments in Hinduja Leyland Finance.
- It has incurred capex of Rs2.5b and investments of Rs1.5b in 1HFY11.
- JV with Nissan, which is focused on LCVs (2.5-6 tons) is on schedule and is expected to commence production in mid-CY11.
- JV with John Deere for manufacturing construction equipment is expected to go for trial production in Dec-10 and rollout in beginning CY11.
Other highlights
- It has built up an inventory of 9,000-10,000 BS II vehicles, which is expected to clear up by Nov-10, by when the demand for BS III vehicle would pick up.
- Ashok Leyland’s finance subsidiary is doing well with financing of ~2,200 trucks in 1HFY11 (~100 trucks in 1QFY11). It targets to finance 4,000-5,000 vehicles in FY11.
- The management has guided for FY11 tax rate be around 2QFY11 levels, as it would benefit from higher weighted deduction for R&D and increasing contribution from Pantnagar plant.
- Order backlog under JNNURM scheme is 1,200 buses to be cleared by Dec-10.
Valuation & view
- We expect strong demand for CVs to continue. This coupled with excise benefits from Pantnagar plant & higher operating leverage will drive earnings growth in FY11.
- The stock trades at 16.9x FY11 consensus EPS of Rs4.5 and at 13.4x FY12 consensus EPS of Rs5.7. Not Rated.
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