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For 3QFY2011, Ashok Leyland (ALL) registered 22.5% yoy growth in net sales,
aided by 14.3% growth in volumes. Net average realisation increased by 7.2%
yoy due to change in product mix. EBITDA margins came in substantially lower
than our expectation at 7.5%. Net profit registered a substantial decline of 58.6%
yoy due to higher raw-material cost and other expenditure. As a result, we revise
downwards our FY2011 and FY2012 earnings estimates for the company to `3.4
(`4) and `4.8 (`5.2). However, due to the recent correction in the stock price, we
recommend Accumulate on the stock.
Strong volumes support good top-line growth; OPM contracts on higher input cost
and other fixed cost: For 3QFY2011, ALL reported 22.5% yoy growth in net sales
to `2,227cr (`1,817cr), which was 5.8% above our expectation. The jump in sales
came on the back of the 14.3% yoy increase in volumes. Net average realisation
for the quarter registered a 7.2% jump yoy to `1,208,030 (`1,126,845). During
3QFY2011, ALL witnessed a 400p yoy decline in EBITDA margin mainly on the
back of higher raw-material cost and other fixed expenditure. Net profit declined
by 58.6% yoy to `43cr (`105cr) on account of contraction at the margin front and
higher interest cost and depreciation cost on a yoy basis.
Outlook and valuation: The overall outlook for the domestic CV industry is
positive, which is in its mid-cycle, with volumes expected to register a ~13%
CAGR over FY2010–12E. Most of the factors that drive freight demand and
consequently M&HCV demand are positive and CV manufacturers are benefiting
from the economic recovery. At `59, ALL is trading at 17.6x FY2011E and 12.4x
FY2012E EPS. We recommend Accumulate on ALL with a Target Price of `62.
However, in the CV space, we prefer Tata Motor as it is trading at reasonable
discount in relative terms.
Subdued operating performance: During 3QFY2011, ALL witnessed a 400bp yoy
decline in EBITDA margin mainly on the back of a 322bp yoy surge in input cost.
Raw-material cost accounted for 70.4% (67.2%) of sales. Staff cost and other
expenditure, as a percentage of sales, also reported an increase of 140bp and
75bp yoy, respectively. Staff cost grew mainly on account of one-time charge of
`26cr related to ex-gratia bonus to employees. Other expenditure increased due to
expenses incurred for the setting and ramping up of the Pantnagar facility,
increased focus on R&D and the high decibel launch of the new, innovative
U-Truck platform vehicles.
ALL hiked prices to the extent of ~`31,000/vehicle (~3%) in October 2010 across
the board, which helped reduce raw-material cost pressures to a certain extent.
The company also hiked prices by ~3% for BS III-compliant vehicles (~6% in all).
ALL has further taken pricing action from January 2011, raising prices by ~2% on
an average, to mitigate raw-material cost increases, specially tyres, castings and
forgings.
Net profit dips 58.6% yoy: Net profit registered a substantial 58.6% yoy and 74%
qoq decline to `43.4cr (`105.6cr), despite higher volume growth. Subdued
operating performance, higher interest cost and increased depreciation cost
impacted the company’s bottom line during the quarter. Interest cost grew
substantially by 193% yoy on account of increased loans. Depreciation cost also
moved up by 26.1% yoy during the quarter, largely due to the ongoing capex. ALL
recorded 2% NPM (5.8%), largely due to subdued operating performance.
Conference call – Key highlights
HCV segment growing faster: ALL has been able to post strong volume
growth, following revival in demand in the HCV segment. HCV volumes, which
picked up from 1HFY2010, continued to witness good traction in 3QFY2011.
The HCV segment has been growing faster than the other segments.
Management expects the overall CV industry’s volumes to grow by ~30% in
FY2011 and by ~15% in FY2012E.
Volume guidance: Management has indicated volume guidance of ~95,000
units for FY2011E. This includes ~85,000 of domestic vehicles and ~10,000
units for exports. ALL is targeting a monthly run rate of ~10,000 units in
4QFY2011. The Pantnagar facility is expected to manufacture ~15,000
vehicles in FY2011E.
Pantnagar plant update: During the quarter, ALL faced issues in transporting
vehicles from its Pantnagar facility to Southern markets. Further, around 4,000
and 6,000 units were manufactured at the Uttaranchal facility during
3QFY2011 and 9MFY2011, respectively. In December 2010, ALL produced
2,100 units at Uttaranchal. Going ahead, ALL expects to maintain a monthly
run rate of `3,000 units.
During the quarter, engine business volumes were affected due to reduced
supplies to the telecom sector. The company sold ~3,800 and ~11,200
engines in 3QFY2011 and 9MFY2011, respectively. Revenue from the
engines business stood at ~`200cr during 9MFY2011. Around 600 kits were
supplied to the vehicle factory in Jabalpur during the quarter. The company
expects to supply ~1,000 kits in 4QFY2011E. The spares business posted
`160cr in sales in 3QFY2011
ALL managed to clear the majority of its ~10,000 units of BS II inventory
during 3QFY2011. Overall, ALL has an inventory of ~9,500 vehicles.
According to management, ~3,600 vehicles (~20% of overall volumes) were
supplied to state transport undertakings (STU) during 3QFY2011, which had a
negative impact on margins.
During the quarter, staff cost increased due to one-time charges of `26cr
towards ex-gratia bonus to employees. Further, `30cr of expenses were
incurred for settlement and executive compensation charges.
ALL’s debt levels including cash credits stand at ~`3,000cr as of December
2010. The company plans to bring it down to `2,600cr by March 2011.
Interest cost during the quarter was high on account of lack of interest
capitalisation benefits and increased working capital requirements.
ALL incurred `700cr towards capex and investments during 9MFY2011 and
expects to incur ~`300cr during 4QFY2011E. The company expects to incur
~`1,000cr towards capex and investments in FY2012.
ALL expects to launch new vehicles through its JV with John Deere in
1QFY2012E.
Investment arguments
Strong volume growth traction: The strong rebound in CV demand in FY2010,
on account of the revival in the Indian economy, aided ALL in posting higher
growth on a low base. As a result, ALL recorded healthy 18% yoy growth in
FY2010. With CV demand in its mid-cycle, we believe the industry would
record double-digit volume growth in FY2011. We estimate ALL to post a
volume CAGR of around 22% over FY2010–12E.
Pantnagar plant to help mitigate margin pressure: Management has indicated
the new tax-free unit at Pantnagar would be relatively more profitable, with
profitability estimated at around 25% higher than that of existing plants. Thus,
EBITDA margins are expected to hold up at around 10.5% in FY2012E. The
company expects to manufacture ~15,000 vehicles from the Uttaranchal plant
in FY2011 and further ramp it to ~35,000 vehicles in FY2012. Total
expenditure at the Uttaranchal plant is expected to be close to `1,100cr, out of
which `1,000cr has already been spent. This capex would result in additional
capacity of close to 50,000 vehicles per year. Tax benefit availed at the
Pantnagar plant would help the company in saving ~`35,000/vehicle on the
net realisation front in FY2011E.
JV contribution yet to crystallise: ALL has entered into an initial agreement to
form a JV with Nissan Motor Company for the development, manufacture and
distribution of LCV products. As ALL has a negligible presence in the LCV
space, this partnership would be positive for it in the long run. ALL expects
vehicle rollouts to start from the JV from 1QFY2012. The company’s JV with
John Deere is expected to start production from FY2012.
Outlook and valuation
The overall outlook for the domestic CV industry is positive, which is in its midcycle,
with volumes expected to post a 13% CAGR over FY2010–12E. Most of the
factors that drive freight demand and consequently M&HCV demand are positive
and CV manufacturers are benefiting from the economic recovery. However, due
to lower-than-expected performance on the earnings front in 3QFY2011, we revise
downwards our FY2011 and FY2012 earnings estimates for the company to `3.4
(`4) and `4.8 (`5.2).
At `59, the stock is trading at 17.6x FY2011E and 12.4x FY2012E EPS. Owing to
the recent correction in the stock price, we recommend Accumulate on the stock
with a Target Price of `62. However, in the CV space, we prefer Tata Motor as it is
trading at reasonable discount in relative terms.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland – 3QFY2011 Result Update
Angel Broking recommends an Accumulate on Ashok Leyland with a Target Price of Rs. 62.
For 3QFY2011, Ashok Leyland (ALL) registered 22.5% yoy growth in net sales,
aided by 14.3% growth in volumes. Net average realisation increased by 7.2%
yoy due to change in product mix. EBITDA margins came in substantially lower
than our expectation at 7.5%. Net profit registered a substantial decline of 58.6%
yoy due to higher raw-material cost and other expenditure. As a result, we revise
downwards our FY2011 and FY2012 earnings estimates for the company to `3.4
(`4) and `4.8 (`5.2). However, due to the recent correction in the stock price, we
recommend Accumulate on the stock.
Strong volumes support good top-line growth; OPM contracts on higher input cost
and other fixed cost: For 3QFY2011, ALL reported 22.5% yoy growth in net sales
to `2,227cr (`1,817cr), which was 5.8% above our expectation. The jump in sales
came on the back of the 14.3% yoy increase in volumes. Net average realisation
for the quarter registered a 7.2% jump yoy to `1,208,030 (`1,126,845). During
3QFY2011, ALL witnessed a 400p yoy decline in EBITDA margin mainly on the
back of higher raw-material cost and other fixed expenditure. Net profit declined
by 58.6% yoy to `43cr (`105cr) on account of contraction at the margin front and
higher interest cost and depreciation cost on a yoy basis.
Outlook and valuation: The overall outlook for the domestic CV industry is
positive, which is in its mid-cycle, with volumes expected to register a ~13%
CAGR over FY2010–12E. Most of the factors that drive freight demand and
consequently M&HCV demand are positive and CV manufacturers are benefiting
from the economic recovery. At `59, ALL is trading at 17.6x FY2011E and 12.4x
FY2012E EPS. We recommend Accumulate on ALL with a Target Price of `62.
However, in the CV space, we prefer Tata Motor as it is trading at reasonable
discount in relative terms.
14.3% yoy surge in volumes supports top-line growth: For 3QFY2011, ALL
reported 22.5% yoy growth in net sales to `2,227cr (`1,817cr), which was 5.8%
above our expectation. The jump in sales came on the back of the 14.3% yoy
increase in volumes. Net average realisation for the quarter registered a 7.2%
jump yoy to `1,208,030 (`1,126,845). Volume growth during the quarter was,
however, restricted due to capacity constraints related to the availability of
components for Bharat Stage (BS) III vehicles. The engine business posted volumes
of ~3,800 units in 3QFY2011 compared to ~3,400 units in 2QFY2011, whereas
the defence business reported volumes of ~600 sets during the quarter. The spare
parts business recorded revenue of ~`160cr as against ~`153cr in 2QFY2011.
Subdued operating performance: During 3QFY2011, ALL witnessed a 400bp yoy
decline in EBITDA margin mainly on the back of a 322bp yoy surge in input cost.
Raw-material cost accounted for 70.4% (67.2%) of sales. Staff cost and other
expenditure, as a percentage of sales, also reported an increase of 140bp and
75bp yoy, respectively. Staff cost grew mainly on account of one-time charge of
`26cr related to ex-gratia bonus to employees. Other expenditure increased due to
expenses incurred for the setting and ramping up of the Pantnagar facility,
increased focus on R&D and the high decibel launch of the new, innovative
U-Truck platform vehicles.
ALL hiked prices to the extent of ~`31,000/vehicle (~3%) in October 2010 across
the board, which helped reduce raw-material cost pressures to a certain extent.
The company also hiked prices by ~3% for BS III-compliant vehicles (~6% in all).
ALL has further taken pricing action from January 2011, raising prices by ~2% on
an average, to mitigate raw-material cost increases, specially tyres, castings and
forgings.
Net profit dips 58.6% yoy: Net profit registered a substantial 58.6% yoy and 74%
qoq decline to `43.4cr (`105.6cr), despite higher volume growth. Subdued
operating performance, higher interest cost and increased depreciation cost
impacted the company’s bottom line during the quarter. Interest cost grew
substantially by 193% yoy on account of increased loans. Depreciation cost also
moved up by 26.1% yoy during the quarter, largely due to the ongoing capex. ALL
recorded 2% NPM (5.8%), largely due to subdued operating performance.
Conference call – Key highlights
HCV segment growing faster: ALL has been able to post strong volume
growth, following revival in demand in the HCV segment. HCV volumes, which
picked up from 1HFY2010, continued to witness good traction in 3QFY2011.
The HCV segment has been growing faster than the other segments.
Management expects the overall CV industry’s volumes to grow by ~30% in
FY2011 and by ~15% in FY2012E.
Volume guidance: Management has indicated volume guidance of ~95,000
units for FY2011E. This includes ~85,000 of domestic vehicles and ~10,000
units for exports. ALL is targeting a monthly run rate of ~10,000 units in
4QFY2011. The Pantnagar facility is expected to manufacture ~15,000
vehicles in FY2011E.
Pantnagar plant update: During the quarter, ALL faced issues in transporting
vehicles from its Pantnagar facility to Southern markets. Further, around 4,000
and 6,000 units were manufactured at the Uttaranchal facility during
3QFY2011 and 9MFY2011, respectively. In December 2010, ALL produced
2,100 units at Uttaranchal. Going ahead, ALL expects to maintain a monthly
run rate of `3,000 units.
During the quarter, engine business volumes were affected due to reduced
supplies to the telecom sector. The company sold ~3,800 and ~11,200
engines in 3QFY2011 and 9MFY2011, respectively. Revenue from the
engines business stood at ~`200cr during 9MFY2011. Around 600 kits were
supplied to the vehicle factory in Jabalpur during the quarter. The company
expects to supply ~1,000 kits in 4QFY2011E. The spares business posted
`160cr in sales in 3QFY2011
ALL managed to clear the majority of its ~10,000 units of BS II inventory
during 3QFY2011. Overall, ALL has an inventory of ~9,500 vehicles.
According to management, ~3,600 vehicles (~20% of overall volumes) were
supplied to state transport undertakings (STU) during 3QFY2011, which had a
negative impact on margins.
During the quarter, staff cost increased due to one-time charges of `26cr
towards ex-gratia bonus to employees. Further, `30cr of expenses were
incurred for settlement and executive compensation charges.
ALL’s debt levels including cash credits stand at ~`3,000cr as of December
2010. The company plans to bring it down to `2,600cr by March 2011.
Interest cost during the quarter was high on account of lack of interest
capitalisation benefits and increased working capital requirements.
ALL incurred `700cr towards capex and investments during 9MFY2011 and
expects to incur ~`300cr during 4QFY2011E. The company expects to incur
~`1,000cr towards capex and investments in FY2012.
ALL expects to launch new vehicles through its JV with John Deere in
1QFY2012E.
Investment arguments
Strong volume growth traction: The strong rebound in CV demand in FY2010,
on account of the revival in the Indian economy, aided ALL in posting higher
growth on a low base. As a result, ALL recorded healthy 18% yoy growth in
FY2010. With CV demand in its mid-cycle, we believe the industry would
record double-digit volume growth in FY2011. We estimate ALL to post a
volume CAGR of around 22% over FY2010–12E.
Pantnagar plant to help mitigate margin pressure: Management has indicated
the new tax-free unit at Pantnagar would be relatively more profitable, with
profitability estimated at around 25% higher than that of existing plants. Thus,
EBITDA margins are expected to hold up at around 10.5% in FY2012E. The
company expects to manufacture ~15,000 vehicles from the Uttaranchal plant
in FY2011 and further ramp it to ~35,000 vehicles in FY2012. Total
expenditure at the Uttaranchal plant is expected to be close to `1,100cr, out of
which `1,000cr has already been spent. This capex would result in additional
capacity of close to 50,000 vehicles per year. Tax benefit availed at the
Pantnagar plant would help the company in saving ~`35,000/vehicle on the
net realisation front in FY2011E.
JV contribution yet to crystallise: ALL has entered into an initial agreement to
form a JV with Nissan Motor Company for the development, manufacture and
distribution of LCV products. As ALL has a negligible presence in the LCV
space, this partnership would be positive for it in the long run. ALL expects
vehicle rollouts to start from the JV from 1QFY2012. The company’s JV with
John Deere is expected to start production from FY2012.
Outlook and valuation
The overall outlook for the domestic CV industry is positive, which is in its midcycle,
with volumes expected to post a 13% CAGR over FY2010–12E. Most of the
factors that drive freight demand and consequently M&HCV demand are positive
and CV manufacturers are benefiting from the economic recovery. However, due
to lower-than-expected performance on the earnings front in 3QFY2011, we revise
downwards our FY2011 and FY2012 earnings estimates for the company to `3.4
(`4) and `4.8 (`5.2).
At `59, the stock is trading at 17.6x FY2011E and 12.4x FY2012E EPS. Owing to
the recent correction in the stock price, we recommend Accumulate on the stock
with a Target Price of `62. However, in the CV space, we prefer Tata Motor as it is
trading at reasonable discount in relative terms.
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