Ashok Leyland - Quarter of disappointments, Upgrade to Accumulate: Emkay

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Ashok Leyland Ltd.

Quarter of disappointments, Upgrade to Accumulate

ACCUMULATE

CMP: Rs 59                                       Target Price: Rs 68

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n     EBIDTA at Rs 1.9bn (est.-Rs 2.1bn) and PAT at Rs 694mn (est.-Rs 965mn) were below est. due to higher staff cost, other expenses, interest cost and depreciation

n     EBIDTA margins for the quarter were at 8.6% vs est of 9.8% despite abv est. sales at Rs 22.3bn (est of 21.7bn) as sales mix was adverse (higher share of STU sales and FBS)

n     Management reiterates FY11 vol. target of 95000 units. We retain our vol. est. of 92692 units (implied volumes for 4QFY11 at 28264 units, YoY growth of 9.5%)

n     Reduce our FY11/FY12 EPS by 8.5%/11.2% to Rs 4.7/Rs 5.7. Upgrade rating to ACCUMULATE due to price correction. 4QFY11 volumes and margins will be the key to stock perf.

Net Sales – marginally above estimate
Net sales at Rs 22.3bn was marginally above est. of Rs 21.7bn due to higher share of
fully built solutions (FBS) and higher sales to STU. Average selling price (ASP)
increased by 5.9% YoY/8.9% QoQ despite adverse product mix due to price hikes (3%
general price hike and 3% for emission norms) and higher share of FBS. Avg.
realization per vehicle stood at Rs 1,217,448 against est. of Rs 1,181,989.

EBIDTA margins at 8.6% below est. of 9.8%
EBIDTA margins nose dive by 270 bps YoY to 8.6% due to sharp increase in staff cost
and other expenses. Also adverse product mix also affected margins. Increase in other
expenses is due to higher logistic costs and running expenses for Pantnagar facility.

APAT – higher interest cost affects net profits
Net profits at Rs 434mn was significantly below est of Rs 965mn due to sharp jump in
interest expenses and slightly higher depreciation charge. Interest cost stood at Rs 475mn
(est of Rs 300mn) due to higher working capital requirements (inventory as well as
receivables from STUs).
Valuations and View
We have lowered our FY11/FY12 EPS est. by 8.5%/11.2 to Rs 4.7/5.7 per share due to cost
pressures. At Rs 59, the stock trades at 10.3x and EV/EBIDTA of 6.4x our FY12 estimates.
We have lowered our TP to Rs 68 per share ((down 10%). However, post the stock price
correction; upgrade the rating on the stock to ACCUMULATE.

Key Con Call Extracts
n Lost market share during the quarter due to production and logistic issues. Pantnagar
produced ~3800 units in 3QFY11 and ~6000 units in 9MFY11. In the month of January,
expect production level at Pantnagar is ~3000 units
n Product mix was adverse in the quarter as not only the share of low tonnage vehicles was
higher also the sale of FBS and sales to STU was higher. Sales to STU was ~3600 units
or 20% of total sale and ~30% of domestic sales
n Demand outlook remains strong as buyers of new vehicles are confident of utilization of
vehicle for 70% of the time. In such a scenario, higher interest rate may not have any
impact. Diesel price hike at the stage is a cause of concerns but expect similar hike in the
freight rates..
n Maintain its guidance of ~95000 units for FY11. Most of the supply to southern STU is
complete.
n Pricing action – Over all price hike in the range of 12% during the year. Raised prices by
1.5% to 2% in January 2011
n Price hike should take care of cost pressures in 4QFY11
n Inventory is around 9500 units. However, there is a sharp increase in receivable as Some
STUs are yet to release the payment
n Capex and investment – FY11 and FY12 combine – Rs 20 bn. Amount spent in 9MFY11
is approximately Rs 7bn
n Gross Debt at Rs 36bn, including cash credit. Long term debt at Rs 26 bn. Aim is to
reduce the debt to Rs 25bn by end of the year through lower working capital.