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Ashok Leyland
Profit affected by higher interest
Dec 10 quarter normalised net profit dipped 43% yoy and 64% qoq, and was 13%
below our forecasts on higher interest expenses and employee bonus provision
related to previous quarters. With the worst of the vehicle emission upgrade
impact behind us, we see a strong quarterly uptrend. Buy.
High net interest expenses led to lower-than-expected profits
! Ashok Leyland reported its December quarter normalised net profit at Rs.607m, 13% below
our forecasts (down 43% yoy and 64% qoq) on the back of net sales of Rs.22.3bn (up 23%
yoy but down 18% qoq). On contacting, the management has clarified that the personnel
expenses for the quarter included a total employee bonus provision for 9MFY11 amounting to
Rs.260m and we have adjusted the expenses to exclude the proportionate provision related
to last two quarters to calculate normalised net profit. Without this adjustment, reported net
profit for the quarter was Rs.434m, down 59% yoy and 74% qoq. Normalised EBITDA for the
quarter came in line with our forecasts at Rs.1.8bn but declined 11% yoy and 40% qoq on
higher personnel expenses to sales and higher other manufacturing expenses to sales. The
net interest expenses for the quarter rose 20% qoq to Rs.475m (up 193% yoy and 58% vs
RBS forecasts) due mainly to higher working capital requirement, leading to the lower-thanexpected PAT. Normalised EPS for the quarter was Rs.0.5/share.
! For the 9MFY11, normalised PAT came at Rs.3.5bn (up 129%) on the back of the net sales of
Rs.72.9bn (up 69% yoy) due to strong volume growth. EBITDA for the period was Rs.7.3bn,
up 89% while EBITDA margin rose 102bp to 9.9%. The normalised EPS for 9MFY11 was
Rs.2.6/share.
Interest expenses increase could impact our 4QFY11 forecasts
! Management (during our conversation with it) has said the high net interest expenses was
due to: 1) a 100bp qoq increase in blended interest rate to ~8%; 2) a high working capital
requirement due to the presence of higher-priced Euro III vehicle in the inventory and
receivables related to Delhi Transport Corporation (DTC) for which bills have been raised and
payment is expected in 4QFY11. We don't envisage any significant change in our forecasts
up to the EBITDA level. However, our 4QFY11 interest expense forecasts could rise as we
don't see the increase in interest rates reversing in near future given the high inflationary
environment. However, we wait for the analyst conference call to gather more information
before making any changes to our model.
Valuation
! We expect Indian M&HCV market growth to continue, although higher fuel prices coupled with
higher interest rate could prove the speed-breakers. The company, with enough flexibility to
increase production and with the new U platform truck launch last quarter, should benefit from
the growth of the industry. The stock is currently trading at 10x our FY12F EPS forecasts and
looks one of the cheapest in our coverage universe. We reiterate Buy
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland
Profit affected by higher interest
Dec 10 quarter normalised net profit dipped 43% yoy and 64% qoq, and was 13%
below our forecasts on higher interest expenses and employee bonus provision
related to previous quarters. With the worst of the vehicle emission upgrade
impact behind us, we see a strong quarterly uptrend. Buy.
High net interest expenses led to lower-than-expected profits
! Ashok Leyland reported its December quarter normalised net profit at Rs.607m, 13% below
our forecasts (down 43% yoy and 64% qoq) on the back of net sales of Rs.22.3bn (up 23%
yoy but down 18% qoq). On contacting, the management has clarified that the personnel
expenses for the quarter included a total employee bonus provision for 9MFY11 amounting to
Rs.260m and we have adjusted the expenses to exclude the proportionate provision related
to last two quarters to calculate normalised net profit. Without this adjustment, reported net
profit for the quarter was Rs.434m, down 59% yoy and 74% qoq. Normalised EBITDA for the
quarter came in line with our forecasts at Rs.1.8bn but declined 11% yoy and 40% qoq on
higher personnel expenses to sales and higher other manufacturing expenses to sales. The
net interest expenses for the quarter rose 20% qoq to Rs.475m (up 193% yoy and 58% vs
RBS forecasts) due mainly to higher working capital requirement, leading to the lower-thanexpected PAT. Normalised EPS for the quarter was Rs.0.5/share.
! For the 9MFY11, normalised PAT came at Rs.3.5bn (up 129%) on the back of the net sales of
Rs.72.9bn (up 69% yoy) due to strong volume growth. EBITDA for the period was Rs.7.3bn,
up 89% while EBITDA margin rose 102bp to 9.9%. The normalised EPS for 9MFY11 was
Rs.2.6/share.
Interest expenses increase could impact our 4QFY11 forecasts
! Management (during our conversation with it) has said the high net interest expenses was
due to: 1) a 100bp qoq increase in blended interest rate to ~8%; 2) a high working capital
requirement due to the presence of higher-priced Euro III vehicle in the inventory and
receivables related to Delhi Transport Corporation (DTC) for which bills have been raised and
payment is expected in 4QFY11. We don't envisage any significant change in our forecasts
up to the EBITDA level. However, our 4QFY11 interest expense forecasts could rise as we
don't see the increase in interest rates reversing in near future given the high inflationary
environment. However, we wait for the analyst conference call to gather more information
before making any changes to our model.
Valuation
! We expect Indian M&HCV market growth to continue, although higher fuel prices coupled with
higher interest rate could prove the speed-breakers. The company, with enough flexibility to
increase production and with the new U platform truck launch last quarter, should benefit from
the growth of the industry. The stock is currently trading at 10x our FY12F EPS forecasts and
looks one of the cheapest in our coverage universe. We reiterate Buy
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