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Ashok Leyland (AL)
Automobiles
Not the right time to bottomfish. We reduce our target price on Ashok Leyland to
Rs56 from Rs60 driven by (1) marginal cut in earnings based on downward revision in
volumes and EBITDA margins and (2) cut in our target multiple to 12X PE (from 13X
earlier) on our FY2012E EPS. We believe slowing commercial vehicle industry growth
coupled with escalating raw material costs could put pressure on the company’s
profitability. Hence we maintain SELL rating on the stock.
Conference call takeaways
Company maintains its volume guidance of 95,000 units in FY2011E (domestic – 85,000
units, exports – 10,000 units) and expects to increase volumes by 18% yoy in FY2012E. We
forecast 10% yoy increase in domestic truck volumes for FY2012E as we believe truck volumes
are likely to slow down driven by higher interest rates, slower growth in industrial production
and deterioration in truck operator’s profitability. Company has 9,500 units of inventory.
Company has taken an average price increase of 2% on January 10, 2010 and has taken
a 12% price increase uptil now in this fiscal. Company indicated that overall raw material
costs will go up by 2% in 4QFY11E and 8% yoy for FY2011E. We highlight that EBITDA
margins have been flat yoy in FY2011E despite a 47% yoy estimated increase in volumes and
12% increase in prices.
Company will produce 9,000 units from the Pantnagar plant in 4QFY11E vs 6,000 units
in 9MFY11. Company will realize savings of Rs35,000/vehicle excise duty benefit from
production at the Pantnagar plant which should improve margins by 90 bps qoq if full benefit is
retained by the company. We forecast 12.3% EBITDA margins in 4QFY11E as we expect a 61%
qoq increase in volumes in line with management guidance. Company has also guided to Rs
50,000/units savings in excise duty in FY2012E as localization of components increase in
Pantnagar.
Company expects to decrease working capital by Rs4 bn in 4QFY11E as state transport
undertakings pay the outstanding payments to the company. However, the company has spent
Rs7 bn in 9MFY11 (including joint venture investments) and is likely to spend Rs3 bn in
4QFY11E which is likely to keep interest expense at current levels in 4QFY11E, in our view.
We revise our earnings estimates marginally
We have marginally increased our volume estimates over FY2011-13E but cut our EBITDA margin
estimates by 40-80 bps in FY2012-13E due to escalating raw material cost pressures. We believe in
a scenario of slowdown in truck volumes; it will be difficult for the company to retain excise duty
benefits accruing from the Pantnagar plant and increase prices to offset the increase in raw
material prices. We retain our earnings in FY2012E but cut our FY2013E earnings by 4%.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland (AL)
Automobiles
Not the right time to bottomfish. We reduce our target price on Ashok Leyland to
Rs56 from Rs60 driven by (1) marginal cut in earnings based on downward revision in
volumes and EBITDA margins and (2) cut in our target multiple to 12X PE (from 13X
earlier) on our FY2012E EPS. We believe slowing commercial vehicle industry growth
coupled with escalating raw material costs could put pressure on the company’s
profitability. Hence we maintain SELL rating on the stock.
Conference call takeaways
Company maintains its volume guidance of 95,000 units in FY2011E (domestic – 85,000
units, exports – 10,000 units) and expects to increase volumes by 18% yoy in FY2012E. We
forecast 10% yoy increase in domestic truck volumes for FY2012E as we believe truck volumes
are likely to slow down driven by higher interest rates, slower growth in industrial production
and deterioration in truck operator’s profitability. Company has 9,500 units of inventory.
Company has taken an average price increase of 2% on January 10, 2010 and has taken
a 12% price increase uptil now in this fiscal. Company indicated that overall raw material
costs will go up by 2% in 4QFY11E and 8% yoy for FY2011E. We highlight that EBITDA
margins have been flat yoy in FY2011E despite a 47% yoy estimated increase in volumes and
12% increase in prices.
Company will produce 9,000 units from the Pantnagar plant in 4QFY11E vs 6,000 units
in 9MFY11. Company will realize savings of Rs35,000/vehicle excise duty benefit from
production at the Pantnagar plant which should improve margins by 90 bps qoq if full benefit is
retained by the company. We forecast 12.3% EBITDA margins in 4QFY11E as we expect a 61%
qoq increase in volumes in line with management guidance. Company has also guided to Rs
50,000/units savings in excise duty in FY2012E as localization of components increase in
Pantnagar.
Company expects to decrease working capital by Rs4 bn in 4QFY11E as state transport
undertakings pay the outstanding payments to the company. However, the company has spent
Rs7 bn in 9MFY11 (including joint venture investments) and is likely to spend Rs3 bn in
4QFY11E which is likely to keep interest expense at current levels in 4QFY11E, in our view.
We revise our earnings estimates marginally
We have marginally increased our volume estimates over FY2011-13E but cut our EBITDA margin
estimates by 40-80 bps in FY2012-13E due to escalating raw material cost pressures. We believe in
a scenario of slowdown in truck volumes; it will be difficult for the company to retain excise duty
benefits accruing from the Pantnagar plant and increase prices to offset the increase in raw
material prices. We retain our earnings in FY2012E but cut our FY2013E earnings by 4%.
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