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Ashok Leyland (AL)
Automobiles
Maintain SELL. 3QFY2011 profits were 26% below our estimates due to 160 bps
lower than forecasted EBITDA margins. Sharp decline in volumes (-28% QoQ), one-time
bonus payments coupled with increase in promotion expenses related to launch of new
U-truck models impact profitability. After a sharp underperformance of the stock we
believe although the absolute downside may be limited but we do not expect stock to
outperform the Sensex over the next 12 months. Hence we maintain our SELL rating.
3QFY2011 performance was impacted by 28% decline in qoq volumes
a) 3QFY2011 profit of Rs 434 mn was 26% below our estimates driven by sharp decline
in EBITDA margins and 28% QoQ decline in volumes. Revenues were 11% ahead of
our expectations driven by (1) 30% qoq increase in non commercial vehicle revenues (i.e
defence kit sales, engine and spare parts sales), (2) 8% sequential improvement in commercial
vehicle ASPs which was ahead of our expectations as company had taken a 3% increase in
prices on BS-2 vehicles and 6% increase on BS-3 vehicles in October 2010.
b) Staff costs also increased by 15% qoq due to a one time bonus payment of Rs 260
mn to employees. However even after excluding bonus payments, salary costs were up by 3%
QoQ despite fall in volumes which could be due to ramp up at Pantnagar plant.
c) Other expenses also declined by only 6% qoq which were higher than our estimates
due to increase in promotion expenses due to launch of new U-truck models and ramp up
costs related to Pantnagar plant.
d) Interest expenses were higher in the quarter due to increase in working capital
requirements (inventory + debtor days increased in 3QFY11) and company expects it to
come down in 4QFY11E but given only Rs 3,000 mn capex has been spent in 9MFY11 and
rest 4,000 mn is left for 4QFY11E we believe interest expense may not come down from
3QFY11 levels.
e) Company indicated that they expect to sell 30,000 units in 4QFY11E vs our
expectations of 28,000 units. Company also stated that tyre costs are likely to go up
by 4-5% in 4QFY11 while steel costs are expected to remain constant as compared to
3QFY2011 levels due to fixed contracts on steel which are valid till March 2011.
Management is hosting a conference call at 12 pm on 24th January 2011 after which we would
revisit our rating on the stock as we seek more clarity on sharp increase in average selling prices
and outlook for FY2012E on commercial vehicle volume growth.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland (AL)
Automobiles
Maintain SELL. 3QFY2011 profits were 26% below our estimates due to 160 bps
lower than forecasted EBITDA margins. Sharp decline in volumes (-28% QoQ), one-time
bonus payments coupled with increase in promotion expenses related to launch of new
U-truck models impact profitability. After a sharp underperformance of the stock we
believe although the absolute downside may be limited but we do not expect stock to
outperform the Sensex over the next 12 months. Hence we maintain our SELL rating.
3QFY2011 performance was impacted by 28% decline in qoq volumes
a) 3QFY2011 profit of Rs 434 mn was 26% below our estimates driven by sharp decline
in EBITDA margins and 28% QoQ decline in volumes. Revenues were 11% ahead of
our expectations driven by (1) 30% qoq increase in non commercial vehicle revenues (i.e
defence kit sales, engine and spare parts sales), (2) 8% sequential improvement in commercial
vehicle ASPs which was ahead of our expectations as company had taken a 3% increase in
prices on BS-2 vehicles and 6% increase on BS-3 vehicles in October 2010.
b) Staff costs also increased by 15% qoq due to a one time bonus payment of Rs 260
mn to employees. However even after excluding bonus payments, salary costs were up by 3%
QoQ despite fall in volumes which could be due to ramp up at Pantnagar plant.
c) Other expenses also declined by only 6% qoq which were higher than our estimates
due to increase in promotion expenses due to launch of new U-truck models and ramp up
costs related to Pantnagar plant.
d) Interest expenses were higher in the quarter due to increase in working capital
requirements (inventory + debtor days increased in 3QFY11) and company expects it to
come down in 4QFY11E but given only Rs 3,000 mn capex has been spent in 9MFY11 and
rest 4,000 mn is left for 4QFY11E we believe interest expense may not come down from
3QFY11 levels.
e) Company indicated that they expect to sell 30,000 units in 4QFY11E vs our
expectations of 28,000 units. Company also stated that tyre costs are likely to go up
by 4-5% in 4QFY11 while steel costs are expected to remain constant as compared to
3QFY2011 levels due to fixed contracts on steel which are valid till March 2011.
Management is hosting a conference call at 12 pm on 24th January 2011 after which we would
revisit our rating on the stock as we seek more clarity on sharp increase in average selling prices
and outlook for FY2012E on commercial vehicle volume growth.
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