Ashok Leyland -Strong 4Q, but bumpy road ahead::Macquarie Research,

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Ashok Leyland
Strong 4Q, but bumpy road ahead
Event
 We attended the post 4Q’FY11 earnings presentation. Company management
was cautious on FY12E growth outlook due to high base effect and has
underlined concerns on rising interest rate. The company also guided 10-
10.5% EBITDA margin for FY12E, 50-100bp lower than FY11. We remain
cautious on the stock and reiterate our Neutral rating.      
Impact
 4Q results impressive, but difficult to sustain. Ashok Leyland reported better
than expected 4Q results, with net sales of Rs38.3bn (Up 30% YoY) and net
profit of Rs2.98bn (34% YoY). 4Q results were well ahead of Street (Rs2.35bn)
and our estimate (Rs2.46bn) on account of 44bp EBITDA margin expansion.
Margin expansion was from better product mix (higher defence vehicles and
engine supply) and higher production (24%) from Pantnagar facility. However,
we think the margin will be difficult to sustain as product mix is likely to change.
 Unlikely to meet 12-15% volume growth guidance in FY12E. The company
guided 12-15% volume growth (7-8% domestic and 20% export volume
growth) for FY12E. We believe this is unlikely to be met due to subdued CV
sales outlook in a rising interest rate environment and the likely impact on
transporters’ profitability on account of imminent diesel price hike as well.
Volume will also get impacted due to lack of JNNURM bus orders, and
management expects bus market share to decline to 50% from 54% in FY11.
 Subdued margin guidance of 10-10.5% for FY12E. Company gave margin
guidance of 10-10.5% on the back of change in product mix (higher sales of Utrucks, which are making Rs35k-100k losses per vehicle) and unlikelihood of
further price hikes. Lower margin guidance despite high sales from the
Pantnagar facility (where the co guides 35k trucks in FY12E), with each truck
receiving duty benefits of ~Rs35k/vehicles, provides us little margin comfort.
 Rs5-6bn debt for capex to impact earnings going forward. The company
provided FY12E capex guidance of ~Rs12bn, with Rs6-7bn in their own
facilities (Rs3bn in Pantnagar and Rs3-4bn on Neptune engine) and rest
(~Rs5-6bn) in their JV facilities. Management indicated that ~Rs5-6bn of
capex is likely to be funded through fresh debt issuance and the additional
debt will impact their earnings going forward.    
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs58.00 based on a EV/EBITDA methodology.
 Catalyst: Sales volume numbers and diesel price hike
Action and recommendation
 Maintain cautious view on AL. We maintain our cautious stance on AL due
to low volume and margin outlook. We prefer Tata Motors over AL.