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UBS Investment Research
Ashok Leyland
D owngrade on deteriorating vols., Sell
Event: Ashok Leyland reports 11%YoY decline in MHCV vols for May'11
Leyland has reported a decline of 13%YoY in MHCV vols FY12ytd vs 9%YoY
growth reported in the segment by Tata Motors. We believe co. is losing market
share to Tata Motors and Eicher. We remain negative on M&HCV growth and
expect 5%YoY growth in FY12 given the weak industrial growth environment.
Impact: Sharp cut to estimates on weaker vol. growth outlook
We reduce FY12E vol. growth for Leyland to 0% from 10%. As a result we reduce
our EBITDA margin est. for FY12/13 from 10.4%/10.1% to 9.4%/9.1%. We are
reducing our earnings for FY12/13 by 29%/34% respectively. We are significantly
below co. guidance of 15% vol. growth and 10%-10.5% EBITDA margin for FY12
Action: Downgrade to Sell, rising debt remains a concern
We are 31% below consensus EPS for FY12E. We believe there remains further
downside risk to our est. due to rising competitive pressure, transition to the new
‘U’ Truck platform and potentially weaker M&HCV growth. We believe co.
balance sheet has deteriorated significantly due to higher than expected
investments at Rs 9bn in FY11 in associates and JVs. Co. plans to borrow further
Rs 6bn in FY12 to part fund capex and investments of Rs 12bn leading to higher
interest outgo. The debt/equity ratio should rise to ~0.8x
Valuations: Downgrade to Sell (from Neutral), Reduce PT to Rs 45
We derive our price target from a DCF-based methodology using UBS’s VCAM
tool with a 12.5% WACC. We add Rs3.0 for Leyland’s stake in IndusInd Bank.
Vol. outlook remains weak,
downgrade to sell
We downgrade Ashok Leyland to Sell as we cut our domestic MHCV growth
outlook for FY12 from 10% to 0%. We remain negative on M&HCV growth
and expect 5%YoY industry growth in FY12 given the weak industrial growth
environment.
We believe the near term growth outlook for MHCV’s remains challenging
given sluggish near term IIP growth and the high base in terms of MHCV
demand for Q2FY12 due to pre-buying ahead of emission norms change in
Q2FY11. While our discussion with MHCV mfrs indicates that both freight
rates and fleet utilization for truckers remains good, we also note that
overloading seems to be fairly rampant given lax implementation of norms.
We believe the govt. is likely to raise diesel prices in June’11. Also, due to high
commodity prices and emission norms change have resulted in 12%YoY
increase in MHCV prices. We believe rising fuel prices, interest rates and
continued increase in MHCV prices are likely to further increase the incentive
for overloading.
Emerging concerns on competitive pressure
Weakness in Leyland’s volumes raises concerns of competitive pressure in the
MHCV industry. Although exact market share data is not available for May,
significant decline in vols. indicate that co. is losing market share to Tata Motors
and Eicher. We believe competitive pressure will intensify with the roll out of
MNAL during FY12.
Margins to remain under pressure
We believe margins will remain under pressure on account of lower volumes.
Mgmt.’s margin guidance of 10-10.5% for FY12 is based on 10-15% domestic
vol. growth expectation, which we believe will be difficult to achieve given
increasing competitive pressure. We reduce our margin estimate for FY12/13 by
90/100bps to 9.4% and 9.1% on back of:
Lack of operating leverage: There has been significant increase in
ALL’s fixed cost base due to capacity expansion at Pantnagar plant. With
slowing volume growth, margins are likely to come under pressure as every
1% change in MHCV changes earnings by ~4% in FY12E, all else equal.
Transition to U-truck platform margin dilutive: In FY12, co. expects
the proportion of truck sales (that are based on U truck platform) to total
domestic truck sales to reach 25% (~24,000 units). Mgmt. believes that this
may result in marginal negative impact on the margins as the pricing of these
trucks don’t fully recover the cost increases.
Potential increase in discounts: We believe Co. has been facing
increasing competitive pressure and has lost market share to Tata Motors and
Eicher.We believe co. will be forced to increase discounts in order to clear
inventory leading to margin decline.
Balance sheet deterioration
Leyland has invested significantly in capex and JVs leading to higher debt.
There was higher than expected investments at Rs 9bn in FY11 in associates and
JVs. Co. plans to borrow a further Rs 6bn in FY12 to part fund capex and
investments of Rs 12bn leading to debt/equity likely rising to ~0.79 and higher
interest outgo.
Changes in estimates
We change our domestic MHCV YoY growth estimates to 0% for FY12E
from 10% previously, mainly to reflect moderating MHCV growth and
increasing competitive intensity.
We reduce our EBITDA margin estimate for FY12/13 by 90/100bp to
9.4%/9.1% respectively due to higher operating cost and slower volume
growth outlook.
We increase our interest expense estimate due to additional debt of Rs.6bn
we expect the co. to raise in FY12 in order to fund capex and investments.
Ashok Leyland
Ashok Leyland is the second-largest player in the medium and heavy
commercial vehicle (MHCV) segment in India. The company had a 23% market
share in MHCVs in FY10. It has formed a joint venture with Nissan Motors for
light commercial vehicles and a joint venture with John Deere for construction
equipment. The majority shareholder is the Hinduja Group, with a 51% stake.
Statement of Risk
The domestic MHCV market remains highly leveraged to industrial production
growth. Consequently, any slowdown in the economy, could lead to an abrupt
slowdown in MHCV demand. This remains the key risk for Ashok Leyland,
along with loss of market share with increasing competitive pressure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Ashok Leyland
D owngrade on deteriorating vols., Sell
Event: Ashok Leyland reports 11%YoY decline in MHCV vols for May'11
Leyland has reported a decline of 13%YoY in MHCV vols FY12ytd vs 9%YoY
growth reported in the segment by Tata Motors. We believe co. is losing market
share to Tata Motors and Eicher. We remain negative on M&HCV growth and
expect 5%YoY growth in FY12 given the weak industrial growth environment.
Impact: Sharp cut to estimates on weaker vol. growth outlook
We reduce FY12E vol. growth for Leyland to 0% from 10%. As a result we reduce
our EBITDA margin est. for FY12/13 from 10.4%/10.1% to 9.4%/9.1%. We are
reducing our earnings for FY12/13 by 29%/34% respectively. We are significantly
below co. guidance of 15% vol. growth and 10%-10.5% EBITDA margin for FY12
Action: Downgrade to Sell, rising debt remains a concern
We are 31% below consensus EPS for FY12E. We believe there remains further
downside risk to our est. due to rising competitive pressure, transition to the new
‘U’ Truck platform and potentially weaker M&HCV growth. We believe co.
balance sheet has deteriorated significantly due to higher than expected
investments at Rs 9bn in FY11 in associates and JVs. Co. plans to borrow further
Rs 6bn in FY12 to part fund capex and investments of Rs 12bn leading to higher
interest outgo. The debt/equity ratio should rise to ~0.8x
Valuations: Downgrade to Sell (from Neutral), Reduce PT to Rs 45
We derive our price target from a DCF-based methodology using UBS’s VCAM
tool with a 12.5% WACC. We add Rs3.0 for Leyland’s stake in IndusInd Bank.
Vol. outlook remains weak,
downgrade to sell
We downgrade Ashok Leyland to Sell as we cut our domestic MHCV growth
outlook for FY12 from 10% to 0%. We remain negative on M&HCV growth
and expect 5%YoY industry growth in FY12 given the weak industrial growth
environment.
We believe the near term growth outlook for MHCV’s remains challenging
given sluggish near term IIP growth and the high base in terms of MHCV
demand for Q2FY12 due to pre-buying ahead of emission norms change in
Q2FY11. While our discussion with MHCV mfrs indicates that both freight
rates and fleet utilization for truckers remains good, we also note that
overloading seems to be fairly rampant given lax implementation of norms.
We believe the govt. is likely to raise diesel prices in June’11. Also, due to high
commodity prices and emission norms change have resulted in 12%YoY
increase in MHCV prices. We believe rising fuel prices, interest rates and
continued increase in MHCV prices are likely to further increase the incentive
for overloading.
Emerging concerns on competitive pressure
Weakness in Leyland’s volumes raises concerns of competitive pressure in the
MHCV industry. Although exact market share data is not available for May,
significant decline in vols. indicate that co. is losing market share to Tata Motors
and Eicher. We believe competitive pressure will intensify with the roll out of
MNAL during FY12.
Margins to remain under pressure
We believe margins will remain under pressure on account of lower volumes.
Mgmt.’s margin guidance of 10-10.5% for FY12 is based on 10-15% domestic
vol. growth expectation, which we believe will be difficult to achieve given
increasing competitive pressure. We reduce our margin estimate for FY12/13 by
90/100bps to 9.4% and 9.1% on back of:
Lack of operating leverage: There has been significant increase in
ALL’s fixed cost base due to capacity expansion at Pantnagar plant. With
slowing volume growth, margins are likely to come under pressure as every
1% change in MHCV changes earnings by ~4% in FY12E, all else equal.
Transition to U-truck platform margin dilutive: In FY12, co. expects
the proportion of truck sales (that are based on U truck platform) to total
domestic truck sales to reach 25% (~24,000 units). Mgmt. believes that this
may result in marginal negative impact on the margins as the pricing of these
trucks don’t fully recover the cost increases.
Potential increase in discounts: We believe Co. has been facing
increasing competitive pressure and has lost market share to Tata Motors and
Eicher.We believe co. will be forced to increase discounts in order to clear
inventory leading to margin decline.
Balance sheet deterioration
Leyland has invested significantly in capex and JVs leading to higher debt.
There was higher than expected investments at Rs 9bn in FY11 in associates and
JVs. Co. plans to borrow a further Rs 6bn in FY12 to part fund capex and
investments of Rs 12bn leading to debt/equity likely rising to ~0.79 and higher
interest outgo.
Changes in estimates
We change our domestic MHCV YoY growth estimates to 0% for FY12E
from 10% previously, mainly to reflect moderating MHCV growth and
increasing competitive intensity.
We reduce our EBITDA margin estimate for FY12/13 by 90/100bp to
9.4%/9.1% respectively due to higher operating cost and slower volume
growth outlook.
We increase our interest expense estimate due to additional debt of Rs.6bn
we expect the co. to raise in FY12 in order to fund capex and investments.
Ashok Leyland
Ashok Leyland is the second-largest player in the medium and heavy
commercial vehicle (MHCV) segment in India. The company had a 23% market
share in MHCVs in FY10. It has formed a joint venture with Nissan Motors for
light commercial vehicles and a joint venture with John Deere for construction
equipment. The majority shareholder is the Hinduja Group, with a 51% stake.
Statement of Risk
The domestic MHCV market remains highly leveraged to industrial production
growth. Consequently, any slowdown in the economy, could lead to an abrupt
slowdown in MHCV demand. This remains the key risk for Ashok Leyland,
along with loss of market share with increasing competitive pressure.
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