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UBS Investment Research
Ashok Leyland
Reiterate Sell rating on weak volumes
[ EXTRACT]
Weak volume growth momentum
Ashok Leyland (Leyland) has lost 500bp in market share in FY12 YTD to Tata
Motors and Eicher in the medium & heavy commercial vehicle (MHCV) segment.
We expect 0% YoY growth in FY12 for Leyland compared with 5% YoY industry
growth. We believe near-term MHCV growth remains challenging because of
sluggish near-term IIP growth and the high base for MHCV demand in Q2 FY12,
caused by buying ahead of emission norm changes in Q2 FY11.
Margins under pressure on low operating leverage
We believe the EBITDA margin will remain under pressure because of lower
volumes. Management’s margin guidance of 10-10.5% for FY12 is based on 10-
15% domestic volume growth, which we believe will be difficult to achieve, given
intensifying competition. The transition to the new U truck platform and a potential
increase in discounts by the company to clear inventory would add pressure on
margins. We estimate an EBITDA margin of 9.4%/9.1% for FY12/FY13.
Deteriorating balance sheet remains a concern
We believe Leyland’s balance sheet has deteriorated substantially due to higherthan-
expected investments of Rs9bn in associates and JVs in FY11. It plans to
borrow Rs6bn in FY12 to partially fund Rs12bn in investments and capex, leading
to higher interest expense. We estimate the debt/equity ratio could rise to 0.8x.
Valuation: price target of Rs45.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a WACC of
12.5%. We add Rs3.00 for Leyland’s stake in IndusInd Bank.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Ashok Leyland
Reiterate Sell rating on weak volumes
[ EXTRACT]
Weak volume growth momentum
Ashok Leyland (Leyland) has lost 500bp in market share in FY12 YTD to Tata
Motors and Eicher in the medium & heavy commercial vehicle (MHCV) segment.
We expect 0% YoY growth in FY12 for Leyland compared with 5% YoY industry
growth. We believe near-term MHCV growth remains challenging because of
sluggish near-term IIP growth and the high base for MHCV demand in Q2 FY12,
caused by buying ahead of emission norm changes in Q2 FY11.
Margins under pressure on low operating leverage
We believe the EBITDA margin will remain under pressure because of lower
volumes. Management’s margin guidance of 10-10.5% for FY12 is based on 10-
15% domestic volume growth, which we believe will be difficult to achieve, given
intensifying competition. The transition to the new U truck platform and a potential
increase in discounts by the company to clear inventory would add pressure on
margins. We estimate an EBITDA margin of 9.4%/9.1% for FY12/FY13.
Deteriorating balance sheet remains a concern
We believe Leyland’s balance sheet has deteriorated substantially due to higherthan-
expected investments of Rs9bn in associates and JVs in FY11. It plans to
borrow Rs6bn in FY12 to partially fund Rs12bn in investments and capex, leading
to higher interest expense. We estimate the debt/equity ratio could rise to 0.8x.
Valuation: price target of Rs45.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a WACC of
12.5%. We add Rs3.00 for Leyland’s stake in IndusInd Bank.
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