Ashok Leyland 1Q FY12: Operating performance in line, earnings marginally lower ::Standard Chartered Research,

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Ashok Leyland
1Q FY12: Operating performance in line, earnings marginally lower


 ALL’s revenue was above our estimate, led by higher
sales of spare parts and defence products; hence,
adjusted margin was higher than our estimate at 9.4%.
 Earnings were marginally lower than our estimate due to
higher interest, depreciation and tax rate.
 We lower FY12 earnings by 3% to factor in higher
interest and depreciation.
 We expect Uttarakhand ramp-up, improved realisation
and softening commodity prices to boost margin.
 Attractively valued at 8.7x FY12E earnings; Maintain
OUTPERFORM, but lower price target to Rs66 (Rs71
earlier).


Revenue up 6% yoy – above our estimate. ALL’s 1Q
revenue was above our estimate, led by price hikes and
improved spare parts and defence product sales.  
Operating performance above expectations. The
company’s RM/sales remained flat qoq at 72.1% (-180bps
yoy). Other expenses were Rs94.6m lower due to a onetime prior period write-back. Reported margin at 9.8% was
higher than our estimate. Even after adjusting for the one-off
write-back, EBITDA margin at 9.4% was higher than our
estimate of 9.2%.
Earnings hurt by higher interest and tax rate. Interest
was much higher than expected at Rs533m (we expected
Rs460m) on account of higher working capital requirement.
The average tax rate was 22%, above our expectation of
18%. As a result, ALL’s earnings at Rs863m (down 30%
yoy) were marginally lower than our expectation of Rs902m.
Outlook:  With the volume ramp-up in southern market no
longer a constraint, we expect ALL to gain lost market share
in the coming quarters. Volume ramp-up, increased
contribution from Uttarakhand, substantially improved
realisations and softening commodity prices are likely to
lead to margin expansion from here on. However, to factor
in a higher than anticipated interest and depreciation, we
have lowered our FY12 estimates by 3% to Rs5.7 per share
while maintaining our FY13 estimates.
Valuation. At current valuations of 8.7x FY12E earnings
and 4.7x EV/EBITDA, the stock appears attractively valued.
Maintain OUTPERFORM with a revised price target of Rs66
(11x rolling one-year forward earnings)