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Ashok Leyland (AL)
Automobiles
Lofty targets but slow execution. We believe management guidance of 15% yoy
growth in volumes in FY2012E seems aggressive due to high inventory levels, slowdown
in freight demand and our expectations of loss in market share. We expect the
company to lose 100 bps market share in FY2012E due to its higher dependence on
heavy truck volumes than its competitor Tata Motors. We maintain our SELL rating on
the stock with a target price of Rs52 which is based on 11X FY2013E EPS.
Management attributes decline in volume growth to slowdown in South India
The company lost 5% market share qoq in the domestic commercial vehicle segment in 1QFY12
which management attributed to 20% yoy decline in South India volumes due to elections in
April-May 2011. The company maintained its volume growth guidance of 15% yoy in FY2012E
and expects to increase market share in 2HFY12E. The company has increased inventory by 2,000
units during the quarter to 10,000 units as sales lagged production in 1QFY12.
Production at Pantnagar plant falls sharply in 1QFY12
The company produced 5,900 units at its tax-free plant at Pantnagar in 1QFY12 versus 13,500
units produced in 4QFY11. Management has guided to produce 36,000 units from the plant in
FY2012E driven by pick-up in production at the Pantnagar plant in 2HFY12E. The company has
also increased its guidance to Rs 40,000/vehicle excise benefits from the Pantnagar plant (from
Rs35,000 earlier) due to increase in localization at the Pantnagar plant. According to our
calculation, excise benefit of Rs40,000/vehicle for the production at the Pantnagar plant aided the
company in improving EBITDA margins by 100 bps during the quarter. Hence, ex Pantnagar
benefits, EBITDA margins would have been ~8.4% in 1QFY12, in our view.
The company maintained its EBITDA margin guidance of 10.5% which we believe could be
conservative if management achieves its target volumes in FY2012E. We believe EBITDA margins
will be maintained at ~10% levels despite our expectations of 4% yoy growth in volumes in
FY2012E due to benefits from the Pantnagar plant and moderation in raw material costs in
2HFY12E.
We maintain our SELL rating on the stock
We maintain our SELL rating on the stock as we believe volume growth is likely to remain muted
over the next two years and earnings are expected to decline by 12% yoy in FY2012E due to
significant increase in capital expenditure. We maintain our earnings estimates and price target of
Rs52 which is based on 11X FY2013E EPS.
Management remains optimistic of gaining market share
Management remains optimistic of gaining market share in the commercial vehicle segment
and maintained its volume growth outlook of 15% yoy in FY2012E. The company expects
domestic commercial vehicle volumes to increase by 8-9% yoy in FY2012E. The company
has lost ~5% market share qoq in 1QFY12. Management indicated that South Indian
commercial vehicle industry volumes declined by 20% yoy due to election in Southern Indian
states which resulted in a market share decline for Ashok Leyland as they have 50% market
share in South India. The company indicated that demand for multi-axle trucks declined by
40% yoy in South India. Other regions like North, West and East Indian have grown at
~15% yoy in 1QFY12, according to the management. The company also indicated that
factory inventory levels have increased by 10,000 units by end of June 2011 versus 8,000
units in March 2011. We expect 2QFY12E volume growth to decline as the company
corrects its inventory levels.
While we agree with management’s view that commercial vehicle volumes are likely to grow
at single digit but we expect Ashok Leyland to lose 100 bps market share in FY2012E as we
expect heavier tonnage volumes to grow at a slower rate given lower freight generation in
the economy. We forecast a 4% yoy growth in Ashok Leyland’s domestic commercial vehicle
volumes versus our industry volume growth assumptions of 8% yoy in FY2012E.
Ramp-up in U-truck volumes is also below expectations. The company sold 800 units (4% of
total volumes) versus management’s guidance that U-truck volumes will form 20-25% of
total volumes in FY2012E. EBITDA margins in the U-truck are much lower than existing
trucks; hence, EBITDA margins should ideally improve if volume growth picks up.
Production at Pantnagar plant falls in 1QFY12
The company produced 5,900 units at its tax-free plant at Pantnagar in 1QFY12 versus
13,500 units produced in 4QFY11. Management has guided to produce 36,000 units from
the plant in FY2012E driven by pick-up in production at Pantnagar plant in 2HFY12E. The
company has also increased its guidance to Rs40,000/vehicle excise benefits from the
Pantnagar plant (versus Rs35,000/vehicle earlier) due to increase in localization at the
Pantnagar plant. According to our calculation, excise benefit of Rs40,000/vehicle for the
production at the Pantnagar plant aided the company in improving EBITDA margins by 100
bps during the quarter. Hence, ex Pantnagar benefits, EBITDA margins would have been
~8.4% in 1QFY12, in our view.
Spare part and defence kit revenues report a strong growth
The company indicated that spare part revenues increased by 31% yoy in 1QFY12 while
engine sales declined by 3% yoy impacted by a significant decline in the telecom engine
volumes. The company sold 3,400 engine volumes in 1QFY12 (-13% yoy decline). The
company sold 500 units of defence kits in 1QFY12 versus 140 kits in 1QFY11.
Other key takeaways
The company had increased vehicle prices by 2% in April 2011 in the domestic market
and by 6% in the export markets. The company has increased prices further by 0.8% in
June 2011. The company indicated that the raw material costs increased by 2% during
the quarter and expects raw material costs to moderate in 2HFY12E.
Depreciation expenses increased sharply during the quarter due to amortization of capex
invested in the Pantnagar plant and increase in amortization of product development
expenses. The company invested Rs1.3 bn in capex in 1QFY12 and plans to spend Rs6 bn
in FY2012E. The company also plans to spend Rs5 bn in investments primarily in LCV joint
venture with Nissan and Hinduja Leyland finance.
Interest expenses increased sharply due to increase in working capital levels.
Total debt of the company increased to Rs32 bn by end of June 2011 from Rs26 bn at
end of March 2011.
The company will launch its first LCV vehicle Dost (1.2 ton vehicle) in next few days from
its joint venture with Nissan. The company will do contract manufacturing for the joint
venture at its Hosur plant. The company has a capacity to produce 55,000 units in the
LCV joint venture. The company will launch 3-6 ton vehicles over the next 12-18 months
to increase its presence in the LCV segment.
The company maintained its EBITDA margin guidance of 10.5% in FY2012E which we
believe could be conservative if management achieves its target volumes in FY2012E. We
believe EBITDA margins will be maintained at ~10% levels despite our expectations of
4% yoy growth in volumes in FY2012E due to benefits from the Pantnagar plant and
moderation in raw material costs in 2HFY12E.
We maintain our earnings estimates and our rating. Our target price of Rs52 is based on
11X FY2013E EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland (AL)
Automobiles
Lofty targets but slow execution. We believe management guidance of 15% yoy
growth in volumes in FY2012E seems aggressive due to high inventory levels, slowdown
in freight demand and our expectations of loss in market share. We expect the
company to lose 100 bps market share in FY2012E due to its higher dependence on
heavy truck volumes than its competitor Tata Motors. We maintain our SELL rating on
the stock with a target price of Rs52 which is based on 11X FY2013E EPS.
Management attributes decline in volume growth to slowdown in South India
The company lost 5% market share qoq in the domestic commercial vehicle segment in 1QFY12
which management attributed to 20% yoy decline in South India volumes due to elections in
April-May 2011. The company maintained its volume growth guidance of 15% yoy in FY2012E
and expects to increase market share in 2HFY12E. The company has increased inventory by 2,000
units during the quarter to 10,000 units as sales lagged production in 1QFY12.
Production at Pantnagar plant falls sharply in 1QFY12
The company produced 5,900 units at its tax-free plant at Pantnagar in 1QFY12 versus 13,500
units produced in 4QFY11. Management has guided to produce 36,000 units from the plant in
FY2012E driven by pick-up in production at the Pantnagar plant in 2HFY12E. The company has
also increased its guidance to Rs 40,000/vehicle excise benefits from the Pantnagar plant (from
Rs35,000 earlier) due to increase in localization at the Pantnagar plant. According to our
calculation, excise benefit of Rs40,000/vehicle for the production at the Pantnagar plant aided the
company in improving EBITDA margins by 100 bps during the quarter. Hence, ex Pantnagar
benefits, EBITDA margins would have been ~8.4% in 1QFY12, in our view.
The company maintained its EBITDA margin guidance of 10.5% which we believe could be
conservative if management achieves its target volumes in FY2012E. We believe EBITDA margins
will be maintained at ~10% levels despite our expectations of 4% yoy growth in volumes in
FY2012E due to benefits from the Pantnagar plant and moderation in raw material costs in
2HFY12E.
We maintain our SELL rating on the stock
We maintain our SELL rating on the stock as we believe volume growth is likely to remain muted
over the next two years and earnings are expected to decline by 12% yoy in FY2012E due to
significant increase in capital expenditure. We maintain our earnings estimates and price target of
Rs52 which is based on 11X FY2013E EPS.
Management remains optimistic of gaining market share
Management remains optimistic of gaining market share in the commercial vehicle segment
and maintained its volume growth outlook of 15% yoy in FY2012E. The company expects
domestic commercial vehicle volumes to increase by 8-9% yoy in FY2012E. The company
has lost ~5% market share qoq in 1QFY12. Management indicated that South Indian
commercial vehicle industry volumes declined by 20% yoy due to election in Southern Indian
states which resulted in a market share decline for Ashok Leyland as they have 50% market
share in South India. The company indicated that demand for multi-axle trucks declined by
40% yoy in South India. Other regions like North, West and East Indian have grown at
~15% yoy in 1QFY12, according to the management. The company also indicated that
factory inventory levels have increased by 10,000 units by end of June 2011 versus 8,000
units in March 2011. We expect 2QFY12E volume growth to decline as the company
corrects its inventory levels.
While we agree with management’s view that commercial vehicle volumes are likely to grow
at single digit but we expect Ashok Leyland to lose 100 bps market share in FY2012E as we
expect heavier tonnage volumes to grow at a slower rate given lower freight generation in
the economy. We forecast a 4% yoy growth in Ashok Leyland’s domestic commercial vehicle
volumes versus our industry volume growth assumptions of 8% yoy in FY2012E.
Ramp-up in U-truck volumes is also below expectations. The company sold 800 units (4% of
total volumes) versus management’s guidance that U-truck volumes will form 20-25% of
total volumes in FY2012E. EBITDA margins in the U-truck are much lower than existing
trucks; hence, EBITDA margins should ideally improve if volume growth picks up.
Production at Pantnagar plant falls in 1QFY12
The company produced 5,900 units at its tax-free plant at Pantnagar in 1QFY12 versus
13,500 units produced in 4QFY11. Management has guided to produce 36,000 units from
the plant in FY2012E driven by pick-up in production at Pantnagar plant in 2HFY12E. The
company has also increased its guidance to Rs40,000/vehicle excise benefits from the
Pantnagar plant (versus Rs35,000/vehicle earlier) due to increase in localization at the
Pantnagar plant. According to our calculation, excise benefit of Rs40,000/vehicle for the
production at the Pantnagar plant aided the company in improving EBITDA margins by 100
bps during the quarter. Hence, ex Pantnagar benefits, EBITDA margins would have been
~8.4% in 1QFY12, in our view.
Spare part and defence kit revenues report a strong growth
The company indicated that spare part revenues increased by 31% yoy in 1QFY12 while
engine sales declined by 3% yoy impacted by a significant decline in the telecom engine
volumes. The company sold 3,400 engine volumes in 1QFY12 (-13% yoy decline). The
company sold 500 units of defence kits in 1QFY12 versus 140 kits in 1QFY11.
Other key takeaways
The company had increased vehicle prices by 2% in April 2011 in the domestic market
and by 6% in the export markets. The company has increased prices further by 0.8% in
June 2011. The company indicated that the raw material costs increased by 2% during
the quarter and expects raw material costs to moderate in 2HFY12E.
Depreciation expenses increased sharply during the quarter due to amortization of capex
invested in the Pantnagar plant and increase in amortization of product development
expenses. The company invested Rs1.3 bn in capex in 1QFY12 and plans to spend Rs6 bn
in FY2012E. The company also plans to spend Rs5 bn in investments primarily in LCV joint
venture with Nissan and Hinduja Leyland finance.
Interest expenses increased sharply due to increase in working capital levels.
Total debt of the company increased to Rs32 bn by end of June 2011 from Rs26 bn at
end of March 2011.
The company will launch its first LCV vehicle Dost (1.2 ton vehicle) in next few days from
its joint venture with Nissan. The company will do contract manufacturing for the joint
venture at its Hosur plant. The company has a capacity to produce 55,000 units in the
LCV joint venture. The company will launch 3-6 ton vehicles over the next 12-18 months
to increase its presence in the LCV segment.
The company maintained its EBITDA margin guidance of 10.5% in FY2012E which we
believe could be conservative if management achieves its target volumes in FY2012E. We
believe EBITDA margins will be maintained at ~10% levels despite our expectations of
4% yoy growth in volumes in FY2012E due to benefits from the Pantnagar plant and
moderation in raw material costs in 2HFY12E.
We maintain our earnings estimates and our rating. Our target price of Rs52 is based on
11X FY2013E EPS.
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