Ashok Leyland - "Not yet out of the woods":: LKP

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Q1 disappoints on the bottom-line

Ashok Leyland (AL)'s Q1 FY12 performance was below our expectations at the bottomline as depreciation (up 38% yoy) and interest costs (up 69% yoy) hampered the performance of the company. Depreciation costs jumped on higher capex incurred in the previous year for Pantnagar expansion, while interest costs went up due to higher inventory bearing costs and working capital expenses. Volumes declined by a significant 35% qoq and 10% yoy in this quarter, while realization growth was flattish. Despite an adverse swing in product mix towards bus segment, the price hike of 2% taken in April supported net realizations. EBITDA margins for the quarter came in at 9.8%, while net profits declined by 80% yoy to Rs.862mn.

Management guidance of 1, 08,000 units in FY 12 seems optimistic

Despite selling only 19,277 units in Q1 FY12, a decline of 10% yoy and 35% qoq, management expects to clock ~90,000 units in the rest of the nine months. They have still maintained their previous guidance of 1,08,000 units, a growth of 14% yoy. Management believes that they can achieve this through expected fall In interest rates. However, we believe that with macro headwinds such as inflation ceasing to ease down, it will be difficult for interest rates to see a significant decline in the coming quarters. Also, fuel price hikes, no significant growth in freight rates, shortage of truck drivers and rising competition will make it extremely difficult for AL to meet its guidance and increase its market share to a targeted 27% from current 22%(AL reported MS loss in Q1 on weak Southern demand).

Bottom-line to be impacted by continued pressure due to depreciation and interest costs

Though the EBITDA margins for this quarter came in at 9.8%, it was supported by price hikes taken in April and higher spare part and genset sales. The company has taken another price hike of 1.5-2% in July which will impact Q2 margins positively. But the slowdown prevailing on the high margin truck business will adversely impact profitability. With no plans of further significant price hikes, we believe it will be difficult for the company to maintain its margin guidance of 10.5% for FY12. Also production from the tax haven plant of Pantnagar has been at just 5,900 units in Q1, v/s expected 7,500 units. Management expects to produce 9,000 units in Q2 and Q3 each and 12,000 in Q4 from this plant and increase the cost savings upto Rs.47, 000 per unit. With inventory soaring to 10,100 units at the end of June up from 7,500 in April, we see the Pantnagar ramp up to be difficult as the existing inventory pile up and slowing demand will provide little room for the company to expand production. This will impact depreciation and interest costs, coupled with higher debt increasing interest burden.

Outlook and valuation

In view of slowdown in the CV industry impacting ALL the most, it being a pure play CV player, we continue to estimate a meager 4% CAGR at the bottom-line during FY 11-13E. We thus, maintain our estimates and Underperformer rating on the stock with a target price of Rs.43 (8.5x times FY 13E EPS of Rs. 5.1).