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Ashok Leyland (ASOK.BO)
Buy Equity Research
Below expectations on higher fixed costs; retain Buy on valuation
What surprised us
Ashok Leyland reported 1QFY12 net income of Rs768mn (after adjusting
for a one-off item of Rs95mn arising from a change in accounting policy
for land lease amortization), down 37% yoy, 7% below Bloomberg
consensus, and 3.5% below our estimates. Excluding the one-off item, we
believe operating profit was largely in line with our and consensus
expectations, but reported net income was lower due to: 1) higher
depreciation costs on ramp-up of new Pantnagar plant; and 2) higher
interest costs with increased working capital requirement from higher
finished goods inventory. We therefore reduce our FY12E/FY13E/FY14E
EPS by 9.3%/7.2%/7.8% mainly on higher depreciation and interest costs.
As a consequence, we lower our 12-month FY12E P/E-based target price to
Rs58 (from Rs64). We also incorporate FY11 annual report results into our
model. Management expects the interest rate cycle to be more favourable
in the coming quarters, as well as higher tax benefits from the Pantnagar
plant due to improved localisation. The company plans to launch its first
LCV branded ‘Dost’ in a JV with Nissan in July, which should boost
volumes over FY12E-FY13E, in our view.
What to do with the stock
We maintain our Buy rating on the stock as it is trading at 25% discount to
historical average on FY12E P/B, and 5% discount after adjusting for the
revaluation reserve. We expect volumes to improve in the seasonally
stronger 2QFY12E-4QFY12E, which should boost net income margins, in
our view. Key risks: Less favourable inflation and interest rates cycle.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland (ASOK.BO)
Buy Equity Research
Below expectations on higher fixed costs; retain Buy on valuation
What surprised us
Ashok Leyland reported 1QFY12 net income of Rs768mn (after adjusting
for a one-off item of Rs95mn arising from a change in accounting policy
for land lease amortization), down 37% yoy, 7% below Bloomberg
consensus, and 3.5% below our estimates. Excluding the one-off item, we
believe operating profit was largely in line with our and consensus
expectations, but reported net income was lower due to: 1) higher
depreciation costs on ramp-up of new Pantnagar plant; and 2) higher
interest costs with increased working capital requirement from higher
finished goods inventory. We therefore reduce our FY12E/FY13E/FY14E
EPS by 9.3%/7.2%/7.8% mainly on higher depreciation and interest costs.
As a consequence, we lower our 12-month FY12E P/E-based target price to
Rs58 (from Rs64). We also incorporate FY11 annual report results into our
model. Management expects the interest rate cycle to be more favourable
in the coming quarters, as well as higher tax benefits from the Pantnagar
plant due to improved localisation. The company plans to launch its first
LCV branded ‘Dost’ in a JV with Nissan in July, which should boost
volumes over FY12E-FY13E, in our view.
What to do with the stock
We maintain our Buy rating on the stock as it is trading at 25% discount to
historical average on FY12E P/B, and 5% discount after adjusting for the
revaluation reserve. We expect volumes to improve in the seasonally
stronger 2QFY12E-4QFY12E, which should boost net income margins, in
our view. Key risks: Less favourable inflation and interest rates cycle.
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