Accumulate Ashok Leyland : TP: Rs30 - Prabhudas Lilladher

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Ashok Leyland                    Accumulate             CMP: Rs27               TP: Rs30

Q2FY12 Result Update - Results above expectations

n  Good performance despite tough environment: Ashok Leyland (AL) reported growth of 14.0% YoY in its top-line at Rs30.9bn (PLe: Rs30.2bn). Volume for the quarter declined by 3.9% YoY, whereas average realisation grew by 18.7% YoY. Average realisation/vehicle was higher than our expectation on account of higher sales to the defence sector (Revenue of Rs1bn v/s Rs200m) and price hikes taken in previous quarters. Material cost/vehicle increased by 18.6% as against 18.7% improvement in average realization/vehicle. However, on account of 18.9% YoY increase in employee cost and 18.6% YoY growth in other expenditure, EBITDA for the quarter grew by only 8.1% YoY to Rs3.3bn (PLe: Rs3.0bn). On a QoQ basis, EBITDA improved by 90bps due to sequential decline of 50bps in other expenses. Interest expenses grew by 58.9% YoY on account of borrowing for higher working capital requirement. As a result, PAT for the quarter declined by 7.8% YoY to Rs1.54bn (PLe: Rs1.37m).

n  Loan funds increase substantially: There was an increase of Rs7.7bn in the loan funds as of September 2011, taking the total loans to Rs33bn. Out of this, around Rs6bn loan has been on account of working capital requirement.

n  Our volumes estimates: We maintain our volume estimate of 93K units for FY12E, lower than the management guidance of 1.0lac. We have assumed volumes of 8k units and 18k units of the new LCV ‘Dost’ in FY12E and FY13E, respectively. As a result, we expect 18.0% YoY growth in FY13E volumes.

n  Outlook & Valuation: Our ground level interaction with truckers suggests that in some pockets, fleet operators are postponing their purchase decision which could lead to muted growth in M&HCV segment in FY12E. In our view, the operating performance is likely to improve on account of higher sales from the tax-free Uttarakhand plant (~33% of overall domestic sales). Maintain ‘Accumulate’ on account of fair valuations of 9.9x FY13E EPS.

Prabhudas Lilladher