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Ashok Leyland (AL)
Automobiles
Operating leverage benefits lead to expansion in margins. Net profit of Rs1.54 bn
(-8% yoy, 94% qoq) was 37% above our estimates due to better-than-expected
realization and lower-than-expected staff costs. EBITDA margins (10.7%) increased by
130 bps sequentially boosted by operating leverage benefits while gross margins
declined by 150 bps qoq. We maintain our SELL rating on the stock as we believe
headwinds to volume growth remain in 2HFY12E due to lower industrial production.
Operating leverage benefits boost 2QFY12 operating margins
Net sales in 2QFY12 of Rs30.94 bn (+14% yoy, 24% qoq) were 4% above our expectations driven
by higher defence kit and spare parts revenues. Gross margins declined by 150 bps qoq due to
adverse product mix and higher raw material costs during the quarter. Staff costs as a % of sales
declined by 190 bps qoq due to operating leverage benefits while other expenses as % of sales
also declined by 90 bps qoq. Higher other income and lower tax rate led to a 37% beat on our
profit estimates. Interest expenses rose sharply qoq due to higher working capital requirements.
�� Company’s volumes have declined by 6% yoy in April-October 2011 period and we believe
volumes are likely to grow in low single digits in 2HFY12E. We see downside risks to our
volume estimates for FY2012E.
�� Company has a finished goods inventory of 8,600 units at end of September (declined from
10,000 vehicles in June 2011) which has not corrected much despite a tepid volume growth.
�� Company had taken a 0.8% price increase in June 2011 and has taken a further price increase
of ~0.8% in November 2011. We believe price increase is unlikely to benefit the company as
tepid volume growth will result in higher discounts which will offset the impact of price increase.
�� Company expects raw material costs to remain static in 2HFY12E. Company indicated that it
produced 8,000 units from Pantnagar in 2QFY12 versus 5,900 units in 1QFY12 which also
aided improvement in EBITDA margins.
We maintain our SELL rating on the stock
We maintain our SELL rating on the stock as we forecast a muted volume growth for the company
over the next two years. We expect volumes to remain under pressure in 2HFY12E as industrial
production is slowing down which would lead to lower freight availability in the economy and thus
impact volume growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok Leyland (AL)
Automobiles
Operating leverage benefits lead to expansion in margins. Net profit of Rs1.54 bn
(-8% yoy, 94% qoq) was 37% above our estimates due to better-than-expected
realization and lower-than-expected staff costs. EBITDA margins (10.7%) increased by
130 bps sequentially boosted by operating leverage benefits while gross margins
declined by 150 bps qoq. We maintain our SELL rating on the stock as we believe
headwinds to volume growth remain in 2HFY12E due to lower industrial production.
Operating leverage benefits boost 2QFY12 operating margins
Net sales in 2QFY12 of Rs30.94 bn (+14% yoy, 24% qoq) were 4% above our expectations driven
by higher defence kit and spare parts revenues. Gross margins declined by 150 bps qoq due to
adverse product mix and higher raw material costs during the quarter. Staff costs as a % of sales
declined by 190 bps qoq due to operating leverage benefits while other expenses as % of sales
also declined by 90 bps qoq. Higher other income and lower tax rate led to a 37% beat on our
profit estimates. Interest expenses rose sharply qoq due to higher working capital requirements.
�� Company’s volumes have declined by 6% yoy in April-October 2011 period and we believe
volumes are likely to grow in low single digits in 2HFY12E. We see downside risks to our
volume estimates for FY2012E.
�� Company has a finished goods inventory of 8,600 units at end of September (declined from
10,000 vehicles in June 2011) which has not corrected much despite a tepid volume growth.
�� Company had taken a 0.8% price increase in June 2011 and has taken a further price increase
of ~0.8% in November 2011. We believe price increase is unlikely to benefit the company as
tepid volume growth will result in higher discounts which will offset the impact of price increase.
�� Company expects raw material costs to remain static in 2HFY12E. Company indicated that it
produced 8,000 units from Pantnagar in 2QFY12 versus 5,900 units in 1QFY12 which also
aided improvement in EBITDA margins.
We maintain our SELL rating on the stock
We maintain our SELL rating on the stock as we forecast a muted volume growth for the company
over the next two years. We expect volumes to remain under pressure in 2HFY12E as industrial
production is slowing down which would lead to lower freight availability in the economy and thus
impact volume growth.
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