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Ashok Leyland (AL)
Automobiles
Volume growth likely to remain sluggish. We maintain our SELL rating on the stock
as we believe volume growth is likely to remain sluggish in 2HFY12E due to slowdown
in freight availability and decline in freight rates in certain regions in India. We believe
EBITDA margins are likely to sustain at 10.5% levels over the next two years but believe
upside triggers to stock price will depend on pick-up in volume growth which looks
challenging in the near term. We retain our target price of Rs26.
Cautious outlook could limit upside triggers to the stock price
While Ashok Leyland 2QFY12 results beat our estimates significantly, we believe volume growth is
likely to remain sluggish in 2HFY12E due to slowdown in the South India market, decline in freight
availability, possibility of hike in diesel prices and decline in freight rates in East & South India. The
management highlighted the following in the concall on 2QFY12 results:
South India truck volumes declined by 23% yoy impacted by elections in Tamil Nadu and
Telangana issue. Multi-axle volumes also declined by 33% yoy which impacted Ashok Leyland’s
market share as it has a 30% market share in that segment.
Tractor trailer market also declined sharply by 25% yoy but tipper segment posted a 50% yoy
growth in 2QFY12. The company also cautioned that MHCV domestic industry volumes are
unlikely to grow by more than 5-6% yoy in FY2012E.
The company has a finished goods inventory of 9,000 vehicles at end of September 2011
(declined marginally by 1,000 units from June 2011).
The company maintained its guidance of 10.5% EBITDA margin for FY2012E but marginally
decreased its volume guidance to 100,000 units from 110,000 units earlier.
We maintain our SELL rating on the stock and retain our target price
We maintain our SELL rating on the stock as we see limited triggers for stock price performance as
volume growth is expected to remain sluggish in 2HFY12E. Our target price remains unchanged at
Rs26 (based on 11X FY2013E EPS). We have marginally tweaked our earnings estimates to factor in
lower volume growth in 2HFY12E but increase our EBITDA margin estimates by 50 bps over the
next two years to factor in lower commodity costs.
Conference call takeaways
We attended the conference call hosted by the management on 2QFY12 results.
Key takeaways are as follows
South India truck volumes declined by 23% yoy impacted by elections in Tamil Nadu and
Telangana issue. Multi-axle volumes also declined by 33% yoy which impacted Ashok
Leyland’s market share as it has a 30% market share in that segment.
Tractor trailer market also declined sharply by 25% yoy but tipper segment posted a 50%
yoy growth despite ban on mining activities and slowdown in construction across India.
We believe growth in tipper volumes could decline as we do not see any major pick-up in
mining and construction activity in 2HFY12E.
The company also indicated that it lost 2% market share in the North Indian market to
Tata Motors due to higher share of purchases by the big fleet operators where Tata
Motors has a larger presence. The North Indian market is growing as some states like UP
have put a ban on overloading of trucks and other states are likely to follow, however, we
would like to see actual implementation on the ground.
The company also cautioned that MHCV domestic industry volumes are unlikely to grow
by more than 5-6% yoy in FY2012E. Truck freight rates on the East and South India
routes have started to decline indicating slowdown in those geographies.
Export volumes continue to remain strong as the company has started exporting fully built
vehicles.
The company took a price increase of 1% in June 2011 and took a further price hike of
1% in November 2011 which we believe is surprising as raw material costs have declined
and are unlikely to increase much. Volume growth is also tepid and discounts are
expected to remain high which could potentially offset the benefits accruing from price
increases, in our view.
The company has a finished goods inventory of 9,000 vehicles at end of September 2011
(declined by 1,000 units from June 2011).
The company produced 9,000 units from Pantnagar plant in 2QFY12 versus 5,900 units in
1QFY12.
The company maintained its guidance of 10.5% EBITDA margin for FY2012E but
marginally decreased its volume guidance to 100,000 units from 110,000 units earlier.
Nissan LCV joint venture has sold 210 vehicles uptil now. 116 units are being sold in Tamil
Nadu which will be sold under the Nissan brand while outside Tamil Nadu vehicles will be
sold under the Ashok Leyland brand. The management expects to sell 55,000 units of
LCV in FY2013E. According to the arrangement with Nissan, the company will produce
on a cost + basis for the joint venture and hence operating margins will be inflated next
year as operating margin earned by producing for this joint venture will be part of Ashok
Leyland’s standalone results while joint venture will continue to report losses for at least
two years as per management’s expectations.
We do not value the investments made in the joint ventures currently as projects will take
time to break even and we would like to assess the success of the construction
equipment (which will be produced from John Deere JV) and LCVs in the market before
valuing these ventures.
We have marginally tweaked our estimates for FY2012E and FY2013E. We have reduced our
FY2012E earnings estimates by 2% and increased our FY2013E earnings estimates by 2%.
FY2012E downward revision in earnings reflects 3% downward revision in volume estimates
to factor in slower-than-expected growth in trucks for 2HFY12E while we have increased our
EBITDA margin assumptions by 50 bps over the next two years due to decline in raw
material costs.
We maintain our SELL rating on the stock as we see limited triggers for the stock price
performance as volume growth is expected to remain sluggish in 2HFY12E. Our target price
remains unchanged at Rs26 (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
Volume growth likely to remain sluggish. We maintain our SELL rating on the stock
as we believe volume growth is likely to remain sluggish in 2HFY12E due to slowdown
in freight availability and decline in freight rates in certain regions in India. We believe
EBITDA margins are likely to sustain at 10.5% levels over the next two years but believe
upside triggers to stock price will depend on pick-up in volume growth which looks
challenging in the near term. We retain our target price of Rs26.
Cautious outlook could limit upside triggers to the stock price
While Ashok Leyland 2QFY12 results beat our estimates significantly, we believe volume growth is
likely to remain sluggish in 2HFY12E due to slowdown in the South India market, decline in freight
availability, possibility of hike in diesel prices and decline in freight rates in East & South India. The
management highlighted the following in the concall on 2QFY12 results:
South India truck volumes declined by 23% yoy impacted by elections in Tamil Nadu and
Telangana issue. Multi-axle volumes also declined by 33% yoy which impacted Ashok Leyland’s
market share as it has a 30% market share in that segment.
Tractor trailer market also declined sharply by 25% yoy but tipper segment posted a 50% yoy
growth in 2QFY12. The company also cautioned that MHCV domestic industry volumes are
unlikely to grow by more than 5-6% yoy in FY2012E.
The company has a finished goods inventory of 9,000 vehicles at end of September 2011
(declined marginally by 1,000 units from June 2011).
The company maintained its guidance of 10.5% EBITDA margin for FY2012E but marginally
decreased its volume guidance to 100,000 units from 110,000 units earlier.
We maintain our SELL rating on the stock and retain our target price
We maintain our SELL rating on the stock as we see limited triggers for stock price performance as
volume growth is expected to remain sluggish in 2HFY12E. Our target price remains unchanged at
Rs26 (based on 11X FY2013E EPS). We have marginally tweaked our earnings estimates to factor in
lower volume growth in 2HFY12E but increase our EBITDA margin estimates by 50 bps over the
next two years to factor in lower commodity costs.
Conference call takeaways
We attended the conference call hosted by the management on 2QFY12 results.
Key takeaways are as follows
South India truck volumes declined by 23% yoy impacted by elections in Tamil Nadu and
Telangana issue. Multi-axle volumes also declined by 33% yoy which impacted Ashok
Leyland’s market share as it has a 30% market share in that segment.
Tractor trailer market also declined sharply by 25% yoy but tipper segment posted a 50%
yoy growth despite ban on mining activities and slowdown in construction across India.
We believe growth in tipper volumes could decline as we do not see any major pick-up in
mining and construction activity in 2HFY12E.
The company also indicated that it lost 2% market share in the North Indian market to
Tata Motors due to higher share of purchases by the big fleet operators where Tata
Motors has a larger presence. The North Indian market is growing as some states like UP
have put a ban on overloading of trucks and other states are likely to follow, however, we
would like to see actual implementation on the ground.
The company also cautioned that MHCV domestic industry volumes are unlikely to grow
by more than 5-6% yoy in FY2012E. Truck freight rates on the East and South India
routes have started to decline indicating slowdown in those geographies.
Export volumes continue to remain strong as the company has started exporting fully built
vehicles.
The company took a price increase of 1% in June 2011 and took a further price hike of
1% in November 2011 which we believe is surprising as raw material costs have declined
and are unlikely to increase much. Volume growth is also tepid and discounts are
expected to remain high which could potentially offset the benefits accruing from price
increases, in our view.
The company has a finished goods inventory of 9,000 vehicles at end of September 2011
(declined by 1,000 units from June 2011).
The company produced 9,000 units from Pantnagar plant in 2QFY12 versus 5,900 units in
1QFY12.
The company maintained its guidance of 10.5% EBITDA margin for FY2012E but
marginally decreased its volume guidance to 100,000 units from 110,000 units earlier.
Nissan LCV joint venture has sold 210 vehicles uptil now. 116 units are being sold in Tamil
Nadu which will be sold under the Nissan brand while outside Tamil Nadu vehicles will be
sold under the Ashok Leyland brand. The management expects to sell 55,000 units of
LCV in FY2013E. According to the arrangement with Nissan, the company will produce
on a cost + basis for the joint venture and hence operating margins will be inflated next
year as operating margin earned by producing for this joint venture will be part of Ashok
Leyland’s standalone results while joint venture will continue to report losses for at least
two years as per management’s expectations.
We do not value the investments made in the joint ventures currently as projects will take
time to break even and we would like to assess the success of the construction
equipment (which will be produced from John Deere JV) and LCVs in the market before
valuing these ventures.
We have marginally tweaked our estimates for FY2012E and FY2013E. We have reduced our
FY2012E earnings estimates by 2% and increased our FY2013E earnings estimates by 2%.
FY2012E downward revision in earnings reflects 3% downward revision in volume estimates
to factor in slower-than-expected growth in trucks for 2HFY12E while we have increased our
EBITDA margin assumptions by 50 bps over the next two years due to decline in raw
material costs.
We maintain our SELL rating on the stock as we see limited triggers for the stock price
performance as volume growth is expected to remain sluggish in 2HFY12E. Our target price
remains unchanged at Rs26 (based on 11X FY2013E EPS).
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