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ASHOK LEYLAND
PRICE: RS.27 RECOMMENDATION: REDUCE
TARGET PRICE: RS.27 FY13E P/E: 10.1X
q ALL's 3QFY12 results came in below our and street expectations. While
revenues came largely as anticipated, EBITDA margin came in sharply
below our expectations.
q Various one-time operating costs led to sharp increase in employee cost
and other expenses. Even after taking those into account, the EBITDA
margins were below expectations leading to profitability coming in way
below our and consensus estimates.
q Going forward, the company expects its volumes to grow by 6% in FY12
and FY13. While margins are expected to improve, we expect the same
to be under pressure in the near term.
q On the back of lower than expected results and rising cost, we are lowering
our FY12 and FY13 earnings estimate. Our revised earning estimate
stands lower by 17.6% and 3.8% for FY12 and FY12 respectively.
q At the CMP of Rs27, the stock trades at 10.1x its estimated FY13 earnings
of Rs27 per share. We lower our target price to Rs27 (earlier Rs28) and
continue with our REDUCE rating on the stock.
Revenues came largely on expected lines
n ALL's 3QFY12 revenues at Rs28,798mn was in line with our estimate of
Rs29,043mn.
n Revenues grew by 29% YoY largely on account of YoY 20% increase in volumes.
n For the quarter industry volumes in the bus segment remained weak on account
of lower off take from the STU's whereas truck segment reported growth.
Volumes in the tractor trailer and multi axle vehicle segment saw weakness; tipper
segment registered a strong growth.
n ALL largely maintained its market share during the quarter except for the tractor
trailer segment in the northern region.
n Spare parts sale during the quarter was at Rs1,850mn as against Rs1,600mn in
3QFY11. Similarly sales to defence establishments increased from Rs650mn in
3QFY11 to Rs850mn in 3QFY12.
n Company took a price increase of around 1-2% in January. ALL also effected a
price hike in engine division and export markets.
n Company expects to sell close to 100,000 units in FY12 and grow by 6% in
FY13. In our assumptions we have factored in flat growth for FY12 and 10%
growth in FY13. In absolute numbers, our volume assumption stands slightly
lower to the company's guidance.
Rise in cost severely dents EBITDA margin during the quarter
n Increase in cost across overheads severely impacted EBITDA during the quarter.
Despite 29% growth in revenues, EBITDA grew by only 10% from Rs1,920mn in
3QFY11 to 2,104mn for the quarter under consideration.
n Sequentially EBITDA was down by 36.5%.
n Increased purchase of traded goods on account of purchase of Dost (LCV) from
the Nissan-Leyland JV led to increase in raw material cost as a % of sales from
73.5% in 2QFY12 to 73.9% in 3QFY12. Management expects an impact of
~50bps on the margins on account of this arrangement with the JV.
n Employee cost at Rs2,723mn was higher by 25% YoY and 8.3% QoQ. Reasons
of increase in employee cost includes 1.Bonus payment to employees to the tune
of Rs160mn and 2.Increase in head count at the executive level primarily at the
Uttarakand plant increased the cost by Rs80mn. While the bonus payment is annual
exercise, rise of Rs80mn is recurring in nature.
n Other expenses increased sharply during the quarter from Rs1,879mn in 3QFY11
to Rs2,683mn in 3QFY12, a YoY growth of 43%. Sequentially too, other expenses
were higher by 14%. Reasons for the same include 1.Higher number of
annual maintenance contract serviced during the quarter costing Rs200mn to the
company 2.Exchange loss of Rs150mn and 3.Substantial increase in marketing
spend to the tune of Rs70mn.
n Company modified the method of amortization of value of leasehold land and
that lead to a write back of Rs94.6mn under other expenses.
n On account of above mentioned reasons, the company witnessed a steep fall in
EBITDA margin from 8.6% in 3QFY11 and 10.7% in 2QFY12 to 7.3% in
3QFY12. Even after factoring for the one-time expenses, EBITDA margins were
disappointing.
n Going ahead, some of these expenses are not expected to be repeated, that will
lead to sequential improvement in margins. However we expect the margins to
remain under pressure in the near term due to subdued demand outlook and rise
in cost overheads.
Profits came in below expectations due to poor operating performance
n Poor operating performance led to net profits coming in way below our and consensus
expectations. ALL reported net profit of Rs669mn as against expected
Rs1,270mn.
n Depreciation remained similar to 2QFY12 levels at Rs866mn. However, increase
in capex led to 34% YoY increase in depreciation.
n Interest cost increased YoY from Rs475mn to Rs550mn on account of rising interest
rate and increase in loans. Sequentially though interest cost was lower by
12%.
n Tax rate at 7% came in lower due to rise in R&D capital expenditure MAT credit
taken during the quarter.
Conference call highlights
n Company expects the volumes in FY12 to grow by 6% and by 4-6% in FY13.
n Uttarakand plant produced 2,570 units in January 2012 and the company expects
to increase production to 4,000 units on a monthly basis by March 2012.
April 2011 - January 2012 production from this plant stands at 22,130 units.
n Inventory levels during the quarter declined from 9500 units in 2QFY12 to 9,000
units. Further the company said that dealers inventory remains in line with historical
levels.
n ALL has witnessed some revival in the Southern market in January 2012.
n Discounts during 3QFY12 were at significantly higher levels.
n ALL has invested ~Rs3.5bn in capex YTD and expects full year capex to be
around Rs5.5-6.0bn. Investments in JV YTD stands at Rs1.5bn and for the full
year it is expected to be around Rs2.5-3.5bn.
n Debt as at end of 3QFY12 stood at Rs41bn that consist of Rs31bn as long term
and Rs10bn towards working capital. Company expects to bring the working
capital loan to Rs5bn by the end of 4QFY12.
Change in estimates
n On the back of lower than expected earnings and increase in employee and
other expenses, we are lowering our FY12 and FY13 estimates.
n For FY12, we are marginally lowering our revenues by 1.8%. However due to
poor 3QFY12 results we are lowering our estimates from 10.5% to 9.5% leading
17.6% drop in earnings from our previous estimates.
n We are keeping are revenues unchanged for FY13 but lowering our EBITDA
margin estimate from 11.2% to 10.7% leading to factor in rise in staff cost and
other expenses. Accordingly our revised net profit estimate stands lower by
3.8%.
Valuation
n At the CMP of Rs27, the stock trades at 10.1x its estimated FY13 earnings of
Rs2.7 per share.
n Due to cutting down of our FY13 earnings estimate we are lowering our target
price to Rs27 (earlier Rs28).
n We continue to retain REDUCE rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ASHOK LEYLAND
PRICE: RS.27 RECOMMENDATION: REDUCE
TARGET PRICE: RS.27 FY13E P/E: 10.1X
q ALL's 3QFY12 results came in below our and street expectations. While
revenues came largely as anticipated, EBITDA margin came in sharply
below our expectations.
q Various one-time operating costs led to sharp increase in employee cost
and other expenses. Even after taking those into account, the EBITDA
margins were below expectations leading to profitability coming in way
below our and consensus estimates.
q Going forward, the company expects its volumes to grow by 6% in FY12
and FY13. While margins are expected to improve, we expect the same
to be under pressure in the near term.
q On the back of lower than expected results and rising cost, we are lowering
our FY12 and FY13 earnings estimate. Our revised earning estimate
stands lower by 17.6% and 3.8% for FY12 and FY12 respectively.
q At the CMP of Rs27, the stock trades at 10.1x its estimated FY13 earnings
of Rs27 per share. We lower our target price to Rs27 (earlier Rs28) and
continue with our REDUCE rating on the stock.
Revenues came largely on expected lines
n ALL's 3QFY12 revenues at Rs28,798mn was in line with our estimate of
Rs29,043mn.
n Revenues grew by 29% YoY largely on account of YoY 20% increase in volumes.
n For the quarter industry volumes in the bus segment remained weak on account
of lower off take from the STU's whereas truck segment reported growth.
Volumes in the tractor trailer and multi axle vehicle segment saw weakness; tipper
segment registered a strong growth.
n ALL largely maintained its market share during the quarter except for the tractor
trailer segment in the northern region.
n Spare parts sale during the quarter was at Rs1,850mn as against Rs1,600mn in
3QFY11. Similarly sales to defence establishments increased from Rs650mn in
3QFY11 to Rs850mn in 3QFY12.
n Company took a price increase of around 1-2% in January. ALL also effected a
price hike in engine division and export markets.
n Company expects to sell close to 100,000 units in FY12 and grow by 6% in
FY13. In our assumptions we have factored in flat growth for FY12 and 10%
growth in FY13. In absolute numbers, our volume assumption stands slightly
lower to the company's guidance.
Rise in cost severely dents EBITDA margin during the quarter
n Increase in cost across overheads severely impacted EBITDA during the quarter.
Despite 29% growth in revenues, EBITDA grew by only 10% from Rs1,920mn in
3QFY11 to 2,104mn for the quarter under consideration.
n Sequentially EBITDA was down by 36.5%.
n Increased purchase of traded goods on account of purchase of Dost (LCV) from
the Nissan-Leyland JV led to increase in raw material cost as a % of sales from
73.5% in 2QFY12 to 73.9% in 3QFY12. Management expects an impact of
~50bps on the margins on account of this arrangement with the JV.
n Employee cost at Rs2,723mn was higher by 25% YoY and 8.3% QoQ. Reasons
of increase in employee cost includes 1.Bonus payment to employees to the tune
of Rs160mn and 2.Increase in head count at the executive level primarily at the
Uttarakand plant increased the cost by Rs80mn. While the bonus payment is annual
exercise, rise of Rs80mn is recurring in nature.
n Other expenses increased sharply during the quarter from Rs1,879mn in 3QFY11
to Rs2,683mn in 3QFY12, a YoY growth of 43%. Sequentially too, other expenses
were higher by 14%. Reasons for the same include 1.Higher number of
annual maintenance contract serviced during the quarter costing Rs200mn to the
company 2.Exchange loss of Rs150mn and 3.Substantial increase in marketing
spend to the tune of Rs70mn.
n Company modified the method of amortization of value of leasehold land and
that lead to a write back of Rs94.6mn under other expenses.
n On account of above mentioned reasons, the company witnessed a steep fall in
EBITDA margin from 8.6% in 3QFY11 and 10.7% in 2QFY12 to 7.3% in
3QFY12. Even after factoring for the one-time expenses, EBITDA margins were
disappointing.
n Going ahead, some of these expenses are not expected to be repeated, that will
lead to sequential improvement in margins. However we expect the margins to
remain under pressure in the near term due to subdued demand outlook and rise
in cost overheads.
Profits came in below expectations due to poor operating performance
n Poor operating performance led to net profits coming in way below our and consensus
expectations. ALL reported net profit of Rs669mn as against expected
Rs1,270mn.
n Depreciation remained similar to 2QFY12 levels at Rs866mn. However, increase
in capex led to 34% YoY increase in depreciation.
n Interest cost increased YoY from Rs475mn to Rs550mn on account of rising interest
rate and increase in loans. Sequentially though interest cost was lower by
12%.
n Tax rate at 7% came in lower due to rise in R&D capital expenditure MAT credit
taken during the quarter.
Conference call highlights
n Company expects the volumes in FY12 to grow by 6% and by 4-6% in FY13.
n Uttarakand plant produced 2,570 units in January 2012 and the company expects
to increase production to 4,000 units on a monthly basis by March 2012.
April 2011 - January 2012 production from this plant stands at 22,130 units.
n Inventory levels during the quarter declined from 9500 units in 2QFY12 to 9,000
units. Further the company said that dealers inventory remains in line with historical
levels.
n ALL has witnessed some revival in the Southern market in January 2012.
n Discounts during 3QFY12 were at significantly higher levels.
n ALL has invested ~Rs3.5bn in capex YTD and expects full year capex to be
around Rs5.5-6.0bn. Investments in JV YTD stands at Rs1.5bn and for the full
year it is expected to be around Rs2.5-3.5bn.
n Debt as at end of 3QFY12 stood at Rs41bn that consist of Rs31bn as long term
and Rs10bn towards working capital. Company expects to bring the working
capital loan to Rs5bn by the end of 4QFY12.
Change in estimates
n On the back of lower than expected earnings and increase in employee and
other expenses, we are lowering our FY12 and FY13 estimates.
n For FY12, we are marginally lowering our revenues by 1.8%. However due to
poor 3QFY12 results we are lowering our estimates from 10.5% to 9.5% leading
17.6% drop in earnings from our previous estimates.
n We are keeping are revenues unchanged for FY13 but lowering our EBITDA
margin estimate from 11.2% to 10.7% leading to factor in rise in staff cost and
other expenses. Accordingly our revised net profit estimate stands lower by
3.8%.
Valuation
n At the CMP of Rs27, the stock trades at 10.1x its estimated FY13 earnings of
Rs2.7 per share.
n Due to cutting down of our FY13 earnings estimate we are lowering our target
price to Rs27 (earlier Rs28).
n We continue to retain REDUCE rating on the stock.
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