ALL still expects to grow at 7-8% in FY 13 as South India recovers and market share goes up
Although the MHCV industry has de-grown by 12.5% in Q1 FY13, the drop in Southern markets has been as low as 4.5%, thus indicating that the South Indian markets which were subdued for last one year are showing signs of improvement, where ALL commands more than 50% market share. This has led ALL to gain market share from 25.7% to 26.2% on a sequential basis. Company believes that despite slowdown in the MHCV industry, they will do better on the back of demand coming back to south India. ALL has targeted to grow by 7-8% this year on the back of 15-20% growth in the bus segment and exports mainly to Africa and Middle East. Also the LCV Dost may help the company to gain market share (currently 25%) in the LCV segment in the 7 states where it is launched. The production of Dost is slated to increase rapidly and consume the entire capacity of 50,000, while ALL expects to sell 32,000 units in FY 13. New launches include a 10x2 rigid axle vehicle, a front engine, low floor, fully flat Jan Bus, haulage U truck and a mini bus in 3Q FY13. Over and above this, accounting of sales of LCV Dost outside Tamil Nadu (currently ~70%) will provide the additional trigger to volume growth as Dost has got an encouraging response.
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Benefits of PN plant may get offset by high working capital and inventory bearing costs in FY 13
The LCV Dost's proportion selling out of TN is expected to increase thus putting pressure on margins. Management has projected FY 13 margins to be at 10% including Dost. However, increased benefits from Pantnagar plant despite a cut in production taken recently and price hikes will help ALL to arrest a significant amount of margin fall. ALL now targets to sell 30,000 units from PN plant as production starts to pick up from August (4,000 v/s 2,000 each in June and July and 7,500 in Q1 FY13). Also, the company expects to save Rs 70,000 per vehicle from Q2 from current level of Rs 60,000 per vehicle. However, inventory levels over 10,000 of finished goods and working capital overshooting upto levels of Rs25.6 bn as compared to Rs 10 bn at the end of FY 12 will put significant pressure on profitability as the company will be unable to increase its production and deliver operating leverage. Management mentioned that they will try to clear off the inventory first by putting a cap on production and bring it down to levels of 6000-7000 post which production level can get back to normalcy. They have also mentioned that they will bring down the capex to Rs4.5bn from Rs6bn projected earlier. Also debt raised for capacity expansion in future is attracting higher interest costs as seen in this quarter, which is again putting pressure on the bottomline. The current debt level is seen at Rs 47.5bn (current net D/E at 1.2x), which the management wishes to bring down to Rs36 bn by FY 13 end, thus relieving some pressure on the balance sheet. In line with above rationale, we are bringing down our margin estimate for FY 13E to 9.5% (management expectation of 10%) and FY 14E to 9.9% and cutting our earnings estimate by 20-25% for the next two years.
Outlook and valuation
In view of positive market developments in South India, which is the home wicket for ALL, new launches and success of Dost, we still remain sanguine about the company’s ability of delivering in the second half of the year on volume front. However, concerns on profitability such as higher Dost sales, higher working capital and inventory built-up, higher discounting and higher debt profile leads us to cut the profitability estimates. At CMP of Rs23, the stock looks attractive at a P/E of 8.1x on FY14E earnings of Rs 2.9 post the recent dip in the stock. We maintain our Outperformer rating on the stock with a pruned down target price of Rs 29 (from Rs 31) with an upside of 24%
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