2Q beats but challenges persist; Maintain Neutral Ashok Leyland :: Centrum

2Q beats but challenges persist; Maintain Neutral
Ashok Leyland’s (ALL) 2QFY13 operating results were ahead of our estimates
with EBITDA margins at 10.1% compared to our estimate of 7.8% largely
driven by better than expected realization growth. ASP for the quarter grew
1.3% despite higher contribution from low realization Dost (we believe this
was largely on account of strong export realizations). Based on our
calculations, we believe that domestic realizations have dropped 1.4% during
the quarter. While, we are upgrading our earnings estimates by 9% and 14%
for FY13E and FY14E respectively driven by better performance in 2Q, we
continue to believe that current discounts and negligible rise in fleet
operators’ pricing power suggest weak demand environment for M&HCV
goods segment. We expect the recovery to be gradual for the M&HCV goods
segment over 2HFY13-FY14E and await meaningful signs of recovery in the
investment cycle before re-rating the stock. As a result, we maintain our
Neutral rating on the stock with a revised target price of Rs26.8 in line with
the earnings upgrade.

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Operating performance in line: Revenues stood at Rs.33bn compared to our
estimate of Rs.30.2bn. Higher than expected ASP (growth of 1.3% QoQ)
coupled with containment in other overheads led to better than expected
operating performance. EBITDA margins stood at 10.1% compared to our
estimate of 7.8%. Further tax rate came lower at 8.5% compared to our
estimate of 17.3%. As a result, Adjusted PAT stood at Rs.1.4bn compared to
our estimate of 702mn.
Conference call highlights: 1) the management expects overall M&HCV
industry to register a drop of 5-10% for FY13E. However, overall volume
growth for AL is likely to remain flat 2.) Inventory during the quarter stood
lower at 8,400 units compared to 10,000 units at end of 1Q 3.) Discounts
continue to remain at elevated levels (Rs.80k vs. Rs.60-65k in 1Q) and are
expected to continue given weak demand conditions 4.) The company has
guided for capex of Rs.6-6.5bn and investments in the range of Rs.6-7bn in
FY13E.