Management Interaction Takeaways
Ashok Leyland
Neutral
Target Price: Rs25.8
CMP: Rs27.3
Downside: 5.5%
Challenges persist; Maintain Neutral
We interacted with the management of Ashok Leyland to get the sense on recent developments. Overall demand environment for the M&HCV segment continues to be challenging with inventory and discounting levels inching up compared to 2QFY13 levels. The management now expects a volume drop of 5-10% for FY13E compared to flattish volume growth guided in 2QFY13. We continue to maintain our Neutral rating on the stock with a revised target price of Rs25.8 in line with the earnings downgrade.
Key takeaways:
m Volume expectations for Industry for FY13E: Given the challenging demand environment for the M&HCV segment, the management now expects industry volumes to register a YoY drop of 10-14% at 300k-315k for FY13E compared to 350k for FY12. Earlier, during the 2QFY12 conference call, the management had indicated industry volume drop of 5-10%. YTDFY13, the industry has registered a YoY volume drop of 16%.
m Volume and market share expectation for Ashok Leyland for FY13E: The management has scaled down its overall volume expectation for FY13E to 85,000-90,000 units compared to flattish volumes expected during the 2QFY12. This would imply a volume drop of 5%-10% for FY13E. However, given that the company has delivered better volume growth YTDFY13 compared to industry growth, it expects to inch up its domestic market share to 26% for FY13E compared to 23.3% in FY12. The exports market continues to remain challenging especially of Sri Lanka (due to increase in excise duty on Trucks from 5% to 20%) which accounts for more than 40%-45% of its exports volumes. The company expects overall export volumes to be in the range of 10,000-11,000 for FY13E compared to 12,852 units in FY12.
m Inventory and discount levels inch up vs. 2QFY13: Given the weak demand off take the inventory and discount levels post the 2Q have gone up. The current inventory stands at ~11,200 units as compared to 8,000 units at end of 2QFY12. Increase in inventory levels would lead to higher working capital requirement in 3QFY13 putting some pressure on interest cost. Similarly, the discount levels have moved up to Rs.100k compared to 80k in 2QFY12 and Rs.60-65k in 1QFY12. The company had taken average price hike of Rs.13,000 per unit beginning October 2012. However, the ASPs for the 3Q would be impacted given higher discounts more than offsetting the benefit of price hikes.
m Valuations and Recommendation: 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. Our recent interaction with dealers further reinforces our view of gradually recovery. Further, the dealers also indicated that the LCV segment in the recent past has faced considerable sluggishness in demand. As a result, we maintain our Neutral rating on the stock with a revised target price of Rs25.8 in line with the earnings downgrade.
m Volume and market share expectation for Ashok Leyland for FY13E: The management has scaled down its overall volume expectation for FY13E to 85,000-90,000 units compared to flattish volumes expected during the 2QFY12. This would imply a volume drop of 5%-10% for FY13E. However, given that the company has delivered better volume growth YTDFY13 compared to industry growth, it expects to inch up its domestic market share to 26% for FY13E compared to 23.3% in FY12. The exports market continues to remain challenging especially of Sri Lanka (due to increase in excise duty on Trucks from 5% to 20%) which accounts for more than 40%-45% of its exports volumes. The company expects overall export volumes to be in the range of 10,000-11,000 for FY13E compared to 12,852 units in FY12.
m Inventory and discount levels inch up vs. 2QFY13: Given the weak demand off take the inventory and discount levels post the 2Q have gone up. The current inventory stands at ~11,200 units as compared to 8,000 units at end of 2QFY12. Increase in inventory levels would lead to higher working capital requirement in 3QFY13 putting some pressure on interest cost. Similarly, the discount levels have moved up to Rs.100k compared to 80k in 2QFY12 and Rs.60-65k in 1QFY12. The company had taken average price hike of Rs.13,000 per unit beginning October 2012. However, the ASPs for the 3Q would be impacted given higher discounts more than offsetting the benefit of price hikes.
m Valuations and Recommendation: 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. Our recent interaction with dealers further reinforces our view of gradually recovery. Further, the dealers also indicated that the LCV segment in the recent past has faced considerable sluggishness in demand. As a result, we maintain our Neutral rating on the stock with a revised target price of Rs25.8 in line with the earnings downgrade.
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