Operating performance disappoints; Maintain Buy Ashok Leyland :: Centrum

Operating performance disappoints; Maintain Buy
Ashok Leyland’s (ALL) 3QFY13 operating results were lower compared to our
expectations with EBITDA margins at 4.3% vs. est. 7.8%. Operating deleverage
coupled with higher other expenditure led to weak operating
performance. As a result, the company reported adjusted loss of Rs.587mn
(adjusted for exceptional item of Rs.1.6bn) and managed to post PAT of
Rs.741mn. Despite disappointing 3QFY13 results, we believe that favorable
macro impetus and expected interest rate down cycle (we expect 100-125bps
cut in interest rates for FY14E) should augur well for the M&HCV business in
FY14E. Also our metals analyst expects mining-related issues to be resolved
leading to court orders for resumption of closed mines. Mining activity has a
significant bearing on the freight market, especially in south India where ALL
has a strong market. We continue to maintain our Buy rating on the stock with
a target price of Rs.31.
Operating performance disappoints: Net revenues stood at Rs.24bn
registering a YoY/QoQ drop of 17%/28%. Net revenues were lower by 4% on
account of lower realizations (drop of 5% vs. our expectations of drop by 1%).
Driven by operating de-leverage and higher other expenditure, EBITDA
margins stood at 4.3% vs. our estimate of 7.8%. As a result, the company
reported a loss of Rs.587mn (excluding the exceptional item of Rs.1.6bn).
Including the exceptional item, the company managed to post PAT of
Rs.741mn.
Conference call highlights: 1) the management indicated that it had
withdrawn plans to raise funds through QIP worth Rs.5bn; instead it will raise
funds through divestment from un-related areas and could also look at
liquidating its stake in IndusInd bank. 2.) total long term borrowing was at
Rs.35bn and short term loans at Rs.15bn. 3.) Total capex and investment
planned for FY13E stands at Rs.9bn (Rs.5.5bn incurred thus far) 4.) Production
from UTK plant stands at 6,700 units compared to 7,200 units in 2QFY13 (it
targets volumes of 32k in FY13E and 42k in FY14E) 5.) Dost’s supply side
constraints related to gear boxes were resolved a few months back
(management is targeting 11-12k in 4QFY13) 6.) Discount levels have moved
up to Rs.100k from 80k in 2Q and 50k in 1Q).

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Valuations and Recommendations: At the CMP of Rs25, the stock trades at
11.4x FY14E EPS of Rs2.2 and 8.6x FY15E EPS of Rs2.9. We continue to maintain
Buy rating on the stock with a target price of Rs31.