Q1 results simply dismal
Ashok Leyland (ALL)’s topline was in line with our expectations. Volumes during the quarter dipped by a huge 27% yoy and 37% qoq as the CV industry is going through one of its toughest phases. The company lost market share by 3% on a yoy basis primarily in the south as the southern markets continued to post weak demand. However, net realizations have remained flattish as discounts came down a bit by Rs 25,000 to Rs 1.45 lakh and ALL took a price hike of Rs 18,000. EBITDA margins came in at a dismal all-time low of 1% indicating the sorry state of heavy discounting and adverse product mix. This was a sharp decline of 430 bps qoq, as RM to sales expanded to 75.5% of sales as product mix became unfavorable. Employee costs to sales jumped to 10.9% from 7.6% qoq and 8.9% yoy, however, on absolute basis, there was a decline of 8.5% qoq in employee costs as the company reduced their number of working days, employee strength as well as incurred salary cuts. Other expenses to sales went up to 12.6% from 11.6% qoq and 10.3% as sales declined, but in absolute terms, this cost item declined by 29% qoq and 4% yoy as a lot of cost savings on the admin side as well as marketing side were initiated. Higher interest costs stemming from higher working capital, higher investments in JVs, increased borrowings for product development and Pantnagar facilities tarnished the bottomline. Due to the operational underperformance as well as higher interest costs, ALL posted deep losses to the tune of Rs 1.35bn, biggest loss ever incurred by the company.
Outlook and valuation
We believe the company’s volumes will face pressure in the coming quarters as economy as well as industrial activity is taking lot of time to revive. With mining ban lifting up in Karnataka gradually and new launches coming from ALL along with good network expansion in markets other than South India, we believe the company would be able to achieve our modest estimate of 2% volume growth in FY 14E. With margins hitting rock bottom, we believe that with new models getting launched, pricing action taken, RM costs coming down and employee costs getting cut, margins will move upwards from Q1 level for sure. On balance sheet side, the company is striving to bring down their inventory levels and working capital in FY 13. ALL has also given a pruned down capex and investment guidance for FY 14E, which would help the company to put up a better show going forward. Although the stock has declined by more than 40% over the last couple of months, with weak volume expectations, we believe that the further growth catalysts for ALL are limited, though balance sheet may improve. We have cut down our earnings forecast for FY 14E/15E by 45%/33% on lower volume expectations than before and have cut down our target price to Rs15.7 from Rs25.7 earlier and rating from Outperformer to Underperformer.
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