Steady performance; rich valuations limit upside Ashok Leyland :: HDFC Securities

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Steady performance; rich valuations limit upside Ashok Leyland’s (AL) 3QFY15 operating performance was broadly inline with expectations. Per the company, sequential compression in gross margin was purely driven by lower mix of defense/spares sales. The company has maintained tight control on its working capital by lowering inventory levels. AL’s capex + investments spends on a YTD basis (Rs 0.9bn) are tracking well below its full year guidance of Rs 5bn. As a result, AL’s gearing now stands at 1:1. AL appears to be well placed to benefit from the imminent CV upcycle with adequate spare capacity, strong distribution network and recently beefed up product portfolio. The company’s focus on improving internal efficiencies and its balance sheet discipline are already starting to reflect in its financial performance. While we remain positive on AL’s improving fundamentals and strong growth outlook, we believe that the sharp run up in the stock price has made valuations at EV/EBITDA of 13.4x/10.4x on FY16/FY17E appear fairly punchy. We maintain our Neutral rating on the stock with a revised SOTP based TP of Rs 69.  Result summary : AL reported better than expected topline growth of 72% YoY driven by healthy volume/Net ASP growth of 37.6%/25% YoY. Gross margin performance was slightly weaker than expected with 90bps QoQ decline. Mgt alluded to lower mix of defense/spare sales being the key reason for gross margin compression. However, with tight cost control efforts reflecting in lower increases in staff/other expenses, EBITDA margin declined marginally by 20bps QoQ to 7.1%. APAT at Rs 321mn was slightly below estimates due to higher tax provision being made on account of an improved profit outlook for the year.  Earnings call highlights : (i) Capex + Investments for YTD is at Rs 0.9bn; and for the full year, company expects to keep these spends well below earlier guidance of Rs 5bn (ii) AL expects industry volumes to grow at a CAGR of atleast 15-20% YoY for the next two years on the back of a macro recovery. Mgt expect AL’s current market share to sustain (iii) Discount remain at elevated levels of 170-175k/vehicle (iv) Over the next few years, AL aspires to take its EBITDA margins to double digits through its internal cost reduction efforts (v) AL’s current debt stands at Rs 40bn and gearing is at 1:1x.

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