Ashok Leyland : Maintain Sell; Stock Price Reflects Positives: Citi

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Ashok Leyland (ASOK.BO)
Maintain Sell; Stock Price Reflects Positives
 Rs1.67bn PAT marginally exceeded our estimates — Quantitatively, volume growth
positively surprised this Q, esp. Sep’s sharp uptick. A benign raw material
environment aided EBITDA margins, which were 11.3% (+130 bps Q/Q). Pricing
remains lackluster – despite a c4% price hike in 1HFY11, we reckon discounts of
c3% have negated this benefit significantly. Higher working capital (9000 vehicles
of stock) resulted in higher interest costs.
 Con call takeaways — 1) A more balanced market-share profile is the key positive
– ALL’s gained ~7-8% share in the northern and eastern markets – broad-basing
geographic sales mix and reducing dependence on the southern market. 2) Mgmt
remains positive on pricing – it has hiked prices by ~3% in 3Q on the overall
portfolio and by 6% on the BS-III models. We remain skeptical on mgmt’s ability to
pass through these hikes, given the current pricing environment. 3) Mgmt guided
to an EBITDA margin of 10-10.5% (lower than 11.3% in 2Q), citing raw material
cost pressures. Our forecasts differ – and reflect higher margins (>11% in
FY11/12). We could be wrong, especially if operating leverage from the new plant
is less than anticipated. 4) Capex guidance was marginally increased to Rs 21bn
(earlier Rs 20bn) over FY11/12. 5) Volume guidance for FY11 is 95,000 (revised
marginally from 90k).
 Market share trends mixed — ALL’s share in domestic trucks declined c30bps
QoQ but rose 540bps QoQ in buses. Overall, ALL’s share rose marginally by 30bps
QoQ in the domestic MHCV market. Per mgmt, reduction in trucks’ share in total
vols negatively impacted overall margins. Going forward, we expect mgmt to match
its guidance of ~95,000 vehicles in FY12.
 Maintain Sell, revise TP to Rs 72 — EPS upgrades for FY11 have been 18%
(better volumes), but relatively muted for FY12 (~3%) as we cut margins on
pricing / cost concerns. New TP is rolled to 8x CEPS on Mar12e. Imputed
EV/EBITDA multiple is ~8x, reflecting mid cycle valuations.