Ashok Leyland,Robust volume guidance:: Prabhudas Lilladher,

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 Results in line with expectation: Ashok Leyland (AL) reported a growth of 72.0% YoY in
top‐line to Rs27.1bn (we expected Rs27.4bn). Volume for the quarter grew by 72.0% YoY,
whereas average realisation was flat YoY. Average realisation/vehicle was flat QoQ due
to lower engine sales at Rs690bn (compared to Rs740mn in Q1FY11) and marginal sales
of defence kits to the vehicle factory at Jabalpur compared to 140 units in Q1FY11.
EBITDA margins improved by 130bps QoQ on account of better operating leverage due to
higher volumes (volumes grew by 14.9% QoQ). Depreciation as well as interest expenses
were higher on a QoQ basis on account of the Pantnagar facility commencing operations
and expensing the interest capitalized earlier. As a result, PAT grew by 32% QoQ
toRs1.67bn (we saw R1.62bn).
 Price Hike & Emission norms: AL had taken a 4% price hike in H1FY11 on account of
increase in raw material cost. AL has taken a price increase of 31,000/ vehicle on 4th
October on account of change in emission norms from BS‐II to BS‐III. In addition to the
above, AL has taken another 3% price hike to fully compensate the raw material price
increase. As a result, we expect EBITDA margins to remain high in the 11%‐11.5% range.
 Uttarakhand plant to produce 15,000 units in FY11E: In the H1FY11, AL produced 2,500
units at Uttarakhand Plant whereas for H2FY11E the company is targeting 12,500 units
with 7,500 units being produced in Q4FY11. AL has indicated savings of Rs35,000/unit on
production from the Uttaranchal plant which is an excise‐free zone.
 Capex for next two years: AL has earmarked Rs12bn for capex over the next couple of
years, in addition to investments earmarked for the various joint ventures to the tune of
Rs8bn. We believe the JVs could add around Rs6/share in FY13E.
 Outlook & Valuation: With higher industrial and agriculture sector growth, the demand
for trucks for transportation has been increasing. AL has guided for a volume The stock is
currently trading at 15.0x FY11E EPS and 12.1x FY12E EPS, which in our view is attractive,
given the upturn in the CV cycle and a 40% CAGR in profits for FY10 – FY12E. Maintain
‘Accumulate’.