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Ashok's 1Q EBITDA impressed us, but PAT disappointed given high depreciation and interest
costs. We expect its marked build-up in inventory and the spike in debt in 1Q to continue
weighing on profit. We trim our EPS forecasts, reflecting the weak 1Q and macro headwinds for
truck demand, and lower our TP. Hold.
1Q result impresses on EBITDA but disappoints on PAT
Ashok Leyland’s 1Q result impressed us on EBITDA (beating our estimate by 10%) thanks to a
better-than-expected product mix favouring defence supplies, despite a 10% yoy dip in sales
volume. Management highlighted that a fivefold yoy rise in defence supply sales, coupled with
vehicle price hikes, resulted in an 18% rise in net sales realisation per vehicle. Adjusting for a
one-time gain from accounting policy changes, the EBITDA margin at 9.4% was in line with our
estimate. However, a steep rise in interest and depreciation expenses led to a 37% yoy dip in
normalised PAT, missing our estimate by 12%.
We trim our EPS forecasts to reflect large debt burden and inventory build-up
Given the weak performance of the Index for Industrial Production (IIP), we expect freight
availability to remain under pressure, in turn dampening truck demand. Taking this and the recent
surge in diesel prices into account, we think freight rates could take time to adjust, delaying a
return to normative profit margins for truck operators. In this context, we view the large inventory
Ashok Leyland carries (10,940 vehicles) as a potential concern. We maintain our 7% volume
growth forecast for FY12 (vs management guidance of 14%). However, building in the rise in
gross debt to Rs32bn at end-1Q in the increasing interest cost environment, we trim our EPS
forecasts by 7% for FY12 and 9% for FY13. We build in an EPS dip in the coming quarters,
except for 3Q, given a low base effect from the vehicle emission norm changes last year.
Macro headwinds concern, Hold with new TP of Rs46.30 for 9% potential downside
Building in our EPS revisions and rolling forward our three-stage DCF valuation, our target price
falls to Rs46.3 (from Rs51). We expect macro headwinds weighing on M&HCV demand, coupled
with Ashok Leyland’s high fixed costs as a share of EBITDA given its capacity expansion, to keep
PAT subdued until end-FY12. The stock may look attractive in terms of PE, but on adjusted book
(for revaluation reserve), it is trading at what we see as a rich valuation of 1.96x FY13F vs its
historical range of 1.3-3.5x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ashok's 1Q EBITDA impressed us, but PAT disappointed given high depreciation and interest
costs. We expect its marked build-up in inventory and the spike in debt in 1Q to continue
weighing on profit. We trim our EPS forecasts, reflecting the weak 1Q and macro headwinds for
truck demand, and lower our TP. Hold.
1Q result impresses on EBITDA but disappoints on PAT
Ashok Leyland’s 1Q result impressed us on EBITDA (beating our estimate by 10%) thanks to a
better-than-expected product mix favouring defence supplies, despite a 10% yoy dip in sales
volume. Management highlighted that a fivefold yoy rise in defence supply sales, coupled with
vehicle price hikes, resulted in an 18% rise in net sales realisation per vehicle. Adjusting for a
one-time gain from accounting policy changes, the EBITDA margin at 9.4% was in line with our
estimate. However, a steep rise in interest and depreciation expenses led to a 37% yoy dip in
normalised PAT, missing our estimate by 12%.
We trim our EPS forecasts to reflect large debt burden and inventory build-up
Given the weak performance of the Index for Industrial Production (IIP), we expect freight
availability to remain under pressure, in turn dampening truck demand. Taking this and the recent
surge in diesel prices into account, we think freight rates could take time to adjust, delaying a
return to normative profit margins for truck operators. In this context, we view the large inventory
Ashok Leyland carries (10,940 vehicles) as a potential concern. We maintain our 7% volume
growth forecast for FY12 (vs management guidance of 14%). However, building in the rise in
gross debt to Rs32bn at end-1Q in the increasing interest cost environment, we trim our EPS
forecasts by 7% for FY12 and 9% for FY13. We build in an EPS dip in the coming quarters,
except for 3Q, given a low base effect from the vehicle emission norm changes last year.
Macro headwinds concern, Hold with new TP of Rs46.30 for 9% potential downside
Building in our EPS revisions and rolling forward our three-stage DCF valuation, our target price
falls to Rs46.3 (from Rs51). We expect macro headwinds weighing on M&HCV demand, coupled
with Ashok Leyland’s high fixed costs as a share of EBITDA given its capacity expansion, to keep
PAT subdued until end-FY12. The stock may look attractive in terms of PE, but on adjusted book
(for revaluation reserve), it is trading at what we see as a rich valuation of 1.96x FY13F vs its
historical range of 1.3-3.5x.
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