Ashok Leyland -- Weak 1Q; subdued outlook ::Macquarie Research

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Ashok Leyland
Weak 1Q; subdued outlook
Event
 We attended the post 1Q’FY12 earnings conference call. Although company
management has reiterated their full year volume growth (~15%) and margin
(10.5%) guidance, we expect the company to miss both volume and margin
guidance due to a weak commercial vehicle growth outlook and high raw
material prices. We remain cautious on AL and reiterate our Neutral rating
with a revised target price of Rs52.
Impact
 Weak 1Q results – sales grew 6% and adjusted PAT declined 36%. Ashok
Leyland reported subdued 1Q results, with net sales of Rs25bn (up 6% YoY,
led by 10% volume decline) and adjusted for a Rs94.6mn gain due to an
accounting modification for leasehold land amortisation, net profit came in at
Rs0.79bn (down 36% YoY). The profit decline was largely on account of a
60bp EBITDA margin contraction, a 69% jump in interest costs (due to higher
working capital loan) and a 38% increase in depreciation expenses (due to
fixed assets addition in the month of Mar-11).
 Unlikely to achieve volume guidance in FY12E. The company reported a 10%
decline in volume in 1Q’FY12 despite 6% industry growth. The company has
stated that the volume decline is primarily due to a 43% volume decline in South
India (50% market share) due to elections in key states and mining-related issues.
We, however, believe achieving 15% volume growth for FY12E would be very
hard to achieve given a slow industry growth outlook and decline in 1Q.
 Reiterated 10.5% margin guidance for FY12E. The company reiterated margin
guidance of 10.5% on the back of higher sales from the Pantnagar facility (36k
trucks, with each truck receiving duty benefits of ~Rs40k/vehicle) and pricing
action (2% in April and 1% in July 2011). We believe the company is likely to miss
margins guidance as well due to volume miss and plant fixed costs. A 2%
increase in raw material costs in 1Q’FY12 will also keep margins under check.
 LCV launch from Nissan JV next week. The company stated that the LCV
launch (DOST) from the Nissan JV is expected next week and the start of
commercial production of construction equipment products from John Deere
is expected at the end of 4Q’FY12E.
Earnings and target price revision
 We cut our FY12E and FY13E EPS by 7% and 10% due to higher interest
costs and depreciation. We revise our TP to Rs52 from Rs58 earlier.
Price catalyst
 12-month price target: Rs52.00 based on an EV/EBITDA methodology.
 Catalyst: Sales volume numbers and further hike in interest rates
Action and recommendation
 Maintain cautious view on AL. We maintain our cautious stance on AL due
to weak volumes and margin outlook. We prefer Tata Motors over AL.