ASHOK LEYLAND -- : ACCUMULATE TARGET PRICE: RS.33 :: Kotak Securities PDF link

Please Share::  India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

http://www.kotaksecurities.com/pdf/dmb/MorningInsight09042012.pdf


ASHOK LEYLAND (ALL)
PRICE: RS.31 RECOMMENDATION: ACCUMULATE
TARGET  PRICE: RS.33 FY13E P/E: 9.3X
 We expect the M&HCV demand to gradually pick up in FY13. Expected
improvement in domestic economy and reduction in interest rates will
kick start recovery in this segment.
 After underperforming in FY12, we expect ALL to outperform the industry volumes in FY13. South India had relatively poor demand off-take in
FY12 and any improvement there will be major positive for the volumes.
 We are increasing our volume estimates to factor in volumes from their
new LCV (Dost) and also raising our M&HCV volume growth rate assumption. Based on revision on revenue and margin estimates, our net
profit estimates stands revised upward by 6.3% to Rs5,190mn for FY12
and by 24% to Rs8,840mn for FY13.
 On the back of increase in our earnings estimate we revise our target
price upward to Rs33 (Rs27 earlier) and upgrade the stock from REDUCE
to ACCUMULATE.
M&HCV demand expected to improve gradually
 In FY12, the M&HCV goods segment is expected to grow by 10% despite various macro headwinds.
 In the current slowdown, the segment did not witness any sharp de-growth in
volumes which otherwise has been the case in previous downturns.  Freight rates
have been relatively stable in recent past despite weak macro indicators.
 Expected improvement in economic activities in the medium term will provide
some boost to the sector in FY13.
 Recent hike in freight rates by the railways is a positive for the sector. Road
transport segment stands to benefit from the sharp hike in freight rates announced by the Indian Railways. Alternatively, this will give transport operators
the levy to raise freight rates.
 Interest rates are expected to come down in phased manner over the medium to
long term which will play a positive role towards demand recovery.
ALL expected to outperform in FY13
 ALL's M&HCV volume growth in FY12 has been flat as against expected 10%
growth in industry volumes.
 Weak demand in the southern region remained one of the prime reasons for the
company's underperformance in FY12. Company's volumes in Southern market
were impacted by 1.Ban on mining activity 2.Elections and 3.Overall sluggish
demand. Improvement in the Southern market will be a major positive for the
company volumes.
 ALL's volumes in FY12 were also impacted by production/logistic issues at the
company's Uttaranchal plant.
 With expected recovery in the medium term and low FY12 base, we expect ALL
to outperform the industry growth rate in FY13 and improve its market share.
Operating margin to improve in FY13
 We expect ALL's operating margin in FY13 to improve over FY12. Operating
margins in FY12 remained under pressure on the back of subdued demand scenario and firm raw material prices.
 With expected growth in M&HCV volumes, we expect the margins to improve in
FY13. However increased volumes from their new LCV "Dost" will be negative
for the margins. Margin in this product is lower than the M&HCV products making it margin dilutive.
 We have assumed EBITDA margin of 9.9% in FY13 as against our expectation of
9.4% in FY12.
Change in estimates and Valuation
 We are revising our estimates for Ashok Leyland upwards. We are increasing our
volume estimates to factor in volumes from their new LCV (Dost) and also raising
our M&HCV volume growth rate assumption. We have factored in price hike and
change in product mix leading to higher blended realization for the M&HCV segment.  Accordingly we revise our revenues upward by 6% to Rs128,186mn and
by 24% to Rs171,257mn for FY12 and FY13 respectively.
 On the EBITDA margin front, we have marginally lowered our FY12 estimate
from 9.5% to 9.4%. For FY13, we have lowered our EBITDA margin assumption
from 10.7% to 9.9% primarily because of inclusion of margin dilutive LCV in our
assumption.
 Based on the above mentioned changes, our net profit stands revised upward by
6.3% to Rs5,190mn for FY12 and by 24% to Rs8,840mn for FY13.
 On the back of increase in our earnings estimate we revise our target price upward to Rs33 (Rs27 earlier) and upgrade the stock from REDUCE to ACCUMULATE