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Another good quarter but valuations price in recovery. Ashok Leyland’s 3QFY15 EBITDA of Rs2,381 mn was 12.5% higher than our estimates led by lower-thanexpected staff cost and higher realizations (qoq decline in staff cost was the key reason for the surprise). Volumes grew 38% yoy led by strong growth in larger commercial vehicles (>25MT). We revise our price target to `44 (from `40 earlier) to factor higher earnings estimates, and maintain our SELL rating because of expensive valuations.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
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Operating leverage benefit playing out Ashok Leyland reported a 90 bps qoq decline in gross margin in 3QFY15. Discounts have stayed at higher levels (`175,000/vehicle) and the management expects these to continue until sustainable recovery takes place. While the better-than expected result was led mainly by staff costs, other expenses and staff costs have gone up 35% and 16% yoy, indicating operating leverage benefit rather than cost-reduction efforts. Net profit was Rs321mn (27% higher than our estimates). Effective tax rate was 46% due to provisions for full-year estimates of profits. Debt reduced by `7bn in 9MFY15, which is lower than our estimates Standalone net debt was `40 bn at the end of December 2014 versus `43bn at the end of September 2014 and `47 bn at the end of March 2014. Spend on capex and investments was contained (`900 mn YTD in FY2015). It had raised `8.8 bn from QIP and land sale in this fiscal and generated an operating free cash without accounting for working capital of `3.4 bn; however, the reduction in net debt is only `7 bn in 9MFY15, which implies that the company has spent `4 bn towards working capital. The management does not see any large capex requirements in the medium-term, but acknowledges that some subsidiaries will require additional investments. We have built in net debt of `20 bn over the next two years, led by generation of free cash from operations and assuming `3 bn from the sale of Indusind shares. Maintain a SELL rating, as peak-cycle margins are already priced in We have built in a 10X rise in EBITDA between FY2014-17 and gross margin of ~27% in FY2017 (versus its peak gross margin of ~28%). We expect EBITDA margins to improve to 9.6% in FY2017, led by a) operating leverage (+160bps improvement in contribution to EBITDA margins over FY2015-17) and b), better product mix (greater contribution of high-tonnage trucks in the volume mix). We believe the street is factoring in ~200bps higher EBITDA margin, which is even better than its peak-cycle margin. The stock trades at 12.5X March 2017 EBITDA on our estimates, which is 25% more expensive than the company’s historical average on peakmargin assumption. We raise our target price to `44 (from `40 earlier) reflecting a) richer product mix and b), an improvement in EBITDA margin led by operating leverage.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily02022015ka.pdf
Another good quarter but valuations price in recovery. Ashok Leyland’s 3QFY15 EBITDA of Rs2,381 mn was 12.5% higher than our estimates led by lower-thanexpected staff cost and higher realizations (qoq decline in staff cost was the key reason for the surprise). Volumes grew 38% yoy led by strong growth in larger commercial vehicles (>25MT). We revise our price target to `44 (from `40 earlier) to factor higher earnings estimates, and maintain our SELL rating because of expensive valuations.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Operating leverage benefit playing out Ashok Leyland reported a 90 bps qoq decline in gross margin in 3QFY15. Discounts have stayed at higher levels (`175,000/vehicle) and the management expects these to continue until sustainable recovery takes place. While the better-than expected result was led mainly by staff costs, other expenses and staff costs have gone up 35% and 16% yoy, indicating operating leverage benefit rather than cost-reduction efforts. Net profit was Rs321mn (27% higher than our estimates). Effective tax rate was 46% due to provisions for full-year estimates of profits. Debt reduced by `7bn in 9MFY15, which is lower than our estimates Standalone net debt was `40 bn at the end of December 2014 versus `43bn at the end of September 2014 and `47 bn at the end of March 2014. Spend on capex and investments was contained (`900 mn YTD in FY2015). It had raised `8.8 bn from QIP and land sale in this fiscal and generated an operating free cash without accounting for working capital of `3.4 bn; however, the reduction in net debt is only `7 bn in 9MFY15, which implies that the company has spent `4 bn towards working capital. The management does not see any large capex requirements in the medium-term, but acknowledges that some subsidiaries will require additional investments. We have built in net debt of `20 bn over the next two years, led by generation of free cash from operations and assuming `3 bn from the sale of Indusind shares. Maintain a SELL rating, as peak-cycle margins are already priced in We have built in a 10X rise in EBITDA between FY2014-17 and gross margin of ~27% in FY2017 (versus its peak gross margin of ~28%). We expect EBITDA margins to improve to 9.6% in FY2017, led by a) operating leverage (+160bps improvement in contribution to EBITDA margins over FY2015-17) and b), better product mix (greater contribution of high-tonnage trucks in the volume mix). We believe the street is factoring in ~200bps higher EBITDA margin, which is even better than its peak-cycle margin. The stock trades at 12.5X March 2017 EBITDA on our estimates, which is 25% more expensive than the company’s historical average on peakmargin assumption. We raise our target price to `44 (from `40 earlier) reflecting a) richer product mix and b), an improvement in EBITDA margin led by operating leverage.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily02022015ka.pdf
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