Ashok Leyland - Weak Quarter; Result Update Q3FY15 ::Edelweiss

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Ashok Leyland’s (AL) Q3FY15 operating show was marred by higher input costs (on adverse product mix). Adj. PAT at INR321mn was also below expectation due to higher tax. Key positives were: 1) overall debt fell to INR40bn (INR44bn Q2FY15); 2) working capital improved due to lower inventory (3,800 versus 5,800 units in Q2FY15); and 3) tight capex/investment spend at INR900mn in 9mFY15 (FY15 target of INR4.5bn). Management maintained positive outlook on volumes owing to domestic recovery in trucks and targets 15-20% growth in FY16 (we are factoring in 22% volume CAGR over FY15-17E). We expect net debt to reduce from INR38bn in FY15 to INR35bn in FY17.

Operating performance below estimate

EBITDA at INR2.3bn was ~6% below estimate (in line with consensus) on higher input costs. EBITDA margins disappointed at 7.1% (versus our estimate of 7.7%). Raw material to sales jumped 90bps QoQ to 74.5% due to adverse product mix (lower defence share), though partially offset by ~90bps QoQ dip in staff costs. Adjusted PAT at INR321mn was impacted by higher tax rate (46% versus 26% in Q2FY15).

Demand recovery on track

Volume recovery remains on track, led by improvement in fleet operators’ profitability and revival in infrastructure/construction activity. AL continues to benefit from strong focus on network expansion (doubled in 3.5 years), foray into export markets and new product launches. We expect improvement in free cash flow generation, led by curtailed capex and margins expansion by ~360bps over FY15-17 on operating leverage benefits, price hikes and benign commodity enviornment.

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https://www.edelweiss.in/research/Ashok-Leyland--Weak-Quarter;-Result-Update-Q3FY15/28177.html