Buy Ashok Leyland Ltd.
Target Price: Rs55
CM Price: Rs51.40
Sustains operating performance improvement; retain Buy
- Robust performance. Ashok Leyland’s 3Q operating performance was fuelled by higher operating leverage from improved volume and success in reducing costs. Maintain Buy.
- Volume recovery drives growth. Its 3Q performance was driven by 12.1% volume growth qoq (and 2x yoy), boosted by the recovery in demand for M&H CVs. Net sales, at Rs18.2bn, were 79.3% higher yoy.
- Sound operating performance. EBITDA margin improved 90bps qoq (and 520bps yoy) to 11.4%, mainly due to lower ‘other expenses’ and staff expenses. The benefits of the cash-and-carry system and better working capital management continue to be felt. However, as the tax rate, at 25.1%, was higher than expected, adj. profit, at Rs1.06bn, slightly belied expectations.
- Outlook remains positive. We retain our positive view for AL, driven by the upswing in demand for trucks. Demand for buses under the JNNURM scheme, though initially slow to materialize, is expected to provide upside to 2HFY10 volumes. Management’s guidance of 25,000 units in 4Q is 20% higher than our present estimate.
- Valuation. We re-iterate our Buy recommendation. The stock trades at 17.5x FY11e and 14.6x FY12e. Our target price is Rs55.
Results Review
AL reported a noteworthy 3Q operating performance (though in line with expectations), fuelled by the higher operating leverage from improved volumes and successful cost reductions. Maintain Buy. Volumes doubled AL’s 3Q performance was driven by 12.1%volume growth qoq (and 2x yoy), boosted by the recovery in demand for M&H CVs. This volume growth has come after a yoy volume decline for five successive quarters.
Robust 3QFY10 performance
Net sales in 3QFY10 jumped 79.3% yoy (and 15.1% qoq), to Rs18.2bn, (volumes grew 2x yoy and realizations declined 10.5%). Qoq, realisations grew 2.7%, while volume growth was 12.1%. Volume growth was robust due to the ongoing recovery in the CV cycle.
The EBITDA margin improved 90bps qoq (and 520bps yoy) to 11.4% (in line with expectations). EBITDA shot up over 3x yoy (and 24.2% qoq), to Rs2.06bn, mainly due to lower ‘other expenses’ and staff expenses.
The benefits of the cash-and-carry system and better working capital management continue to be felt, as interest expense, at Rs162m, came significantly lower than the Rs394m in the previous-year corresponding quarter.
The tax rate at 25.1% was higher than expected (vs our expected 15%). Hence, the adj. net profit, at Rs1.06bn, was slightly lower than expected (+18% qoq).
Positive outlook
We retain our positive view regarding Ashok Leyland, cued in by the recovery in demand for trucks. Demand for buses under the JNNURM
scheme has been slow to materialize initially, but is expected to provide upside to 2HFY10 volumes. Management’s guidance of 25,000 units in 4Q is 20% higher than our present estimate.
Further, the regular price hikes instituted by AL (in Jul, Oct and Jan) would help partially insulate it from the increase in commodity prices now seen, along with steps taken previously to control production-related costs and general and administrative overheads.
Valuation and View
We re-iterate our Buy recommendation regarding Ashok Leyland following its better operating performance, expected higher M&H CV demand and tax benefits at the Uttarakhand plant on its being commissioned in Jan ’10. The stock trades at 17.5x FY11e and 14.6x FY12e. Our target price is Rs55.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 35.67 | 06/02/10 |
| EPS (Rs) | 1.43 | Mar, 09 |
| Sales (Rs crore) | 1,815.53 | Dec, 09 |
| Face Value (Rs) | 1 | |
| Net profit margin (%) | 3.10 | Mar, 09 |
| Last bonus | 1:2 | 03/09/78 |
| Last dividend (%) | 100 | 15/05/09 |
| Return on average equity | 9.05 | Mar, 09 |
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