Ashok Leyland - 'Dost' A Burden On Profitability; Downgrade to 'ACCUMULATE' - TP Rs30 - PINC Research

Q3FY12 Result Review – Ashok Leyland

'Dost' A Burden On Profitability

Ashok Leyland's (AL) Q3FY12 results were disappointing as the LCV 'Dost' diluted the profitability. Incremental 8% contribution of LCV 'Dost' to overall volumes led to a 2.1% QoQ decline in blended realisations. However, raw material cost per vehicle declined by only 1.6%. Other expenditure too rose 13.6% QoQ largely due to increase in marketing spend and a forex loss of Rs150mn resulting in a steep 340bps contraction in margins to 7.3% (PINCe 10%). Net profits at Rs669mn were 40% below our estimate of Rs1.1bn.

- Double digit volume growth, but on a low base
- Realisations decline 2.1% sequentially
- Margins contract 340bps QoQ to 7.3%

Outlook: The management reiterated its endeavour to achieve 25% marketshare during the year and reach within striking distance of its initial guidance of 100k units in FY12. However, considering the loss of marketshare in the current year we reduce FY12 and FY13 volume estimates by 2% and 4.8% to 97k and 104k units respectively. Additionally, we have included 4k and 21k units of the 'Dost' in our FY12 and FY13 estimates. We have also cut our margin estimates resulting in a 16% and 20% reduction in our FY12 and FY13 earnings estimate to Rs2.1 and Rs2.4 respectively. We introduce FY14 earnings estimate of Rs2.8.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 11.3x FY13E earnings. We downgrade the stock to 'ACCUMULATE' with a revised price target of Rs30 (earlier Rs38) discounting FY13E earnings 12.5x.

Source : Equity Bulls

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