Buy Ashok Leyland - Kotak

ALL's 4QFY12 revenues of Rs43,110mn came in line with our estimate of Rs43,487mn. However, lower staff cost (due to lowering of bonus provision and revision in gratuity/leave encashment charges) led to net profit coming in ahead of our expectation.

- Company expects the M&HCV industry to grow by ~6%. For ALL, the management expects the volume to grow at faster clip. In FY13, the company expects M&HCV volumes of 109,000 units and 32,000 units from their newly launched Dost vehicles.

- On the margin front, the company expects improvement in operating margins from its core M&HCV segment to 11.5%. However margin dilutive "Dost" is expected to negatively impact margins by 100 to 150bps thereby taking the overall operating margin expectation by ALL to 10%.

- Current macro factors are not favorable for the M&HCV segment. We expect the M&HCV demand to pick up gradually over 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.

- We revise our FY13 estimates in order to factor 1.Increase in discount levels and 2.Factor in management guidance on the impact of higher contribution from the low margin LCV segment (Dost) in FY13. Based on the above mentioned reasons, we lower our FY13 EBITDA margin estimates from 9.8% to 9.4%. We also increase our interest cost taking into account company's FY13 borrowing plans. Given increase in 4QFY12 depreciation charge, we revise our FY13 depreciation cost upwards. The above mentioned changes has led to lowering of our FY13 net profit estimates by 7.7% to Rs8,156mn.

- We lower our target price to Rs31 (earlier Rs33). Due to adequate upside we change our rating on the stock from ACCUMULATE to BUY.

Source : Equity Bulls

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