Ashok Leyland - Below estimates, downgrade to Add - BRICS

Ashok Leyland's (AL) results were below our estimates largely due to higher contribution from low-margin LCVs and higher raw material costs and other expenditure. With continued pressure on the economy and IIP, we cut our volume estimates for FY13 and 14 and revise EPS estimates down by 9% each. AL trades at 10x FY13 and 8x FY14 - to arrive at our new SOTP value of Rs29 (Rs32 earlier), we value its core business at 11x FY13 (Rs28) factoring in moderate commercial vehicles industry growth and its other businesses at Rs1. We downgrade the stock to Add from Buy.

More contribution from LCVs leads to lower-than-expected revenues: Volumes rose 20% yoy (54% qoq) to 35,688 units. With low-margin LCVs now contributing 13% vs.1% in Q4FY11, revenue growth was slower (up13% yoy, 50% qoq but 1.4% below estimates) than volume. Realisation fell 6% yoy to Rs1.21mn; AL increased prices by 1% in Q4.

Other expenses, raw material drag margin, PAT: EBITDA fell 8% yoy to Rs4.7bn on lower realisation and more discounts offered. EBITDA margins fell 242bps to 11% (13.1% estimated) vs. 13.3% in Q4FY11 on higher raw material costs (up 234bps) and other expenditure (up 223bps due to marketing initiatives). Although tax rate fell to 18% due to tax benefits (R&D, etc), PAT fell 13% yoy to Rs2.58bn (25% lower than estimate). Interest cost was up 61% at Rs724mn on higher term- and working-capital loans.

Revise volume, earnings estimates: While the domestic commercial vehicle industry grew 7% yoy in FY12, AL's growth was flat. We cut ourFY13 sales volume target by 1% to 108,984 units (6% growth) and by 2%for FY14 to 120,921 units (12% growth). We see pressure on sales continuing till industrial growth picks up again in H2FY13. We also see pressure on margins persisting due to lower volume growth and higher discounts offered.

Source : Equity Bulls

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