Ashok Leyland - Q4FY12 Result update - Centrum

Results in-line; Upgrade to Hold

Ashok Leyland's (ALL) 4QFY12 operating results were largely in line with our expectations with EBITDA margins at 10.9% compared to our estimate of 11.3%. Revenues at Rs.43.1bn (our est. Rs.41.1bn) registered a YoY growth of 12.6% and sequential growth of 49.7%. PAT stood at Rs.2.6bn, marginally higher than our estimate of Rs.2.5bn on account of higher than expected other income. We continue to see macro headwinds impacting volume growth in CVs, which can be surprising on the downside. Though we continue to remain concerned given ALL's high dependence on trucks (every 2% drop in volume leads to 5% drop in profitability) and the lack of any medium-term positive catalyst, we are upgrading the stock from Sell to Hold as we roll forward our TP to FY14E earnings. Also, the stock has corrected by 13% since our CV note "All is not well" dated March 29, 2012.

- Operating results in line but below street estimates: 4QFY12 revenues stood at Rs.43bn compared to our estimate of Rs41bn, higher by 4.9%. The drop in realization was lower than our expectations (QoQ drop of 1.9% vs. est. drop of 2.4%). EBITDA margins for the quarter stood at 10.9% vs. our estimate of 11.3% and street estimate of 12%. Higher revenues coupled with lower staff cost despite higher than expected pressure on RMC and higher other expenditure resulted in more or less in line operating performance.

- Conference call highlights: 1) Management expects industry growth at ~6% for trucks and ~5% for busses for FY13E. The company targets 95,000 M&HCV sales in the domestic market vs. 81,118 units in FY12 (YoY volume growth of 17% looks optimistic). 2.) "Dost" continues to create strong demand and has a 3-month order backlog. The company targets volumes at 32,000 units in FY13. Significant ramp up in FY13 can impact overall EBITDA margins by 100-150 bps. 3.) ALL has increased prices by ~1% effective May on its M&HCV product range. This excludes hikes due to higher excise duty. 4.) Production from Pantnagar plant was 29,000 units in FY12 (10,000 in Q4) which is expected to be ramped up to 40,000 units in FY13. 5.) The management targets capex expenditure of Rs 6 - 6.5bn over the next two years mainly for the Pantnagar plant. It has also earmarked investments of Rs 5bn for its Nissan JV.

Valuations and Recommendations: At the CMP of Rs25, the stock trades at 11x FY13E EPS of Rs2.3 and 9x FY14E EPS of Rs2.9. We are upgrading the stock to Hold from Sell as the stock has corrected by 13% since our note - CVs "All is not well" - and also due to our rolling forward the TP to FY14E valuations from FY13E earlier, with revised target price of Rs.27.5 (based on 6.0x FY14E EV/EBITDA and Rs2.7 per share as value of investments in JVs at 50% discount).

Source : Equity Bulls

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