Ashok Leyland - Forex gains, better mix, tax credit help beat estimates - BRICS

AL reported a surprise quarter - with results ahead of our and the Street's estimates - primarily swung around by forex gains and tax credit. Revenue at Rs33bn was 5% above estimate, though EBITDA came in 19% higher than estimate at Rs3.3bn, aided by better product mix and favourable forex movements, thus resulting in EBIDTA margin of 10%. A higher contribution from LCVs, coupled with brand building expenses and discounts, impacted blended realisation and margin. PAT was 50% above estimate at Rs1.4bn, as tax rate fell to 8% and other income was up 77% yoy. We expect a pick-up in the overall economy and industrial production in FY14, which is likely to drive the demand for M&HCVs. We value AL's core business at 10x FY14 earnings (vs. 9x FY13E earlier) to arrive at a core business value of Rs30 and add Rs2 for other businesses, thus taking our SOTP value up to Rs32 (Rs22 earlier). We upgrade AL to Buy from Reduce.

Revenue up 6% yoy, realisation down 16% yoy: Volume was up 25% yoy and 8% qoq to 29,840 units, with LCVs contributing 41% (up from 35% in Q1FY13). This led to blended realisation per unit declining 16% yoy to Rs1.1mn/unit and revenue growth lagging volume growth—at Rs33bn, revenue was up 6% yoy and 10% qoq.

Margin improves 213bps qoq to 10%: Raw material as a % of net sales was down 80bps yoy - due to a change in mix and favourable forex movements - while other expenses were up 137bps yoy. EBITDA came in at Rs3.3bn, flat yoy, resulting in EBIDTA margin of 10%. EBITDA was stronger in comparison to Q1, as AL had incurred majority of the brand building expenses in the previous quarter.

PAT up 50% yoy: Finance cost increased 102bps yoy to Rs1.4bn, due to higher working capital. Other income was up 77% yoy and 85% qoq to Rs239mn, largely due to forex gains. Tax rate declined sharply by 1,157bps yoy to 8.5%; or a provision of Rs133mn, after considering MAT credit (higher R&D expenses and Pantnagar production) amounting to Rs443mn. This resulted in PAT of Rs1,426mn - down 7.5% yoy, up 113% qoq - 50% above estimate.

Source : Equity Bulls

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