Ashok Leyland - 2Q beats but challenges persist; Maintain Neutral - Centrum

Ashok Leyland's (ALL) 2QFY13 operating results were ahead of our estimates with EBITDA margins at 10.1% compared to our estimate of 7.8% largely driven by better than expected realization growth. ASP for the quarter grew 1.3% despite higher contribution from low realization Dost (we believe this was largely on account of strong export realizations). Based on our calculations, we believe that domestic realizations have dropped 1.4% during the quarter. While, we are upgrading our earnings estimates by 9% and 14% for FY13E and FY14E respectively driven by better performance in 2Q, we continue to believe that current discounts and negligible rise in fleet operators' pricing power suggest weak demand environment for M&HCV goods segment. We expect the recovery to be gradual for the M&HCV goods segment over 2HFY13-FY14E and await meaningful signs of recovery in the investment cycle before re-rating the stock. As a result, we maintain our Neutral rating on the stock with a revised target price of Rs26.8 in line with the earnings upgrade.

Operating performance in line: Revenues stood at Rs.33bn compared to our estimate of Rs.30.2bn. Higher than expected ASP (growth of 1.3% QoQ) coupled with containment in other overheads led to better than expected operating performance. EBITDA margins stood at 10.1% compared to our estimate of 7.8%. Further tax rate came lower at 8.5% compared to our estimate of 17.3%. As a result, Adjusted PAT stood at Rs.1.4bn compared to our estimate of 702mn.

Conference call highlights: 1) the management expects overall M&HCV industry to register a drop of 5-10% for FY13E. However, overall volume growth for AL is likely to remain flat 2.) Inventory during the quarter stood lower at 8,400 units compared to 10,000 units at end of 1Q 3.) Discounts continue to remain at elevated levels (Rs.80k vs. Rs.60-65k in 1Q) and are expected to continue given weak demand conditions 4.) The company has guided for capex of Rs.6-6.5bn and investments in the range of Rs.6-7bn in FY13E.

Valuations and Recommendations: At the CMP of Rs26, the stock trades at 12.6x FY13E EPS of Rs2.0 and 9.8x FY13E EPS of Rs2.6. We continue to maintain Neutral rating on the stock with a revised target price of Rs26.8.

Source : Equity Bulls

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