Ashok Leyland - Operating performance disappoints; Maintain Buy - Centrum

Ashok Leyland's (ALL) 3QFY13 operating results were lower compared to our expectations with EBITDA margins at 4.3% vs. est. 7.8%. Operating deleverage coupled with higher other expenditure led to weak operating performance. As a result, the company reported adjusted loss of Rs.587mn (adjusted for exceptional item of Rs.1.6bn) and managed to post PAT of Rs.741mn. Despite disappointing 3QFY13 results, we believe that favorable macro impetus and expected interest rate down cycle (we expect 100-125bps cut in interest rates for FY14E) should augur well for the M&HCV business in FY14E. Also our metals analyst expects mining-related issues to be resolved leading to court orders for resumption of closed mines. Mining activity has a significant bearing on the freight market, especially in south India where ALL has a strong market. We continue to maintain our Buy rating on the stock with a target price of Rs.31.

Operating performance disappoints: Net revenues stood at Rs.24bn registering a YoY/QoQ drop of 17%/28%. Net revenues were lower by 4% on account of lower realizations (drop of 5% vs. our expectations of drop by 1%). Driven by operating de-leverage and higher other expenditure, EBITDA margins stood at 4.3% vs. our estimate of 7.8%. As a result, the company reported a loss of Rs.587mn (excluding the exceptional item of Rs.1.6bn). Including the exceptional item, the company managed to post PAT of Rs.741mn.

Conference call highlights: 1) the management indicated that it had withdrawn plans to raise funds through QIP worth Rs.5bn; instead it will raise funds through divestment from un-related areas and could also look at liquidating its stake in IndusInd bank. 2.) total long term borrowing was at Rs.35bn and short term loans at Rs.15bn. 3.) Total capex and investment planned for FY13E stands at Rs.9bn (Rs.5.5bn incurred thus far) 4.) Production from UTK plant stands at 6,700 units compared to 7,200 units in 2QFY13 (it targets volumes of 32k in FY13E and 42k in FY14E) 5.) Dost's supply side constraints related to gear boxes were resolved a few months back (management is targeting 11-12k in 4QFY13) 6.) Discount levels have moved up to Rs.100k from 80k in 2Q and 50k in 1Q).

Valuations and Recommendations: At the CMP of Rs25, the stock trades at 11.4x FY14E EPS of Rs2.2 and 8.6x FY15E EPS of Rs2.9. We continue to maintain Buy rating on the stock with a target price of Rs31.

Source : Equity Bulls

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