Ashok Leyland Result Update: Ongoing M&HCV Downtrend to Continue Impacting Near Term Performance - Karvy

(AL IN; HOLD; Mkt Cap: US$1,071mn; CMP: Rs22; TP: Rs23; 6% Upside)

Ashok Leyland (ALL) reported disappointing performance in Q4FY13 mainly due to 23% YoY plunge in M&HCV volume, which dragged its EBIDTA margin by 554 bps YoY to 5.3% (our estimate of 10.3%). Its revenues dipped 14% YoY to Rs. 37.3 bn in Q4FY13. Its Raw Material/Sales ratio grew 163 bps YoY (467 bps QoQ) to 75.8%, while its Other Expenses/Sales ratio rose by 204 bps YoY to 11.4% mainly due to higher advertising and business consulting fees. ALL's inventory of finished vehicles declined by ~3,000 units QoQ to ~8,000 units in Q4FY13, lowering working capital and consequently its interest outflow. ALL has posted PAT of Rs. 1.5 bn – including Rs. 1.34 bn gain on sale of long-term investment – excluding which, its adjusted net profit declined 90% YoY to Rs. 251 mn, while the adjusted EPS stood at Rs 0.09 in Q4FY13.

Key Concerns: Despite gain in market-share in FY13, ongoing M&HCV slowdown and growth in LCVs segment tapering off would result in lower volume for ALL. Its total debt rose to ~Rs. 43 bn – including Rs. 8 bn for working capital – as against total debt of Rs. 33 bn by FY12-end. However, drastically lowering its capex plan, ALL announced capex and investment to the tune of Rs. 2.5 bn each in FY14E (vs. earlier guidance of ~Rs. 15 bn over two years), which would reduce its interest burden, going forward. This may provide partial relief to its stretched balance sheet.

Outlook & Valuation

Amid low M&HCV volume and margin profile, we cut our revenue estimates by 2% & 0.5%, and EBIDTA estimates by 8.5% and 5.1% for FY14E & FY15E, respectively. Due to lower interest on low working capital – owing to decline in inventory – we lower FY14E EPS by only 3.2%, while increasing FY15E EPS by 1.5%. Currently, the stock trades at P/E of 7.5xFY15E. Despite near-term pressure amid ongoing slowdown in M&HCV segment, we are comfortable on the current valuation in view of attractive dividend yield at the CMP and likely recovery in M&HCV segment in H2FY14E. Therefore, we reiterate our "HOLD" recommendation on the stock and maintain target price of Rs. 23 per share, valuing the stock at 8xFY15E EPS.

Source : Equity Bulls

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