Ashok Leyland - Operating performance disappoints, maintain Neutral

Ashok Leyland's (ALL) 4QFY13 overall results were significantly lower than our expectations with EBITDA margin at 5.3% vs. est. 8.1%. Revenues stood at Rs.37bn compared to our estimate of Rs.35.6bn, higher by 4.8% largely driven by better than expected net realizations. Net realizations dropped 11% YoY (est. drop of 15%) but registered a growth of 2.5% QoQ (est. drop of 2.2%). EBITDA margins at 5.3% contracted by 558bps YoY but expanded by 94bps QoQ. Adjusted PAT for the quarter stood at Rs.230mn. Post our recent interaction with dealers; we understand that M&HCV segment is the worst hit across vehicle categories. Dealers spoke of visible signs of defaults by fleet operators moving from 30-day period to 90-day period now, indicating significant pressure on the ground. Dealers saw flattish volume growth for the M&HCV industry and believed sharp recovery in volumes in FY14E is unlikely. Given the current weakness in demand environment and limited signs of a pick up in the near term, we continue to maintain our Neutral rating on the stock with revised target price of Rs.24.

- Operating results significantly lower than expected: Revenues stood at Rs.37bn compared to our estimate of Rs.35.6bn, higher by 4.8% largely driven by better than expected net realizations. Net realizations dropped 11% YoY (est. drop of 15%) and registered a growth of 2.5% (est. drop of 2.2%). Gross margins declined by 390bps QoQ on account of higher discounts, rate negotiations with vendors and unfavorable mix shift. EBITDA margins at 5.3% contracted by 558bps YoY and expanded by 94bps QoQ. Adjusted PAT for the quarter stood at Rs.230mn.Reported PAT of Rs1.5bn reflects exceptional profit of Rs1.27bn from asset sale.

- Conference call highlights: 1.) Industry volume growth guidance for FY14E is 3-4%; ALL volumes to grow 4-5% 2) Discounts continues to remain at elevated levels. Discount levels have moved up to Rs.130k/vehicle from RS.110k/vehicle seen in 3QFY13. Company plans to curtail the same to Rs100k/vehicle 3) FY14 capex and investments expected to be Rs2.5bn each, significantly lower than FY13 levels of Rs8.9bn/Rs8bn respectively 4) Inventory (company end) declined to 6,200 vehicles in 4Q from ~10,800 in 3Q, dealer level inventory stands at 2,000 units 5) Management expects to reduce debt to ~Rs40bn in FY14E.

- Valuations and Recommendations: At the CMP of Rs22.1, the stock is currently trading at 19.6x FY14E EPS of Rs.1.1 and 10.7x FY15E EPS of Rs.2.1. We continue to maintain our Neutral rating on the stock based on a revised target price of Rs.24 ( based on 6.5x FY15E EV/EBITDA + Rs.3.9 of investments ) as we roll forward our valuations to FY15E from earlier Sept 2014E.

Source : Equity Bulls

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