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Research
Ashok Leyland - Poor quarter - Standard Chartered Securities
Posted On : 2013-07-18 22:22:27( TIMEZONE : IST )
IN-LINE, AL IN, CMP INR 15.75, Price Target INR 16
- Ashok Leyland (ALL) posted a wider-than-expected loss of INR 1.35bn in 1QFY14 versus our estimate of INR 780mn.
- The sharp underperformance was driven by an historic low margin (due to sharp volume decline and record high discounts) of 1% and higher interest (increased debt).
- Factoring in the 1QFY14 underperformance and little recovery expected in the near term, we sharply lower our estimates.
- IER expect volume recovery only in FY15E over a substantially low base (down 28% since FY11).
- The stock appears fully valued at 10x FY15E earnings. Even IER's historical one-year forward EV/sales chart suggests that the stock is very close to its bottom. Due to the lack of near-term triggers, IER maintains our In-Line rating with a revised price target of INR 16.
Margins down to historic low. ALL witnessed sharp margin erosion in 1QFY14 to 1% due to low volumes (down 26% y/y), record high discounts (average INR 159,000/vehicle) and poor product mix.
ALL posts wider-than-expected loss. EBIDTA for the quarter declined 90% y/y to INR 233mn. Led by poor operating performance and higher interest burden, ALL reported a loss of INR 1.35bn, far higher than IER loss estimate of INR 780mn.
Sharp earnings downgrade followed by weak performance. On account of the wider-than-expected loss in 1QFY14 and also little signs of a recovery in the near term, IER has sharply cut its FY14 earnings estimates. It now expects ALL to post a loss of INR 3bn in FY14 (versus PAT of INR 2bn earlier). It has lowered its FY15E earnings by 17% to INR 1.6 per share.
Maintain In-Line. IER now expects a recovery in ALL's volumes only in FY15 - it has factored in 20% volume growth in FY15 over a substantially low base (after 15% CAGR decline in volume for the past three years). This translates to a monthly run-rate of 6,700 units - far lower than its normalised average run-rate of 7,800/month three years ago. The stock is fully valued at 10x FY15E earnings and at 6x EV/EBIDTA. Even IER's historical one year forward EV/sales chart suggests that the stock is very close to its bottom (trading at 0.42x EV/sales). Due to the lack of near-term triggers, it maintain its In-Line rating with a revised price target of INR 16 (versus INR 19 earlier), which is valued at 10x FY15E earnings. IER earnings may face further downside pressure if volumes fail to recover even in FY15E.
