Ashok Leyland - No significant improvement in the offing - LKP Research

Ashok Leyland (ALL)'s MHCV volumes have declined by 23% YTD April-August to 25,615 units. Being a pure play CV player ALL will continue to face the brunt until there is some meaningful recovery in the economic indicators. We have cut our MHCV volume expectations for ALL and now factor in a -15%/10% growth in FY14E/15E. In FY15E, we have shown a growth on the back of some recovery in the economy and low base of FY 14E.

ALL's upcoming launches of Next Gen cab, CNG and passenger versions of Dost, the SUV Stile, Neptune engine trucks, LCV Partner and Jan Bus are not expected to do much to the volume performance in a dull market environment. The latest launch of ALL's ICV (Intermediate Commercial Vehicle) 'Boss' is not expected to elevate ALL's LCV performance. Also the existing LCV of the company 'Dost' has started showing weakness as its sales have dropped by 11% YTD. The partial lifting up of mining ban in Karnataka in April is still to show any impact on ALL's volume performance. The Supreme Court is yet to lift the ban on the rest of the mines in this state which may still take some time to happen. Indications are that it may happen in a phased manner and at a slow pace.

We believe the company's volumes will face pressure in the coming quarters as well, as economy as well as industrial activity is taking lot of time to revive. With almost two quarters into FY 14E, the company is staring at a huge drop in volumes without any signs of recovery.

We forecast 3.3%/7.5% EBITDA margins in FY14E/15E respectively. With higher depreciation costs and interest costs on highly leveraged balance sheet, we expect the company to incur losses in FY14E and post profits in FY 15E with some recovery in volumes and margins expected. In line with this, we have significantly pruned down our earnings forecast for FY 14E/15E and our target price from Rs 15.7 to 11.4.

Source : Equity Bulls

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