Ashok Leyland - Weak demand persists; Sell - Anand Rathi

Sales down yoy and qoq. Ashok Leyland's 3QFY14 sales were poor, down 18.4% yoy, capping a weak 9MFY14. The decline is all encompassing, as LCVs dipped 4.1% yoy and M&H CVs were down 26.4% yoy. A near-term recovery is unlikely, although 3Q may mark the bottom in absolute volumes. A full-fledged cyclical recovery is likely only in 2HFY15.

Revenues to dip. For a fifth consecutive quarter, AL's revenues are expected to decline in 3QFY14. Moreover, we do not expect any respite for the company in 4Q either. On the 18.4% yoy volume decline, and an expected 1% yoy dip in realisations, we expect AL's 3Q revenues to be Rs. 19.2bn, lower 19.3% yoy and 24.6% qoq.

Losses to sustain for third successive quarter. On low operating leverage, we expect 3Q EBITDA margin to be 1%, while there would be an adjusted loss of Rs. 1.1bn. Sale of 1.8m IndusInd Bank shares would provide a boost to the reported profit in 3Q.

Our take. With the company at the wrong end of the CV cycle, the poor performance is likely to continue in 1HCY14. Although its LCV, Dost, was faring better, its recent performance has been a bit restrained. The bread-andbutter M&H CV segment continues to sputter. We have a Sell on the stock because of the ongoing downswing in the M&H CV cycle, with a short-term recovery appearing unlikely. While the low 2HFY13 base would arrest the fall, recouped volumes based on swelling demand are likely only in 2HFY15. On a positive note, the company is taking steps to de-leverage the balance sheet, which is a long-term positive; in the near-term, the cyclical downturn would be an overbearing factor. The stock quotes at 12x FY15e EV/EBITDA. Our target of Rs. 13 is based upon a target EV/E of 10.5x FY15e. Risks. Strong economic growth, rise in freight rates, more-than-expected LCV profitability.

Source : Equity Bulls

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