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Research
Reduce Ashok Leyland - Elara Capital
Posted On : 2010-08-07 23:32:24( TIMEZONE : IST )
- Ashok Leyland
- Rating : Reduce
- Target Price : INR 71
- Downside : 2%
- CMP : INR 73 (as on 28 July 2010)
Strong case for market share gains; upgrade volume assumptions
Ashok Leyland's (ALL) upgraded its volumes guidance to 90K units for FY11 on the back strong growth seen in its dominant southern market. The company has traditionally been a stronger player in the multi-axle and tractor trailer segment and has benefited from the significant traction seen in this segment in recent times. In the light of above developments, we are upgrading our volume estimates to 86 thousand units for FY11E (a YoY growth of 34%) as against our industry growth forecast of 20%. We maintain the view that H2FY11 sales would be subdued due to advance buying seen in H1FY11.
Offsetting factors will keep EBITDA margins under check
We expect ALL's annual EBITDA margins to marginally ahead of its Q1FY11 margins of 10% as margins supportive factors such as softening of key input costs, price hikes and excise benefits from Uttarakhand production outweigh margin pressurising factors such as vehicle up-gradation costs, competitive metrics. We expect EBITDA margins to be 10.4% over FY11-12E.
Spare parts post a decent growth; Engines, Defence disappoint
Amongst ALL's non-cyclicals segments, spare parts registered a 15% growth in Q1FY11. Whereas, engines and Defence segments disappointed. The slowdown in the engines segment was due to substantial fall in demand for Leypower gensets from telecom sector.
Outlook and valuations; Upgrade from SELL to REDUCE
Faster growth of non-south markets and substantial drop in multi-axle and tractor trailer segments were the two key reasons for ALL's market share loss in last few years. With the reversal in the trend in recent times, there is a strong case for the company's market share to improve over FY11. However, we believe, the current price captures most of the earnings growth. LCV JV with Nissan and Construction equipment JV with John Deere would take a little while before they start contributing to profits. We upgrade our recommendation from SELL to REDUCE, with a revised target price of INR 71 (14x FY12 EPS).
