Hold Ashok Leyland - PINC Result Review

Emission Norm Boost

Ashok Leyland's (AL) Q2FY11 performance met our estimates with net profit increasing by 86.7% to Rs1.67bn. Preponement of buying due to new emission norms applicable from 1st October boosted sales during the quarter. Operating leverage and price hikes undertaken led to a 130bps sequential expansion in margins to 11.3%.

Outlook: We expect AL to achieve volumes of 89k and 97k units during FY11 and FY12 respectively. With lower monthly run rates in the coming months, we see margin contraction from current levels to 10.7% for FY11. In FY12, margins are expected to get a leg up due to higher contribution from Pantnagar facility which enjoys fiscal benefits. We maintain our earnings estimates for FY11 and FY12 at Rs4.3 and Rs5.5 respectively.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 13.9x FY12E earnings and 9.6x FY12E EV/EBITDA. At the current valuations, we find the company to be fairly valued. We maintain a 'HOLD' rating on the stock with a price target of Rs76, discounting FY12E earnings 14x.

Source : Equity Bulls

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