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February 2, 2012
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Since 1948
Ashok Leyland
Industry: Auto and Auto Components Industry View: Neutral Result Update
“Margins disappoint, cut target, maintain BUY ”
Q3 profitability subdued as operational costs go up Stock Data
Current Market Price (`) 27
Ashok Leyland (ALL)’s Q3 FY12 reported net sales of Rs28.8 bn, a growth of 29% yoy Target Price (`) 30
and a fall of 7% qoq. Volumes for the quarter were at 23,215 units, which was 2.5% Potential upside (%) 11
down qoq due to sharp fall of the company’s business in the South Indian markets due Reuters ASOK.BO
to policy uncertainties over there. The company lost market share in the tractor trailer Bloomberg AL IN
side in the northern region, while the company grew by 30% in the tipper segment. At What’s Changed
the EBITDA levels, margins came in at 7.3% due to sharp rise in employee costs and 12 month PriceTarget (`) 33 to 31
F2012 EPS (`) 2.3 to 2.2
other expenses. Employee costs (9.5% of net sales) included a one-time expense of
F2013 EPS (`) 2.9 to 2.75
Rs160mn on account of short provisioning of bonus payment done in the earlier
quarter and Rs40 mn hit taken for increase in the headcount cost at the rapidly expanding Key Data
Market Cap (`bn ) 71
Pantnagar plant. Other expenses (9.3% of net sales) were also significantly up due to
52-Week Range (`) 60 / 20
a one time Annual Maintenance Charge of Rs200mn, exchange loss of Rs150mn and sAvg. Daily Trading Value last 6 months (`mn) 150
the Dost launch expense of Rs70mn. Adjusting for the one-time expenses, EBITDA Promoters (%) 39
margins were at 8.6% for the quarter. Interest expenses came in at Rs550 mn, while FII Holding (%) 16
tax rate was at 7% due to MAT credit and provisioning of tax done in the previous quarter. DII Holding (%) 15
Public & Others Holding (%) 30
Volumes to be close to 1 lakh units, 4-6% growth to be observed in FY 13E Fiscal YE FY 10 FY 11 FY 12E FY 13E
Revenues (`mn) 72,447 111,175 121,731 132,454
With improvement in the South Indian markets seen in January, increasing demand for
EBITDA (%) 10.5 11.0 10.1 10.5
tippers strengthening presence in non south markets may see ALL regaining lost PAT (%) 5.9 5.7 4.8 5.5
market share. The company expects to touch 25% market share by the end of March EPS (`) 1.6 2.4 2.2 2.7
from current level of 21%. We believe a 23-24% market share is quite achievable EPS growth (%) 109.9 47.8 -6.7 24.1
viewing a gradual improvement in south Indian markets. We are expecting the company P/E (x) 16.8 11.4 12.2 9.8
P/B(x) 1.0 0.9 1.6 1.5
to close this year with volumes of 98,960 units and next year to post a 6% growth in line
EV/EBITDA (x) 6.9 4.9 8.4 7.2
with management’s expectations of 4-6%. Over and above this, accounting of sales of ROCE(%) 16.6 26.9 19.3 24.2
LCV Dost outside Tamil Nadu (currently ~70%) will provide the additional trigger to ROE(%) 11.6 15.9 13.3 15.1
volume growth as Dost has got an encouraging response. Bus segment is a laggard Dividend yield (%) 3.2 4.3 3.4 4.6
and hence we expect -1% growth this year. Any contract wins on the bus side from the Relative Price Performance
STUs, or revision in the JNNURM contracts may act as an upside trigger for our 120
estimates. 110
100
Q3 margin performance pulls down yearly estimate, to improve going 90
forward 80
70
Cost pressures on the employee costs and other expenses pulled down the adjusted
60
EBITDA margins to 8.6%. Going forward, we believe this concern to get negated, as
50
Dost launch expenses will get reduced and appreciation of Rupee against dollar will Feb-11 Apr-11 Jun-11 Aug-11 Nov-11 Jan-12
mitigate the currency loss incurred in Q3. Increased production from the Pantnagar Ashok Leyland BSE Sensex
facility to a targeted 4000 p.m. from March from current levels of ~2,600 p.m. will provide
additional savings. Reduction in inventory levels from 9500 at the end of December to
9,000 by January end is expected to reduce further as demand improves for ALL, One Year Indexed
(%) 1 Month 3 Months 12 Months
mainly in South India. The company had also taken a price hike of 1.2% in January
Absolute 26 9 3
which got more than offset by the higher discount of 1-2% taken in December.
BSE Relative (15) (7) (2)
Disclaimer:
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is for
general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and assumes
no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. LKP Securities Ltd.,
Ashwin Patil and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell
ashwin_patil@lkpsec.com the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor
or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions.
+91 22 6635 1271 LKP Securities Ltd., and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or
specific transaction to the companies referred to in this report, as on the date of this report or in the past.
Ashok Leyland
However, reduction of discounts will help margins to improve going forward. In spite of these
positive triggers we are reducing EBITDA margins for ALL from 10.7%/11.2% to 10.1%/10.5%
for FY12E/13E on the back of weak Q3 margins and higher U truck sales which still has under
recoveries associated with it.
PAT to be boosted on reduced tax rate
Reduction in interest rate with repayment of debt in line with management’s expectations
despite increased working capital expenses and lower tax rate helped Q3 Adj.PAT to move up
to Rs1.03 mn. Tax rate in the quarter was at 7% due to MAT credit benefit taken in the quarter,
however this will move slightly upwards in Q4. Nevertheless, the tax rate for the year is slated
to move down close to 15% considering lower tax rate for Q3. In FY13E, we expect tax rate
getting normalized at 18% after the one off aberration observed in FY 12. However, with
increased production from Pantnagar facility, we still expect tax rate for FY 13E to be lesser
than FY 11 level of 21%.
Outlook and valuation
In view of weak Q3 margin performance, we have reduced our margin expectations for FY
12E and FY 13E, while maintaining volume estimates. However, with improving business
prospects, we are still positive on the stock, though we have pruned down our target price
from Rs 33 to Rs 30(@11 times FY 13E earnings of Rs 2.75), which gives an upside of 11%
from current levels.
Q3 FY12 Q2 FY12 Q1 FY12 Q4 FY11 Q3 FY11 Q2 FY11 Q1 FY11
Avg Price Realisation (net) 1,240,490 1,307,989 1,294,548 1,289,980 1,208,093 1,103,682 1,097,083
Material cost / unit (Rs) 916,993 961,879 932,770 930,046 883,793 812,081 810,478
Staff cost / unit (Rs) 110,403 106,306 129,548 101,691 132,313 86,006 94,615
Other Expn / unit (Rs) 106,957 93,478 105,328 86,443 101,931 81,048 81,994
Total Expn / unit (Rs) 1,134,353 1,161,664 1,167,645 1,118,180 1,118,037 979,135 987,086
EBITDA per unit 106,137 146,325 126,903 171,800 90,056 124,547 109,997
PAT per unit 44,323 71,478 44,756 100,490 23,524 67,939 57,312
`
Results (`mn) Q3 FY12 Q2 FY12 % qoq Q3 FY11 % yoy
Net Sales 28,798 30,946 -6.9% 22,272 29.3%
Raw Material Cost 21,288 22,757 -6.5% 16,294 30.7%
Staff Cost 2,563 2,515 1.9% 2,439 5.1%
Other Expenses 2,483 2,212 12.3% 1,879 32.1%
Total Expenses 26,334 27,484 -4.2% 20,612 27.8%
EBITDA 2,464 3,462 -28.8% 1,660 48.4%
EBITDA margin (%) 8.6 11.2 (260 bps) 7.5 110 bps
Other Income 32 103 -69.0% 17 91.2%
Depreciation 866 859 0.8% 647 33.9%
Interest 550 627 -12.3% 475 15.8%
PBT 1,080 2,079 -48.0% 555 94.5%
Total tax 51 388 -86.8% 122 -58.1%
Adjusted PAT 1,029 1,691 -39.2% 434 137.3%
Adj PAT margin % 3.6 5.5 (190 bps) 1.9 170 bps
Reported PAT 669 1,541 -56.6% 434 54.3%
LKP Research 2
Ashok Leyland
Financial Summary (Standalone)
Income statement Balance sheet
`
YE Mar (`mn) FY10 FY11 FY12E FY 13E `
YE Mar (`mn) FY10 FY11 FY12E FY 13E
Total Revenues 72,447 111,175 121,731 132,454 SOURCES OF FUNDS
Raw Material Cost 52,186 80,153 88,628 96,680 Equity Share Capital 1,330 1,330 2,661 2,661
Employee Cost 6,716 9,746 11,038 11,613 Reserves & Surplus 35,357 38,299 41,715 45,734
Other Exp 5,917 9,102 9,734 10,226 Total Networth 36,687 39,629 44,375 48,395
EBITDA 7,628 12,175 12,332 13,934 Total debt 22,039 25,683 35,931 30,985
EBITDA Margin(%) 10.5% 11.0% 10.1% 10.5% Net Deferred Tax Liability 4,611 5,338 5,338 5,338
Other income 704 153 250 450 Foreign currency movement -125 0 0 0
Depreciation 2,041 2,674 3,354 3,472 Total Liabilities 63,212 70,650 85,644 84,718
Interest 811 1637 2300 2107 APPLICATION OF FUNDS
PBT 5,480 8,017 6,928 8,805 Net block 42,496 46,338 48,984 51,511
PBT Margin(%) 7.6% 7.2% 5.7% 6.6% Capital WIP 5,615 3,580 5,600 3,500
Tax 1,211 1,705 1,039 1,497 Investments 12,299 18,299 20,299 0
Adj PAT 4,269 6,312 5,889 7,308 Current Assets
Adj PAT Margins (%) 5.9% 5.7% 4.8% 5.5% Cash and Bank 5,189 1,795 3,715 3,020
Exceptional items 32.7 0.0 0.0 0.0 Inventories 16,382 22,088 24,378 21,470
PAT 4237 6312 5889 7308 Sundry Debtors 10,221 11,852 13,007 13,427
PAT Margin (%) 5.8% 5.7% 4.8% 5.5% Loan, Advances & others 9,604 7,936 10,681 12,864
Current Liab & Prov
Current liabilities 23,317 27,074 32,684 34,837
Key Ratios Provisions 6,291 8,208 6,400 6,600
YE Mar (mn) FY10 FY11 FY12E FY 13E Net Current Assets 11,789 8,390 12,697 9,343
Per Share Data (`) Misc expenses 50 44 65 65
Adj. EPS 1.6 2.4 2.2 2.7 Total Assets 63,212 70,650 85,644 84,718
CEPS 2.4 3.4 3.5 4.1
BVPS 27.6 29.8 16.7 18.2
DPS 0.9 1.2 0.9 1.2
Growth Ratios(%)
Total revenues 18.1 53.6 10.6 8.8
Cash Flow
EBITDA 62.5 59.6 1.3 13.0 `
YE Mar (`mn) FY10 FY11 FY12E FY 13E
PAT 109.9 47.8 -6.7 24.1 PBT 5,447 8,017 6,928 8,805
EPS Growth 109.9 47.8 -6.7 24.1 Depreciation 2,127 2,781 3,354 3,472
Valuation Ratios (x) Interest 912 1,754 2,300 2,107
PE 16.8 11.4 12.2 9.8 Chng in working capital 4,339 (4,914) (2,388) 2,659
P/CEPS 11.4 8.0 7.8 6.7 Tax paid (893) (1,503) (1,039) (1,497)
P/BV 1.0 0.9 1.6 1.5 Other operating activities (1,032) (222) 21 0
EV/Sales 0.7 0.5 0.9 0.8 CF from operations (a) 10,901 5,913 9,175 15,546
EV/EBITDA 6.9 4.9 8.4 7.2 Capital expenditure (6,947) (3,526) (8,020) (3,900)
Operating Ratios (Days) Chng in investments (9,052) (6,000) (2,000) 0
Inventory days 82.5 72.5 73.1 59.2 Other investing activities 8,167 349 (4,000) (2,000)
Recievable Days 51.5 38.9 39.0 37.0 CF from investing (b) (7,831) (9,177) (14,020) (5,900)
Payables day 117.5 88.9 98.0 96.0 Free cash flow (a+b) 3,069 (3,263) (4,845) 9,646
Net Debt/Equity (x) 0.46 0.60 0.73 0.58 Inc/dec in borrowings 4,250 3,740 10,248 (4,946)
Profitability Ratios (%) Dividend paid (incl. tax) (1,556) (2,327) (2,473) (3,289)
ROCE 16.6 26.9 19.3 24.2 Other financing activities (1,460) (1,549) (970) (2,107)
ROE 11.6 15.9 13.3 15.1 CF from financing (c) 1,234 (136) 6,805 (10,342)
Dividend payout -54.9 -49.0 -42.0 -45.0 Net chng in cash (a+b+c) 4,303 (3,400) 1,960 (695)
Dividend yield 3.2 4.3 3.4 4.6 Closing cash & cash equiv. 5,154 1,755 3,715 3,020
Source: Company , LKP Research
LKP Research 3
LKP
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