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Ashok Leyland Q3FY12 Result Update_LKP

VIEWS: 3 PAGES: 4

									February 2, 2012

Buy                                                                                                                                              LKP
                                                                                                                                                  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
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