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Ashok Leyland Ltd Research Report - 21st Jan 2016

Automobile | Published on Nov 07th 2015


Results miss estimates: Ashok Leyland (ALL)s 2QFY2016 results have come in below our estimates on account of a lower-than-anticipated top-line. Revenue grew by a robust 54% yoy and by 29% on a sequential basis to Rs4,940cr, but still, is below our estimate of Rs5,281cr. Volumes grew strongly by 51% yoy, led by a sharp 64% yoy growth in the MHCV segment. However, the blended realization grew only marginally; it came in at Rs14.08 lakh/unit, up 2% yoy, declined 4% sequentially, and is below our estimate of Rs15 lakh/unit. Lower proportion of defence supplies and exports led to a sequential dip in the realisation. Operating margin at 12% is at a record five-year high, improving sharply by 490bp yoy, and is broadly in line with our estimates of 12.6%. Soft commodity prices, better product mix (with greater proportion of higher-tonnage vehicles) and cost control initiatives implemented by the company enabled ALL to report a double-digit margin. The adj net profit, at Rs292cr, missed our estimate of Rs355cr. Outlook and valuation: ALL results were below estimates primarily due to lower realization on account of unfavourable mix. However, we expect the mix to be favourable in 2HFY2016 due to higher defence supplies and recovery in exports which would boost realisations. Given the improvement in fleet operators’ sentiments due to revival in the economy, improvement in profitabilities due to falling diesel prices, and policy action initiated in the infrastructure and the mining space, the MHCV demand would continue to grow in double digits. The MHCV industry is clearly in an up-cycle and we estimate ~17% CAGR in volume over FY2015- FY2017. Also, a better mix (higher proportion of MHCVs), reduction in record high discounts due to volume growth, and operating leverage would result in margin expansion, going forward. We expect operating margin to improve from 7.6% in FY2015 to 11.6% in FY2017 (in line with the margins witnessed in the previous up-cycle in FY2011). We maintain our Buy on the stock with a revised price target of Rs111 (based on 13x FY2017 EV/EBIDTA).

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CMP 88
Target Price 111
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others12.0
Grand Total100.0

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