Please refer to important disclosures at the end of this report 1 Quarterly highlights (Standalone) Y/E March (` cr) 3QFY13 3QFY12 % chg (yoy) 2QFY13 % chg (qoq) Net Sales 2,381 2,903 (18.0) 3,296 (27.8) EBITDA 102 210 (51.4) 334 (69.4) EBITDA margin (%) 4.3 7.2 (295)bp 10.1 (584)bp Adj. PAT (82) 67 - 143 - Source: Company, Angel Research Ashok Leyland (AL) reported disappointing results for 3QFY2013 as operating margins collapsed to 4.3%, down 295bp yoy and 584bp qoq, owing to higher discounts in the medium and heavy commercial vehicle (MHCV) segment, adverse product-mix (higher share of Dost) and lower utilization levels. Further, higher interest cost due to increasing working capital requirements also impacted the performance, leading to a bottom-line (adjusted basis) loss of `82cr. We lower our volume estimates to account for the continued weakness in the MHCV segment. We also lower our EBITDA margin estimates to factor in weak 3QFY2013 performance and higher levels of discounting in the industry. Additionally, we raise our estimates for interest outgo due to the increasing working capital requirements. Nevertheless, we believe that expected easing of interest rates in CY2013 will lead to revival in industrial activity and thus the demand for MHCVs. We therefore recommend an Accumulate rating on the stock. Dismal 3QFY2013 results: AL posted a significant decline of 18% yoy (27.8% qoq) in its net sales to `2,381cr as against our estimates of `2,498cr. The disappointing performance was largely due to 29.5% yoy (30.7% qoq) decline in total volumes ex. Dost and 16% yoy (4.9% qoq) decline in net average realization owing to higher level of discounts and adverse product-mix. However, total volumes (including Dost), declined by only 2.8% yoy (24.1% qoq). At the operating level, AL witnessed a substantial contraction in margins to 4.3% (down 295bp yoy) as against our estimates of 8.3%. This can be attributed to 340bp (370bp qoq) and 160bp yoy (300bp qoq) increase in other expenditure and staff cost as a percentage of sales respectively. As a result, the adjusted net profit posted a loss of `82cr for the quarter. Outlook and valuation: While the near term outlook for the MHCV industry remains challenging due to slowdown in overall industrial activity; we expect volumes to recover in FY2014E led by likely easing of interest rates in CY2013. At `25, AL is trading at 11.2x its FY2014E earnings. We recommend an Accumulate rating on the stock with a target price of `28. Key financials (Standalone) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E Net Sales 11,177 12,842 12,910 14,836 % chg 54.3 14.9 0.5 14.9 Net Profit 630 561 394 592 % chg 64.2 (11.0) (29.7) 50.2 EBITDA (%) 10.9 9.8 8.8 9.6 EPS (`) 2.4 2.1 1.5 2.2 P/E (x) 10.6 11.9 16.9 11.2 P/BV (x) 2.5 2.3 2.2 2.0 RoE (%) 16.5 13.7 9.3 13.3 RoCE (%) 14.4 12.9 10.3 12.7 EV/Sales (x) 0.6 0.5 0.5 0.5 EV/EBITDA (x) 6.3 6.0 6.7 5.5 Source: Company, Angel Research ACCUMULATE CMP `25 Target Price `28 Investment Period 12 Months Stock Info Sector Market Cap ( ` cr) Net Debt ( ` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value ( `) BSE Sensex Nifty Reuters Code Bloomberg Code Shareholding Pattern (%) Promoters 38.6 MF / Banks / Indian Fls 19.7 FII / NRIs / OCBs 31.4 Indian Public / Others 10.3 Abs. (%) 3m 1yr 3yr Sensex 7.2 17.7 19.8 Ashok Leyland 7.5 (8.8) (3.2) AL@IN Automobile 1.0 20,104 6,075 ASOK.BO 6,652 1.1 33/20 971,753 3,494 Yaresh Kothari 022-3935 7800 Ext: 6844 [email protected]Ashok Leyland Performance Highlights 3QFY2013 Result Update | Automobile January 25, 2013
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Please refer to important disclosures at the end of this report 1
Ashok Leyland (AL) reported disappointing results for 3QFY2013 as operating margins collapsed to 4.3%, down 295bp yoy and 584bp qoq, owing to higher discounts in the medium and heavy commercial vehicle (MHCV) segment, adverse product-mix (higher share of Dost) and lower utilization levels. Further, higher interest cost due to increasing working capital requirements also impacted the performance, leading to a bottom-line (adjusted basis) loss of `82cr. We lower our volume estimates to account for the continued weakness in the MHCV segment. We also lower our EBITDA margin estimates to factor in weak 3QFY2013 performance and higher levels of discounting in the industry. Additionally, we raise our estimates for interest outgo due to the increasing working capital requirements. Nevertheless, we believe that expected easing of interest rates in CY2013 will lead to revival in industrial activity and thus the demand for MHCVs. We therefore recommend an Accumulate rating on the stock.
Dismal 3QFY2013 results: AL posted a significant decline of 18% yoy (27.8% qoq) in its net sales to `2,381cr as against our estimates of `2,498cr. The disappointing performance was largely due to 29.5% yoy (30.7% qoq) decline in total volumes ex. Dost and 16% yoy (4.9% qoq) decline in net average realization owing to higher level of discounts and adverse product-mix. However, total volumes (including Dost), declined by only 2.8% yoy (24.1% qoq). At the operating level, AL witnessed a substantial contraction in margins to 4.3% (down 295bp yoy) as against our estimates of 8.3%. This can be attributed to 340bp (370bp qoq) and 160bp yoy (300bp qoq) increase in other expenditure and staff cost as a percentage of sales respectively. As a result, the adjusted net profit posted a loss of `82cr for the quarter.
Outlook and valuation: While the near term outlook for the MHCV industry remains challenging due to slowdown in overall industrial activity; we expect volumes to recover in FY2014E led by likely easing of interest rates in CY2013. At `25, AL is trading at 11.2x its FY2014E earnings. We recommend an Accumulate rating on the stock with a target price of `28.
Lower-than-expected growth in top-line: For 3QFY2013, net sales posted a significant decline of 18% yoy (27.8% qoq) to `2,381cr as against our estimates of `2,498cr. The disappointing performance was largely due to 29.5% yoy (30.7% qoq) decline in total volumes (ex. Dost) and 16% yoy (4.9% qoq) decline in net average realization. However, total volumes including Dost, declined by only 2.8% yoy (24.1% qoq) as Dost volumes surged significantly on a low base of last year. The net average realization fell sharply largely on account of higher contribution from the lower priced Dost vehicle and also due to higher discounts in the MHCV segment (higher by `15,000/vehicle to `115,000). Further, withdrawal of duty drawback rates on exports to 2% from 5.5% earlier also impacted the net average realization.
Exhibit 4: Volumes down on decline in MHCV sales
Source: Company, Angel Research
Exhibit 5: Net average realization down 16% yoy
Source: Company, Angel Research
Exhibit 6: Net sales down 18% yoy
Source: Company, Angel Research
Exhibit 7: Domestic market share trend
Source: Company, SIAM, Angel Research
EBITDA margin shrinks to 4.3%: On the operating front, EBITDA margin collapsed 584bp qoq (295bp yoy) to 4.3%, significantly lower than our estimates of 8.3%. This was primarily on account of higher discounts in the MHCV segment, inferior product-mix (share of Dost increased to 35.2% in 3QFY2013 vs 29% in 2QFY2013) and lower utilization levels (due to lower volumes). As a result, other expenditure and staff cost as a percentage of sales surged 340bp (370bp qoq) and 160bp yoy (300bp qoq) respectively during the quarter. The other expenditure was higher on account of higher power costs (due to frequent power cuts in Tamil Nadu), consultancy expenditure, and maintenance and warranty expenses.
Adjusted bottom-line loss of `82cr: Led by disappointing operating performance and higher interest cost (up 77.5% yoy) due to increasing working capital requirements, AL reported a PBT loss of `84cr. However, on the net profit front, the company reported a `74cr profit led by an exceptional gain of `156cr (due to profit on sale of non-current investments). Nevertheless, adjusted for the exceptional gain, AL reported a net loss of `82cr as against `67cr profit in 3QFY2012 (`143cr in 2QFY2013).
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Ashok Leyland | 3QFY2013 Result Update
January 25, 2013
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Conference call – Key highlights
The management expects the MHCV industry to post a decline in FY2013; however it is hopeful of slightly better performance in 4QFY2013 as against 3QFY2013. The company expects to post 24,000-25,000 units of MHCV sales in 4QFY2013. The company sees Dost sales of ~36,000 units in FY2013.
While the MHCV industry sales have declined by ~20% in 9MFY2013, AL’s sales are down by ~12%. The company is targeting a market share of ~26% for FY2013 (YTD market share of ~25%). Going ahead, the Management expects that the company should grow at a rate of 10% in the MHCV segment and is targeting market share gains of ~100bp.
The management has indicated that Dost sales in December 2012 were impacted to the tune of 800-900 units due to the year-end phenomenon. The company expects a monthly run rate of 3,500 units of Dost in 4QFY2013. According to the Management, the breakeven levels for Dost are in the range of 50,000-55,000 units. The combined installed capacity (at AL and Nissan facilities) for Dost currently stands at 110,000 units (55,000 units each). AL sold ~5,800 units of Dost units outside Tamil Nadu and ~2,200 units in Tamil Nadu in 3QFY2013.
The contribution of southern India in overall CV industry was ~26% in 3QFY2013.
The debt levels of the company have increased as compared to March 2012. While long term debt stood at `3,500cr, working capital debt stood at `1,500cr as of December 2012. The company plans to divest some investments in the coming quarters, which will reduce FY2014 debt level by `500cr. Additionally, higher investments in inventories has led to higher working capital requirement and therefore higher interest cost. The company plans to reduce inventory to ~5,500 units (~11,000 units currently) which should lower working capital levels by `550cr.
Spare parts revenue during 3QFY2013 and 9MFY2013 stood at ~`230cr and ~`710cr respectively. Engine volumes stood at ~6,000 units. The management expects engine revenues to touch `500cr in FY2013.
The production at the Pantnagar plant is expected to be in the region of ~30,000 units in FY2013. For FY2014, the company is targeting a production of ~42,000 units from the Pantnagar facility. The income tax benefit at the Pantnagar plant will expire in FY2015 and thereafter the company will get 30% tax benefit; however excise benefits expire by 2020. Post the recent excise duty hike and increase in localization at the plant, benefits have increased to `60,000/vehicle, up from `45,000/vehicle.
The company has incurred a capex of `440cr YTD in FY2013 and is targeting a capex of `600cr for the full year FY2013.
AL has invested ~`500cr YTD in 9MFY2013 in Nissan JV, John Deere JV and Hinduja Foundries. The company plans to invest `900cr in FY2013. Of the incremental `400cr investments, `150cr would be invested in Hinduja Foundries, ~125cr in Albonair and balance in Nissan JV.
Ashok Leyland | 3QFY2013 Result Update
January 25, 2013
6
Investment arguments
Volume growth to benefit from easing of interest rates and recently launched Dost: MHCV demand has witnessed a substantial slowdown in recent times due to high interest rates and slowdown in industrial activity; however, we believe MHCV demand is near its trough. With reversal in interest rates in CY2013, we expect a pick-up in industrial activity, leading to a rebound in MHCV sales in FY2014. As a result, we expect AL’s MHCV volumes to register ~8% yoy growth in FY2014 (expected to post a decline of ~11% in FY2013). Further, the recently introduced LCV - Dost [through JV with Nissan]) has been received well by the markets and AL expects to ramp-up its production going ahead. We expect the company to clock sales of 40,000 units in FY2014.
EBITDA margin to improve by 80bp in FY2014: While raw-material prices have stabilized and AL continues to benefit from the ramp-up in production at the Pantnagar facility (total profitability estimated to be higher due to cost savings of ~`60,000/vehicle), the product-mix is set to change due to increasing proportion of the lower margin LCV - Dost (contribution to total volumes to increase from ~7% in FY2012 to ~28% in FY2013E). AL has indicated that it earns marketing/distribution fees of `15,000-`18,000/vehicle on Dost sales and has also guided that the margins should be structurally lower by 100bp-150bp due to Dost sales. While we expect the margins to decline by 100bp in FY2013 to 8.8% led by higher share of Dost and higher level of discounting, we expect the margins to improve ~80bp in FY2014 to 9.6% primarily on account of revival in MHCV sales leading to operating leverage benefits, price hikes of ~1.5% each in October 2012 and January 2013 and lower levels of discounts.
Outlook and valuation
We lower our volume estimates to account for the continued weakness in the MHCV segment. We also lower our EBITDA margin estimates to factor in weak 3QFY2013 performance and higher levels of discounting in the industry. Additionally, we raise our estimates for interest outgo due to the increasing working capital requirements.
Exhibit 10: Change in estimates Y/E March Earlier Estimates Revised Estimates % chg
FY2013E FY2014E FY2013E FY2014E FY2013E FY2014E
Net Sales (` cr) 13,350 15,300 12,910 14,836 (3.3) (3.0)
OPM (%) 9.2 10.0 8.8 9.6 (40)bp (40)bp
EPS (`) 2.0 2.6 1.5 2.2 (25.9) (14.5)
Source: Company, Angel Research
While the near term outlook for the MHCV industry remains challenging due to slowdown in overall industrial activity, we expect volumes to recover in FY2014E led by likely easing of interest rates in CY2013. At `25, AL is trading at 11.2x its FY2014E earnings. We recommend an Accumulate rating on the stock with a target price of `28.
Ashok Leyland (AL) is the country's second largest CV manufacturer. The company has a strong presence in the MHCV segment, with a domestic market share of ~23% as of FY2012. AL enjoys a dominant position in southern India, with a ~48% market share, and is currently focusing on expanding its presence in northern India by increasing its touch points in the region. The company, through its JV with Nissan Motor and John Deere, intends to expand its product portfolio and has recently launched Dost to tap the growing LCV demand and a backhoe loader (used in the construction equipment segment).
Ashok Leyland | 3QFY2013 Result Update
January 25, 2013
9
Profit and loss statement (Standalone)
Y/E March (` cr) FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E
Total operating income 5,981 7,245 11,177 12,842 12,910 14,836
% chg (22.7) 21.1 54.3 14.9 0.5 14.9
Total expenditure 5,525 6,485 9,963 11,586 11,774 13,405
Net raw material costs 4,480 5,212 8,175 9,462 9,192 10,533
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Disclosure of Interest Statement Ashok Leyland
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
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