Please refer to important disclosures at the end of this report 1 Y/E March (Rs cr) 1QFY11 1QFY10 % chg (yoy) Angel Est % Diff Net Sales 2,348 913 157 2,660 (11.7) Operating Profit 235 11.1 2,017 293 (19.6) OPM (%) 10.0 1.2 881bp 11 (97)bp Reported PAT 123 8.0 1,480 155 (21.1) Source: Company, Angel Research Ashok Leyland (ALL) registered a substantial 157% yoy growth in net sales for 1QFY2011. However, lower-than-expected growth in other businesses (engine and spare parts) restricted higher growth. Net average realisation declined due to the increase in excise duty and change in product mix. EBITDA margins came in lower than our expectation at 10%. Net profit jumped on higher top-line and improved operating leverage. We have revised our estimates upwards by ~3-4% to account for the lower tax rate. Strong volumes support healthy 157% growth in top-line; OPM’s up yoy on higher operating leverage: For 1QFY2011, ALL reported a 157% yoy growth in net sales to Rs2,348cr (Rs913cr), which was below our expectation. The jump in sales came on the substantial 178% yoy growth in volumes. Net average realisation however, declined by 7.4% yoy owing to lower growth in other non-cyclical businesses like engine and defense. During 1QFY2011, ALL witnessed 881bp yoy increase in EBITDA margin mainly on the back of improved operating leverage. Net profit surged1,480% yoy to Rs123cr (Rs7.8cr) on a low base, robust volume growth and better operating performance. Outlook and Valuation: Overall outlook for the domestic CV industry is positive with volumes expected to grow 16-18% yoy in FY2011. A majority of the factors that drive freight demand and consequently M&HCV demand have turned positive and the CV manufacturers are expected to benefit from the economic recovery going forward. We recommend a Neutral on the stock owing to the recent run up in the stock price. Our fair value for ALL works out to Rs73, at which level the stock would trade at 14x FY2012E earnings. We prefer Tata Motor in the CV space as it is trading at reasonable discount in relative terms. Key Financials Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E Net Sales 6,098 7,407 9,793 11,389 % chg (23.1) 21.5 32.2 16.3 Net Profit 178.8 383.6 575.5 689.8 % chg (60.3) 114.6 50.0 19.9 EBITDA (%) 7.5 10.2 10.4 10.5 EPS (Rs) 1.3 2.9 4.3 5.2 P/E (x) 53.9 25.1 16.8 14.0 P/BV (x) 4.6 4.1 3.7 3.2 RoE (%) 6.8 11.9 15.1 16.7 RoCE (%) 6.2 9.2 11.3 12.6 EV/Sales (x) 1.7 1.4 1.1 1.0 EV/EBITDA (x) 25.3 15.1 11.8 10.1 Source: Company, Angel Research NEUTRAL CMP Rs73 Target Price - Investment Period - S tock Info Sector Bloomberg Code AL @IN S hareholding P attern (% ) P romoters 38.6 MF / Banks / Indian Fls 23.9 FII / NR Is / OCB s 27.9 Indian Public / Others 9.6 Abs . (% ) 3m 1yr 3yr Sensex 3.3 17.1 17.9 As hok Leyland 30.0 107.1 94.6 Face Value (R s ) BSE Sensex Nifty R euters Code Automobile Avg. Daily Volume Market Cap (R s cr) Beta 52 Week High / Low 1 17,957 5,398 AS OK.B O 9,578 1.1 74/32 1,024,177 Vaishali Jajoo 022-4040 3800 Ext: 344 [email protected]Yaresh Kothari 022-4040 3800 Ext: 313 [email protected]Ashok Leyland Performance Highlights 1QFY2011 Result Update| Automobile July 28 2010
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Please refer to important disclosures at the end of this report 1
Y/E March (Rs cr) 1QFY11 1QFY10 % chg (yoy) Angel Est % Diff
Net Sales 2,348 913 157 2,660 (11.7)
Operating Profit 235 11.1 2,017 293 (19.6)
OPM (%) 10.0 1.2 881bp 11 (97)bp
Reported PAT 123 8.0 1,480 155 (21.1)
Source: Company, Angel Research
Ashok Leyland (ALL) registered a substantial 157% yoy growth in net sales for 1QFY2011. However, lower-than-expected growth in other businesses (engine and spare parts) restricted higher growth. Net average realisation declined due to the increase in excise duty and change in product mix. EBITDA margins came in lower than our expectation at 10%. Net profit jumped on higher top-line and improved operating leverage. We have revised our estimates upwards by ~3-4% to account for the lower tax rate.
Strong volumes support healthy 157% growth in top-line; OPM’s up yoy on higher operating leverage: For 1QFY2011, ALL reported a 157% yoy growth in net sales to Rs2,348cr (Rs913cr), which was below our expectation. The jump in sales came on the substantial 178% yoy growth in volumes. Net average realisation however, declined by 7.4% yoy owing to lower growth in other non-cyclical businesses like engine and defense. During 1QFY2011, ALL witnessed 881bp yoy increase in EBITDA margin mainly on the back of improved operating leverage. Net profit surged1,480% yoy to Rs123cr (Rs7.8cr) on a low base, robust volume growth and better operating performance.
Outlook and Valuation: Overall outlook for the domestic CV industry is positive with volumes expected to grow 16-18% yoy in FY2011. A majority of the factors that drive freight demand and consequently M&HCV demand have turned positive and the CV manufacturers are expected to benefit from the economic recovery going forward. We recommend a Neutral on the stock owing to the recent run up in the stock price. Our fair value for ALL works out to Rs73, at which level the stock would trade at 14x FY2012E earnings. We prefer Tata Motor in the CV space as it is trading at reasonable discount in relative terms.
Key Financials Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Strong volumes support healthy 157% growth in top-line: For 1QFY2011, ALL reported a 157% yoy growth in net sales to Rs2,348cr (Rs913cr), which was below our expectation. The jump in sales came on the substantial 178% yoy growth in volumes. Net average realisation however, declined by 7.4% yoy owing to lower growth in other non-cyclical businesses like engine and defense.
Engine volumes dropped to ~4,000 units (~4,500 units) with revenues of Rs74cr for 1QFY2011. Defense revenues also declined to Rs12cr (Rs28cr in 4QFY2010), with the company selling around ~140 kits in 1QFY2011 (~400 kits in 4QFY2010). The spare parts business recorded ~12% yoy growth to Rs137cr in 1QFY2011.
Ashok Leyland |1QFY2011 Result Update
July 28 2010 3
Exhibit 3: Net sales up 157% on 178% volume growth
Source: Company, Angel Research
Exhibit 4: Revival in M&HCV segment boosts volume
Source: Company, Angel Research
Exhibit 5: Segment-wise market share trend
Source: Company, Angel Research, SIAM
OPM up on higher operating leverage: During 1QFY2011, ALL witnessed 881bp yoy increase in EBITDA margin mainly on the back of increased improved operating leverage. Staff cost and other expenditure, as a percentage of sales, improved by 717bp and 289bp yoy, respectively. Raw material cost however, increased by 12bp yoy and accounted for 73.8% (72.6%) of sales in 1QFY2011.
The company hiked prices to the extent of Rs14,500/vehicle (1.5%) in April 2010, which helped to reduce the raw material cost pressures to a certain extent. Another price hike action of ~Rs23,500/vehicle (2.5%) was taken by the company towards June end 2010, which should further reduce the pressure going forward.
(7.3)
(15.7)
81.4
141.3 157.3
(75)
0
75
150
225
0
1,000
2,000
3,000
4,000
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
(%)(Rs cr)
Net Sales (LHS) Net Sales Growth (RHS)
(58) (17)
101 139
178
(75)
0
75
150
225
0
7,500
15,000
22,500
30,000
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
(%)(Units)
ALL total volumes yoy change
29.6
39.043.0
37.9 36.1
14.2
19.3 18.5
24.4 25.217.1
22.7 23.126.6 27.0
0
15
30
45
60
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
(%) M&HCV passenger M&HCV goods Total M&HCV
Ashok Leyland |1QFY2011 Result Update
July 28 2010 4
Exhibit 6: EBITDA margins up 881bp
Source: Company, Angel Research
Exhibit 7: Substantial net profit growth on low base
Source: Company, Angel Research
Net profit spikes 1,480% on low base: Net profit grew by a substantial 1,480% yoy to Rs123cr (Rs7.8cr) on a low base, robust volume growth and better operating performance. Interest cost increased substantially by 22.6% yoy on account of increase in loans and interest costs. Depreciation also reported 41.3% yoy increase during the quarter largely due to the ongoing capex. Lower tax rate however, arrested further contraction in NPM.
Conference Call - Key Highlights
HCV segment growing faster: ALL has been able to post strong volume growth
following revival in demand in the heavy commercial vehicle (HCV) segment.
HCV volumes, which picked up from 4QFY2010, witnessed good traction in
1QFY2011. The HCV segment has been growing faster compared to the other
segments.
Demand pick-up in south: Although ALL has a pan-India presence, it
commands market share of close to 45% in the south. The HCV market in the
south witnessed an uptick during 1QFY2011 and management expects
demand to remain robust for the rest of the year. Management expects
stronger growth in the southern market to help the company increase its
overall market share.
Volume guidance: Management has revised its volume target for FY2011 to
~89,000 units from the earlier forecast of ~85,000 units. This includes
~80,000 of M&HCVs, 1,000 LCVs and about 8,000 units for exports. ALL has
a balance order book of ~1,000 units under the JNNURM and for another
1,000 units.
Increase in market share: ALL recorded ~200bp improvement in market share
in the northern and western regions during 1QFY2011. The company
recorded overall market share of 27% (26.5% in 4QFY10). The regional
market share in the HCV segment, as on 1QFY2011 was as follows: North
26%, South 45%, West 17% and East 10%.
Pantnagar plant update: Only 800 units were manufactured at the
Uttaranchal facility during 1QFY2011. However, the company expects to
manufacture 17,000-18,000 vehicles over the next nine months. The
1.2 10.5 11.4 12.9 10.0
72.6 70.2 71.4 73.2 73.9
0
25
50
75
100
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
(%)
EBITDA Margin Raw Material Cost/Sales
0.9
5.6 5.8
7.6
5.2
0
2
4
6
8
0
40
80
120
160
200
240
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
(%)(Rs cr)
Net Profit (LHS) Net Profit Margin (RHS)
Ashok Leyland |1QFY2011 Result Update
July 28 2010 5
company plans to ramp up production to optimal levels of 4,000 units/month
by March 2011.
Exports: Exports grew by ~100% during the quarter backed by demand from
Sri Lanka and Bangladesh. ALL expects strong demand growth from the
Middle East (Dubai and Saudi Arabia).
The company’s debt levels is pegged at ~Rs2,600cr and cash balance is at
~Rs150-200cr. ALL raised Rs300cr during 1QFY2011.
ALL plans to incur Rs700cr and Rs750cr capex during FY2011 and FY2012,
respectively. The spend will be towards manufacturing the new range of
Neptune engines, next generation cabs and on the joint venture with Nissan
Motor Co for LCV’s.
Management has indicated that the applicable tax rate is MAT. However, the
effective tax rate would be lower than MAT on account of the tax credits
available on research and development spends.
Exhibit 8: ALL-M&HCV passenger volume and market share
Source: : Company, SIAM, Angel Research
Exhibit 9: ALL-M&HCV goods volume and market share
Strong volume growth traction: The strong rebound in CV demand in FY2010,
on account of the revival in the Indian economy aided ALL in clocking higher
growth on a low base. As a result, ALL recorded a healthy 18% yoy growth in
FY2010. With CV demand in its mid cycle, we believe in FY2011 industry
would record double-digit volume growth. We estimate ALL to clock a volume
CAGR of around 21.3% over FY2010-12E.
Pantnagar plant help mitigate margin pressure: Management has indicated
the new tax-free unit at Pantnagar would be relatively more profitable, with
profitability estimated at around 25% higher than the existing plants. Thus,
EBITDA margins are expected to hold up at around 10.5% in FY2012E. The
company expects to manufacture more than 18,000 vehicles from the
Uttaranchal plant in FY2011 and further ramp it to ~45,000 vehicles in
FY2012. Total expenditure at the Uttaranchal plant is expected to be close to
Rs1,100cr, out of which Rs1,000cr has already been spent. This capex would
result in additional capacity of close to 50,000 vehicles per annum. Tax
benefit availed at the Pantnagar plant would help the company in saving
~Rs35,000/vehicle on the net realisation front.
JV contribution yet to crystallise: ALL has entered into an initial agreement to
form a JV with Nissan Motor Company for the development, manufacture and
distribution of LCV products. As ALL has a negligible presence in the LCV
space, this partnership would be positive for it in the long run. ALL expects
vehicle roll outs to start from the JV from 2011. Its JV with John Deere is
expected to start production from October 2010.
Ashok Leyland |1QFY2011 Result Update
July 28 2010 7
Outlook and Valuation Overall outlook for the domestic CV industry is positive with volumes expected to grow 16-18% yoy in FY2011. A majority of the factors that drive freight demand and consequently M&HCV demand have turned positive and the CV manufacturers are expected to benefit from the economic recovery going forward. We have revised our estimates upwards by ~3-4% to account for the lower tax rate.
Exhibit 10: Change in estimates
Y/E March Earlier Estimates Revised Estimates % chg
FY11E FY12E FY11E FY12E FY11E FY12E
Net Sales (Rs cr) 9,790 11,382 9,793 11,389 - 0.1
OPM (%) 10.4 10.5 10.4 10.5 - -
EPS (Rs) 4.2 5.0 4.3 5.2 2.6 3.8
Source: Company, Angel Research At the CMP of Rs73, the stock is trading at 16.8x FY2011E and 14.0x FY2012E EPS. We recommend a Neutral on the stock owing to the recent run up in the stock price. Our fair value for ALL works out to Rs73, at which level the stock would trade at 14x FY2012E earnings. We prefer Tata Motor in the CV space as it is trading at reasonable discount in relative terms.
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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 Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors. Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)
