CMP Rs22.3, Target Rs24.5, Upside 9.8%
Source: Company, India Infoline Research
- Ashok Leyland reported its Q1FY13 sales at Rs30.1bn, which were 19.7% up yoy and 30.2% down qoq. Amidst a de-growing MHCV market (12.5% yoy fall in industry sales), the overall volume spurt of 42.6% yoy was on back of the recently introduced LCV Dost (7,247 vehicles; 26% volume contribution in Q1 FY13).
- The blended realization declined by 16% yoy and 9.4% qoq on back of a fast changing product mix, since the introduction of LCV Dost (Q3 FY12). The average realizations on Dost are ~Rs0.4mn vis-a-vis ~Rs1.4mn on MHCV’s. Going ahead, we expect this trend to continue on back of a continued strong demand in the LCV category.
- OPM at 8%, was 173bps down yoy and 290bps down qoq. The OPM fall was mainly attributed to higher sales overheads including one time advertisement expense (appointing MS Dhoni as brand ambassador: Rs160mn), Dost related operating expenses (Rs130mn) and higher warranty costs due to under recoveries in AMC’s (Rs480mn). Moreover, according to management, due to partly changed accounting practices in Q1 FY12, there is a low base effect being observed in the costs. The rise in employee expenses was attributed to timing of LTA, loans and other related expenses.
- Going ahead, the Non Tamil-Nadu sales for Dost are expected to contribute 80% (from present levels of 71%) and thereby further negatively impact margins by 50-100bps.
- Total material costs (RM + purchases) as a percentage of sales increased 68bps yoy on account of lower margins on dost volumes, continued pressure from commodity prices and increased levels of discounts in the M&HCV category.
|As a % of net sales||Q1 FY13||Q1 FY12||bps yoy||Q4 FY12||bps qoq|
- Finance costs jumped due to higher working capital requirements and additional loans taken for the new capex. The finished vehicle inventory as of June end was higher than 10,000 vehicles, much ahead of the comfortable level of ~6,000-7,000 vehicles. Management apprises us of a 25% production cut in July to liquidate the finished goods inventory and ease the working capital requirement by ~Rs7.5bn in the near future.
- The tax rate was sharply lower by 481bps yoy due to the tax benefit accruing from Pantnagar plant. Presently the benefit per vehicle is estimated at ~Rs60,000, and with plans of local value addition it is expected to incrementally go up by Rs10,000 per vehicle.
- Other takeaways from conference call:
- The pricing action taken in May 2012 has been nullified with significant increase in discounts. Presently the average discounts are being observed at ~Rs60,000-65,000 per vehicle.
- Between October and December, the company plans to have three new launches in 10x2 with 5 axles, Front engine low floor bus and 16-tonne haulage and tipper version (BSIV category) respectively.
- In the 2-3.5 tonne category of LCV (wherein Dost operates), the company has achieved 21% market share and is in #2 position. Management gave FY13 volume guidance for Dost at 32,000 vehicles. Additionally, a passenger variant of Dost is also expected to be launched in Q3 FY13.
- The company incurred a capex of Rs1.6bn in Q1 FY13 mainly on Uttarakhand, Ennore plants. The total debt at end of quarter stood at Rs47.5bn with a Debt:Equity of ~1.2x.
- The company revised the FY13 capex guidance downwards to Rs4.5bn from an earlier guidance of Rs6bn.
- With the MHCV segment slowing, and volumes coming off sharply on a sequential basis we expect muted growth and conservatively assume flattish volumes in our model. Meanwhile, LCV segment is expected to provide some volume uptick on back of the much successful Dost. With such assumptions, we estimate revenue CAGR of 11% over FY12-14E for the company. In a weak business environment we value the company at P/E of 8.5x FY14E EPS to achieve a price target of Rs24.5 and thereby maintain our Market Performer rating on the stock.
|(Rs m)||Q1 FY13||Q1 FY12||% yoy||Q4 FY12||% qoq|
|OPM (%)||8.0||9.7||(173) bps||10.9||(290) bps|
|Effective tax rate (%)||17.3||22.1||-||17.8||-|
|Adj. PAT margin (%)||2.2||3.4||(121) bps||6.0||(374) bps|
|Extra ordinary items||-||-||-||16||-|
|Ann. EPS (Rs)||
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