Ashok Leyland (Q2 FY13)

CMP Rs25.6, Target Rs22.8, Downside 11.1%

• Ashok Leyland (ALL) reported its Q2 FY13 sales at Rs32.9bn, which was 5.8% up yoy and 9.6% down qoq. The overall volumes for the quarter at 29,840 units were higher by 27% yoy on back of robust volumes of LCV Dost. Dost volumes were noted at 8,665 units in Q2 FY13 vis-à-vis 210 units in corresponding period last year. M&HCV volumes were recorded at 21,175 units implying a decline of 10.5% yoy and an improvement of 4.6% qoq.  

• The blended realization stood ground qoq (after declining almost 9% qoq in Q1 FY13) but on a yoy basis the realizations were seen down by 16.4%. The yoy decline was explained by the adverse product mix wherein the Dost vehicle saw its proportion increase to ~29% of total volumes from ~1% in Q2 FY12. On a qoq basis despite the increase in discounts, management attributed the slightly better realizations to a better exchange rate and a slightly favourable product mix wherein an export order for Falcon and double-decker buses was executed during the quarter. 

• OPM at 10.1%, indicated strong surprise on the operational front and was 210bps ahead of estimates. The OPM saw a sharp sequential improvement (213bps) primarily led by lower other overheads and staff costs while total material costs (RM + purchases) were seen flat qoq. Other overheads were seen lower on back of lower power costs and lower advertising expenses incurred during the quarter. 

• The non Tamil-Nadu sales for Dost affected margins negatively by ~150bps. Going ahead, we expect the incremental growth in Dost volumes to come from the Non-Tamil Nadu regions thereby further negatively impact margins.

• Finance costs were seen higher by 57.4% yoy and 24.3% qoq on back of the additional loans taken for the new capex. The borrowing for the first half was Rs6.9bn, and the management guided for a high interest cost for the full year. Company plans to raise additional Rs6-7bn in debt going ahead to fund its investments and capex.

• The tax rate at 8.5% was down sharply vis-à-vis 20.1% observed in Q2 FY12. The improvement was attributed to the 100% tax benefit on Pantnagar volumes which were recorded at 7,607 units in the quarter.  

• Other takeaways from conference call:

-  The discounts were seen higher at 80,000-85,000 per vehicle in the quarter. Going ahead management expects the discounts to sustain and sees a possibility of slight increase to touch levels of Rs100,000 per vehicle on the back of rising competition. On account of the high discounts, the full pricing action taken by the company in FY 13 has been nullified.

-  In the 2-3.5 tonne category of LCV (wherein Dost operates), the company has achieved #1 position within first year of its launch. In H1 FY13, a total of 15,900 units of Dost have been sold and management targets for a full year volumes of ~36,000 units. The Dost passenger version is underway and in FY14 management guides for above 50,000 units from the Dost platform. Meanwhile, the Pillaipakkam facility for the JV is planned to come up on production by 2015.

-  Evalia is planned to be manufactured at the Nissan facility and revenues would accrue to the JV company only and not to Ashok Leyland.  On the U-trucks, the management informed that it had scaled down the volume targets post some product issues and for the first half the company had sold ~1600 units.

-  The inventory in the company’s systems was seen at 8,400 vehicles (10-15 days) and company targets to bring it down to 7,000 vehicles as a part of the focus on reducing the working capital requirements. Notably the present working capital requirement is ~Rs17bn and through consistent efforts management targets to bring it down to ~Rs10bn over the next few quarters.  

• The investment target for FY13 has been increased to Rs~6-7bn on back of additional Rs3bn investment planned in Hinduja Foundry (for casting supplies).  On the capex the target for the year was noted at Rs6bn of which Rs3.5bn has been spent in H1 FY13.

• The quarter has seen a strong performance on the operational front wherein the margins have improved on back of controlled costs. However the volumes in MHCV segment still remain a disappointment and the up-tick continues to be on back of margin decretive Dost model. In the MHCV segment, we do not see a substantial improvement in the fundamental demand outlook until mid CY14 owing to slowness in mining and infrastructure sector. Additionally we expect the recovery to lag the demand on back of lower utilization levels in the current fleets. Owing to a better operational performance, we revise our estimates and build in a moderate 5% growth in MHCV volumes for FY14 to achieve a price target of Rs22.8, thereby maintaining a SELL rating the stock.