CMP Rs25, Target Rs26, Upside 4%
Source: Company, India Infoline Research
- Ashok Leyland reported disappointing set of numbers in Q3 FY13 wherein it reported net sales of Rs23.8bn implying decline of 17.3% yoy and a sharp 27.8% qoq. While the total volumes tanked 24% qoq, the fall in net sales was further augmented by higher levels of discounts observed in the quarter leading to a 4.9% fall in realizations sequentially. Besides the Rs15,000/vehicle increase in discounts 1) Poor product mix attributed to lower share of MHCV sales 2) Adverse currency movements 3) Duty drawback reduction to 2% (from earlier 5.5%), were some of the other primary factors stemming the sharp decline in realization on a sequential basis. Discounts in absolute terms were around Rs115,000/unit during Q3 FY13 and the management does not expect any further increase as the company is now forgoing orders at discounts higher than these levels.
- On the volumes and market share movement, management apprised of having gained market share in northern region whereas it lost market share in southern markets owing to heavy discounting in some regions in Andhra Pradesh. LCV Dost December sales were lower on back of deferral of sales to January owing to festive season in Tamil Nadu (Makar sankranti) and going ahead management remained confident of selling 3,500 units/month. In the export market, while the penetration in African countries increased, Sri-Lankan market which was down by ~60% completely offset the growth in other markets.
- At the operating level, the margins nose-dived to 4.3% (lowest in 14 quarters) mainly on back of operating de-leverage. Besides low volumes, the other expenses (as a % of sales) sharply rose by 378 bps qoq on back of higher warranty and consultancy costs. Going ahead, Management lowered its guidance for the operating margins by 50-100bps and expected it to be around 9% in longer term.
- The inventory levels were seen high at 10,800 vehicles as sales during Q3 FY13 were lower than company’s expectations. This increase in inventory led to a sharp rise in working capital requirement which was noted at ~Rs15bn at the quarter end.
- While we are confident of the volume performance of Dost platform, we continue to expect muted MHCV volumes (we build in 5% growth in FY14) in absence of any positive indicators from the mining and infrastructure sector in near term. However as we roll over to FY15, we build in 10% growth in MHCV volumes and expect this growth to kick in revival in realizations and operating margins for ALL. We upgrade our rating from Sell to Market Performer with a revised 9-month price target of Rs26.
|As a % of net sales||Q3 FY13||Q3 FY12||bps yoy||Q2 FY13||bps qoq|
|(Rs m)||Q3 FY13||Q3 FY12||% yoy||Q2 FY13||% qoq|
|OPM (%)||4.3||7.3||(301) bps||10.1||(584) bps|
|Effective tax rate (%)||2.0||7.0||8.5||(652) bps|
|Adj. PAT margin (%)||(3.4)||2.3||(577) bps||4.3||(778) bps|
|Extra ordinary items||1,563||-||-|
|Ann. EPS (Rs)||(1.2)||1.0||(222.7)||2.1||(157.6)|
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