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Ashok Leyland 3QFY2012 performance highlights and results update

Contributed by Angel Broking

Ashok Leyland’s (AL) 3QFY2012 results were significantly below our (as well as consensus) estimates at the EBITDA and net profit level led by steep increase in other expenditure and higher employee costs. Further increasing contribution from the recently launched Dost vehicles too impacted net average realization and hence profitability. We revise upwards our volume and revenue estimates for FY2012/13 as we factor in the sales of Dost into our volume estimates (5,900/33,000 units of Dost in FY2012/13) and expect overall demand scenario  to improve with likely easing of interest rates from 1QFY2013. We lower our EBITDA margin estimates due to inclusion of Dost volumes which is a lower margin product. Consequently our EPS estimates are revised to Rs.2.2/Rs.2.7 for FY2012/13. As AL is currently trading at attractive valuations we maintain our Buy rating on the stock.

Lower-than-expected performance led by steep decline in EBITDA margin: AL reported robust 29.3% yoy (down 6.9% qoq) growth in net sales to Rs.2,880cr aided by a strong 25.9% yoy (down 1.7% qoq) growth in total volumes which benefitted from the sales of recently launched LCV – Dost. Average net realization however grew by a moderate 2.7% yoy (down 5.3% qoq) on account of higher discounts and change in product mix led by introduction of lower priced Dost. EBITDA margin contracted sharply by 340bp qoq due to a substantial surge in other expenditure (annual maintenance charge of Rs.20cr, forex loss of Rs.15cr and increase in marketing spends mainly on Dost at Rs.7cr) and employee costs (Rs.16cr towards bonus payouts and Rs.8cr due to increase in manpower at Pantnagar). Hence net profit declined 56.6% qoq to Rs.67cr; significantly below our estimates.

Outlook and valuation: At Rs.26, AL is trading at attractive valuations of 9.7x its FY2013E earnings. We maintain our Buy rating on the stock with a target price of Rs.32, valuing the stock at 12x its FY2013E earnings.