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Ashok Leyland 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Ashok Leyland (AL) reported disappointing results for 3QFY2013 as operating margins collapsed to 4.3%, down 295bp yoy and 584bp qoq, owing to higher discounts in the medium and heavy commercial vehicle (MHCV) segment, adverse product-mix (higher share of Dost) and lower utilization levels. Further, higher interest cost due to increasing working capital requirements also impacted the performance, leading to a bottom-line (adjusted basis) loss of Rs.82cr. We lower our volume estimates to account for the continued weakness in the MHCV segment. We also lower our EBITDA margin estimates to factor in weak 3QFY2013 performance and higher levels of discounting in the industry. Additionally, we raise our estimates for interest outgo due to the increasing working capital requirements. Nevertheless, we believe that expected easing of interest rates in CY2013 will lead to revival in industrial activity and thus the demand for MHCVs. We therefore recommend an Accumulate rating on the stock.

Dismal 3QFY2013 results: AL posted a significant decline of 18% yoy (27.8% qoq) in its net sales to Rs.2,381cr as against our estimates of Rs.2,498cr. The disappointing performance was largely due to 29.5% yoy (30.7% qoq) decline in total volumes ex. Dost and 16% yoy (4.9% qoq) decline in net average realization owing to higher level of discounts and adverse product-mix. However, total volumes (including Dost), declined by only 2.8% yoy (24.1% qoq). At the operating level, AL witnessed a substantial contraction in margins to 4.3% (down 295bp yoy) as against our estimates of 8.3%. This can be attributed to 340bp (370bp qoq) and 160bp yoy (300bp qoq) increase in other expenditure and staff cost as a percentage of sales respectively. As a result, the adjusted net profit posted a loss of Rs.82cr for the quarter.

Outlook and valuation: While the near term outlook for the MHCV industry remains challenging due to slowdown in overall industrial activity; we expect volumes to recover in FY2014E led by likely easing of interest rates in CY2013. At Rs.25, AL is trading at 11.2x its FY2014E earnings. We recommend an Accumulate rating on the stock with a target price of Rs.28.