Accumulate Ashok Leyland; target Rs 30: PINC Research

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Accumulate Ashok Leyland; target Rs 30: PINC Research

PINC Research is bullish on Ashok Leyland and has recommended accumulate rating on the stock with a target price of Rs 30 in its February 2, 2012 research report.

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PINC Research is bullish on Ashok Leyland and has recommended accumulate rating on the stock with a target price of Rs 30 in its February 2, 2012 research report.

"Ashok Leyland's (AL) Q3FY12 results were disappointing as the LCV 'Dost' diluted the profitability. Incremental 8% contribution of LCV 'Dost' to overall volumes led to a 2.1% QoQ decline in blended realisations. However, raw material cost per vehicle declined by only 1.6%. Other expenditure too rose 13.6% QoQ largely due to increase in marketing spend and a forex loss of Rs 150mn resulting in a steep 340bps contraction in margins to 7.3% (PINCe 10%). Net profits at Rs 669mn were 40% below our estimate of Rs 1.1bn. Volumes during Q3FY11 had been lower due to the pre-ponement of purchases ahead of the change in emission norms. On the depleted base domestic volumes excluding 'Dost' grew 18.7% YoY to 17.7k units. The company gained 270bps marketshare in the heavy bus segment, while its marketshare in the truck segment continued to slide, contracting 330bps QoQ. Overall marketshare in 9MFY12 has contracted 290bps to 22.4%. Additionally, the company sold ~1,700 units of the LCV 'Dost' manufactured through its JV with Nissan. Exports too were lacklustre declining 14.1% YoY (6.6% QoQ) to 3k units."

"Under agreement with its JV partner Nissan, AL will be selling the LCV 'Dost' in markets outside Tamil Nadu. During the quarter the LCV contributed to ~8% of the volumes leading to an inferior product mix. Also, with an increase in discounting levels realisations declined 2.1% QoQ to Rs 1.28mn/unit. Revenues grew 29.3% YoY to Rs 28.8bn, in-line with estimates. Margin pressure was witnessed across all cost heads. Traded goods purchased were up 70%, largely due to the 'Dost' which is a bought-out for the company. Fall in raw material cost per vehicle at 1.6% was lower than the fall in realisations. Employee expenses were up 8.3% on a Rs 160mn bonus payment. Other expenditure saw a steep rise of 13.6% on Rs 70mn marketing spend for the 'Dost' and a Rs 150mn forex loss on restatement of liabilities."

"The management reiterated its endeavour to achieve 25% marketshare during the year and reach within striking distance of its initial guidance of 100k units in FY12. However, considering the loss of marketshare in the current year we reduce FY12 and FY13 volume estimates by 2% and 4.8% to 97k and 104k units respectively. Additionally, we have included 4k and 21k units of the 'Dost' in our FY12 and FY13 estimates. We have also cut our margin estimates resulting in a 16% and 20% reduction in our FY12 and FY13 earnings estimate to Rs 2.1 and Rs 2.4 respectively. We introduce FY14 earnings estimate of Rs 2.8. The stock is currently trading at 11.3x FY13E earnings. We downgrade the stock to 'ACCUMULATE' with a revised price target of Rs 30 (earlier Rs 38) discounting FY13E earnings 12.5x," says PINC Research report.

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