Sushil Finance has recommended hold rating on SML Isuzu with a target of Rs 472, in its November 15, 2012 research report.
“SML Isuzu, despite of a 3.2% YoY de-growth in SIL’s volumes at 3174 units in Q2FY13, it reported net sales growth of 6% YoY at Rs. 2,613 mn vis-à-vis Rs.2,465 mn in Q2FY12 driven by better product mix (PC:GC – 52:48, MCV:LCV – 68:32) resulting in improved realization (+9.5% YoY). For H1FY13, the net sales stood at Rs. 5225 mn vis-à-vis Rs. 4838 mn, a growth of 8.0% YoY. During H1FY13, company’s sales were affected by sand mining ban in its key operating states (Himachal, Kerala, Goa, Punjab), which according to management, should not last for long time.”
“We expect H2FY13 volumes to be better driven by re-launch of Super 12 series of truck (Q3FY13), launch of new ISUZU branded bus (Q3FY13) and couple of product up-gradation initiatives like (a) Increase in the length of its Supreme truck (10T) from 17ft to 19ft while keeping the Gross Vehicle Weight (GVW) constant and (b) increase in the GVW of Sartaj truck (6-7.5T) by 500kgs by way of increase in the tyre rating. Operating profit increased by 8.5% YoY to Rs.228 mn with margin improvement of 21 bps to 8.7% vs. 8.4% in Q2FY12. Margin improvement was largely driven by lower other cost (8.7% vs. 9.2%) which was partly offset by higher employee cost (7.2% vs. 7.0%). PAT increased by 9.0% YoY to Rs.129 mn with margins at 4.9% (4.8%). Higher profitability was on account of lower taxation (25.4% vs. 32.2%) and higher other income (+27% YoY). The slowdown in the CV industry resulted in elevated inventory levels in turn resulting in higher working capital requirement. This led to increased interest burden on the company (+79% YoY). However, we expect inventory rationalization in H2FY13 likely to be driven by relatively better sales and pick-up in the economic activities resulting in moderation in the interest costs.”
“In the current uncertain macroeconomic conditions, SIL is the best bet in the CV industry given its low base, underutilization of capacity, favorable product mix and low gearing. We believe the company is well placed to reap the benefits of economic revival with its margins only set to improve from current levels due to favorable product mix and potential benefit of huge operating leverage. Also, demand for PC (high margin product) will continue to remain strong driven by increased safety standards being adopted by schools and growing acceptance of luxurious buses in the corporate and private tourism. Introduction of new Isuzu branded products would add to the existing premium offerings of the company. At the CMP of Rs.464, the stock is trading at 13.6x and 11.8x its FY13E & FY14E EPS of Rs.34.0 & Rs.39.3 respectively. Given the sharp run-up in the stock price we change our rating to HOLD with a price target of Rs.472 while maintaining our positive outlook, as we believe the company is yet to see operating leverage play (for a 5% volume change, our EPS estimate increases by ~14%),” says Sushil Finance research report.
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