Arihant Capital recommended hold rating on Ashok Leyland with a target price of Rs 88 in its research report dated May 28, 2019.
Arihant Capital 's research report on Ashok Leyland
Ashok Leyland (AL) reported muted results as net sales stood at Rs 88.4bn (+1% YoY / +40% QoQ) led by 1% YoY volume growth while the realizations were at Rs 1.49mn (-1% YoY; +3% QoQ). Gross margins at 27.3% (-152bps YoY/ -250bps QoQ) were impacted by negative operating leverage and lower tonnage mix. EBITDA stood at Rs 9.8bn (-12% YoY; +52% QoQ). The EBITDA margin stood at 11.1% (-170bps YoY/+90bps QoQ) and was impacted by increase in material costs (+26% YoY) due to higher steel prices and high staff costs (+25% YoY). On the concall, management highlighted the that demand to remain subdued in H1FY20 and can see a pickup in H2FY20 led by pre-buying ahead of the emission norms (we expect cost escalation of ~15% for BS VI vehicles from 1st Apr 2020). For FY19, the overall volumes stood 197k (+13% YoY), however the growth tapered down in H2FY19 due to revision in axle load norms in Aug 2018 which led to inventory mismatch and decline in overall tonnage. The impact was further severed by the liquidity crisis where the tightened financing situation led to weak sentiments across rural segments. During FY19, net sales stood at Rs 290bn (+10% YoY) led by 13% volume growth however impacted by 3% YoY decline in realizations led by increased discounting scenario. EBITDA stood at Rs Rs 31.5bn (+6% YoY) whereas the margins stood at 10.8% (-45% bps). Adjusted PAT stood at Rs 19.8bn (+15% YoY).
As the industry continues to negotiate with multiple headwinds such as axle load norms and the weak sentiments, we believe, AL may find it challenging to pass on the increased costs led by BS VI We estimate revenue/EBITDA/PAT CAGR of 3%/4%/3% over FY19-21E. At CMP of Rs 90, stock is trading at 12.3x FY21E. We value the stock at 12x FY21E for a target price of Rs 88 and ascribe a HOLD rating.
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