AshokLeyland_Religare_121114

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Financial Highligh ts

Results Review

INDIA

CONSUMER DISCRETIONARY

7 November 2014

REPORT AUTHORS

Mihir Jhaveri+91 22 6766 3459

[email protected]

Prateek Kumar+91 22 6766 3435

[email protected]

PRICE CLOSE (06 Nov 14)

INR 46.75

MARKET CAP

INR 133.0 bln

USD 2.2 bln

SHARES O/S

2,845.7 mln

FREE FLOAT

61.4%

3M AVG DAILY VOLUME/VALUE

16.0 mln / USD 10.6 mln

52 WK HIGH

INR 47.90

52 WK LOW

INR 14.90

BUYTP: INR 65.00

39.0%

Ashok Leyland

AL IN

Robust Q2; upgrade estimates/TP BUY

AL reported a strong Q2FY15 with topl ine growth of 26% YoY to Rs 32.2bn and

a posit ive surprise on EBITDA margins (7.3% vs. 6.9% est.) and PAT (Rs 444mn

vs. Rs 204mn est.), led by a richer product mix, better realisations and

operating leverage. We raise FY15-FY17 EBITDA estimates by ~12% each on

higher margin assumptions and roll over to a Dec15 TP of Rs 65 from Rs 45

(Sep15) earlier. The ongoing CV cycle recovery, moderation in diesel prices

and potential rate cuts should lend an added boost to volume growth. BUY.

Strong Q2, margins ahead of estimate: ALreported 7.3% EBITDA margins (vs. 2.2%

YoY/4.7% QoQ) on the back of a richer product mix (higher contribution from

defense sector, trucks, buses and exports), better realisations (+15% YoY) and

operating leverage. Though gross margins dipped marginally by 30bps QoQ,

employee cost/sales and other expense/sales fell sharply by 240bps and 55bps

QoQ, driving up operating margins. Overall, better margins and other income

boosted PAT to Rs 444mn (tax-adjusted for exceptional gains of Rs 1.1bn).

AL gaining share, CV vols. inching up:AL indicated a firming up of industry MHCV

volumes owing to a mix of replacement/fresh demand. The company grew ahead of

industry owing to gains in overall market share by 170bps YoY and sharper growth

in the southern market (large presence). Price discounts, however, remain elevated

at Rs 160k-170k (likely to continue for the next two quarters at least). Working

capital inched up owing to long-gestation orders from JNNRUM and Sri Lanka.

Upgrade estimates/TP, maintain BUY:We raise FY15-FY17 EBITDA estimates by

~12% each on higher margin assumptions and accordingly roll over to a new Dec15

TP of Rs 65 (core business valued at Rs 62 based on 10x one-year forward

EV/EBITDA and investment JVs valued at Rs 3). Despite the sharp run-up in stock

price YTD, we believe valuations hold further upside given the reviving CV cycle and

improving macro climate. Maintain BUY.

Y/E 31 Mar FY13A FY14A FY15E FY16E FY17E

Revenue (INR mln) 124,812 99,434 130,601 158,908 196,174

EBITDA (INR mln) 8,765 1,666 8,786 14,792 19,795

Adjusted net profit (INR mln) 1,441 (4,763) 1,024 6,188 10,566

Adjusted EPS (INR) 0.5 (1.8) 0.4 2.3 4.0

Adjusted EPS growth (%) (74.5) NA NA 504.6 70.8

DPS (INR) 0.6 0.0 0.0 0.6 0.6

ROIC (%) 7.5 (3.3) 5.8 13.3 19.3

Adjusted ROAE (%) 3.3 (10.7) 2.1 11.4 17.4

Adjusted P/E (x) 86.3 NA NA 20.1 11.8

EV/EBITDA (x) 17.4 99.3 19.0 11.0 7.9

P/BV (x) 2.8 2.8 2.4 2.2 1.9

Source: Company, Factset, RCML Research

This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end ofthis report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, andtrading securities held by a research analyst account.

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BUYTP: INR 65.00

39.0%

Ashok LeylandAL IN

Results Review

INDIA


7 November 2014 Page 2of 6

Fig 1 - Ac tual vs estimated performance

(Rs mn) Actual Estimated % Variance Consensus % Variance

Net sales 32,177 31,934 0.8 30,395 5.9

EBITDA 2,344 2,203 6.4 2,061 13.7

EBITDA Margin (%) 7.3 6.9 38bps 6.8 50bps

Adj net income 444 204 118.0 130 241.6

FDEPS (Rs) 0.2 0.1 118.0 0.0 241.6

Source: Bloomberg, RCML Research

Fig 2 - Quarterly performance

(Rs mn) Q2FY15 Q2FY14 YoY% Q1FY15 QoQ%

Net sales 32,177 25,496 26.2 24,778 29.9

Expenditure 29,833 24,934 19.6 23,617 26.3

EBITDA 2,344 563 316.5 1,161 101.9

Other income 257 231 11.2 231 11.2

Interest 1,007 1,244 (19.0) 1,063 (5.3)

Depreciation 1,031 901 14.4 1,033 (0.2)

PBT 563 (1,351) NA (705) NA

Tax 445 (663) NA (225) NA

Adj . PAT 444 (557) NA (480) NA

EBITDA margin (%) 7.3 2.2 508bps 4.7 260bps

EPS (Rs) 0.5 (0.1) NA (0.2) NA

Vehicles Sold 25,371 23,110 9.8 19,981 27.0

Net Realizations (Rs) 12,68,251 11,03,255 15.0 12,40,080 2.3

RM Cost/unit (Rs) 9,33,426 8,41,938 10.9 9,08,805 2.7

Adj PAT/unit (Rs) 17,503 (24,096) na (23,999) na

Source: Company, RCML Research

Earnings call highlights

MHCV sales were at 79% of total sales (vs. 75% in Q1) comprising domestic business65% (Trucks and Buses) and exports 14%.

AL indicated a trend reversal in industry MHCV volumes owing to a mix ofreplacement and fresh demand. The company grew ahead of industry owing to gains

in overall market share by 170bps YoY and sharper growth in the southern market,

where it has a major presence.

Management indicated that vehicle discounts remain high at Rs 160k-170k and areexpected to remain so for at least two more quarters. AL has undertaken some price

hikes (+1%in September on select truck models) to counter the discounts.

Higher contribution from defense vehicles, trucks, buses and exports aided margingrowth during the quarter. Over the medium term, AL is targeting an export share of

one-third total revenue.

AL manufactured 4,600 units in Q1 and 5,200 vehicles in Q2 at its Pantnagar plant.Actual production at the plant depends on client requirement and logistics

considerations.


3/6

BUYTP: INR 65.00

39.0%

Ashok LeylandAL IN

Results Review

INDIA



Working capital inched up in Q2FY15 (from 12-13 days in Q1) owing to highervolumes related to orders from JNNRUM (domestic) and Sri Lanka. While orders

related to JNNRUM stand at 4,000 units (350 executed till now, balance by Q1FY16-

end), Sri Lanka orders total 2,200 units, to be completed in 2-3 months.

The company incurred only Rs 150mn-160mn towards capex and Rs 520mn towardsinvestment in ventures, totaling to Rs 640mn for H1. For FY15, management expects

capex to be well under the Rs 5bn mark as guided earlier and envisages no

greenfield capacity expansion.

Fig 3 - Revised estimates

Key parameters FY15E FY16E FY17E

(Rs mn) Old New % Chg Old New % Chg Old New % Chg

Revenue 1,22,288 1,30,601 6.8 1,48,314 1,58,908 7.1 1,82,580 1,96,174 7.4

EBITDA 7,881 8,786 11.5 13,193 14,792 12.1 17,633 19,795 12.3

EBITDA margin (%) 6.4 6.7 28bps 8.9 9.3 41bps 9.7 10.1 43bpsNet profit 493 1,024 107.4 5,166 6,188 19.8 9,100 10,566 16.1

FDEPS (Rs)* 0.17 0.36 107.4 1.8 2.2 19.8 3.2 3.7 16.1

Source: Company, RCML Research, * Adjusted for QIP

Fig 4 - SOTP valuation

Amount(Rs mn)

MultipleValue

(Rs mn)Value per share

(Rs)

EBITDA (1-yr fwd) 19,795 10x EV/EBITDA 1,97,953

Net Debt 31,857

Market Value 1,66,096 62

Nissan JV (FY15 book value) 5,230 1x P/BV 5,230 2

John Deere JV (FY15 book value ) 2,036 1x P/BV 2,036 1

Target Price 65

Source: RCML Research


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BUYTP: INR 65.00

39.0%

Ashok LeylandAL IN

Results Review

INDIA



Per Share Data

Y/E 31 Mar (INR) FY13A FY14A FY15E FY16E FY17E

Reported EPS 1.6 0.1 0.4 2.3 4.0

Adjusted EPS 0.5 (1.8) 0.4 2.3 4.0

DPS 0.6 0.0 0.0 0.6 0.6

BVPS 16.7 16.7 19.6 21.2 24.5

Valuation Ratios

Y/E 31 Mar (x) FY13A FY14A FY15E FY16E FY17E

EV/Sales 1.2 1.7 1.3 1.0 0.8

EV/EBITDA 17.4 99.3 19.0 11.0 7.9

Adjusted P/E 86.3 (26.1) 121.5 20.1 11.8

P/BV 2.8 2.8 2.4 2.2 1.9

Financial Ratios

Y/E 31 Mar FY13A FY14A FY15E FY16E FY17E

Profitability & Return Ratios (%)

EBITDA margin 7.0 1.7 6.7 9.3 10.1

EBIT margin 4.0 (2.1) 3.6 6.7 7.9

Adjusted profit margin 1.2 (4.8) 0.8 3.9 5.4

Adjusted ROAE 3.3 (10.7) 2.1 11.4 17.4

ROCE 5.7 (2.3) 4.0 8.9 12.9

YoY Growth (%)

Revenue (3.3) (20.3) 31.3 21.7 23.5

EBITDA (30.2) (81.0) 427.5 68.4 33.8

Adjusted EPS (74.5) (430.4) (121.5) 504.6 70.8

Invested capital 12.5 (1.9) 1.2 (2.9) 3.8

orking Capital & Liquidity Ratios

Receivables (days) 42 48 45 43 42Inventory (days) 83 74 51 51 49

Payables (days) 80 87 73 74 73

Current ratio (x) 0.9 0.9 1.0 1.0 1.1

Quick ratio (x) 0.0 0.0 0.0 0.0 0.0

Turnover & Leverage Ratios (x)

Gross asset turnover 1.8 1.3 1.6 1.9 2.3

Total asset turnover 1.0 0.8 1.0 1.2 1.4

Net interest coverage ratio 1.6 0.0 1.4 3.8 7.2

Adjusted debt/equity 1.0 1.1 0.8 0.6 0.4

DuPont Analysis

Y/E 31 Mar (%) FY13A FY14A FY15E FY16E FY17E

Tax burden (Net income/PBT) 30.6 522.1 79.0 79.0 79.0

Interest burden (PBT/EBIT) 95.0 43.3 27.5 73.8 86.2

EBIT margin (EBIT/Revenue) 4.0 (2.1) 3.6 6.7 7.9

Asset turnover (Revenue/Avg TA) 104.0 79.6 101.6 116.5 135.0

Leverage (Avg TA/Avg equities) 276.8 280.5 265.9 251.0 238.7

Adjusted ROAE 3.3 (10.7) 2.1 11.4 17.4


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BUYTP: INR 65.00

39.0%

Ashok LeylandAL IN

Results Review

INDIA



Income Statement

Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E

Total reven ue 124,812 99,434 130,601 158,908 196,174

EBITDA 8,765 1,666 8,786 14,792 19,795

EBIT 4,957 (2,105) 4,711 10,615 15,516

Net interest income/(expenses) (3,145) (3,864) (3,415) (2,783) (2,142)

Other income/(expenses) 0 0 0 0 0

Exceptional items 2,896 5,057 0 0 0

EBT 1,811 (5,969) 1,296 7,833 13,375

Income taxes (370) 1,206 (272) (1,645) (2,809)

Extraordinary items 0 0 0 0 0

Min. int./Inc. from associates 0 0 0 0 0

Repor ted net pro fi t 4,337 294 1,024 6,188 10,566

Adjustments (2,896) (5,057) 0 0 0

Adj usted net pro fi t 1,441 (4,763) 1,024 6,188 10,566

Balance Sheet


Accounts payables 24,854 21,923 26,825 31,956 38,687

Other current liabilities 8,845 8,905 9,796 10,775 11,853

Provisions 3,872 1,779 1,779 3,623 3,623

Debt funds 43,554 46,903 42,403 36,903 31,403

Other liabilities 18 24 24 24 24

Equity capital 2,661 2,661 2,846 2,846 2,846

Reserves & surplus 41,890 41,818 49,324 53,668 62,390

Shareholders' fund 44,551 44,479 52,169 56,513 65,236

Total liabil ities and equiti es 125,693 124,012 132,996 139,794 150,825

Cash and cash eq. 139 117 517 1,202 2,060

Accounts receivables 14,194 12,990 16,101 18,721 22,573

Inventories 18,960 11,887 14,990 17,576 21,317

Other current assets 14,589 16,775 19,018 21,904 26,562

Investments 23,376 27,897 29,897 29,897 29,897

Net fixed assets 49,184 52,219 50,144 47,968 45,689

CWIP 5,626 1,551 1,551 1,551 1,551

Intangible assets 4,898 4,643 4,643 4,643 4,643

Deferred tax assets, net (5,274) (4,068) (3,868) (3,668) (3,468)

Other assets 0 0 0 0 0

Total asset s 125,693 124,012 132,996 139,794 150,825

Cash Flow Statement


Net income + Depreciation 8,145 4,064 5,098 10,365 14,845

Interest expenses 3,769 4,529 4,240 3,690 3,140

Non-cash adjustments (128) 73 (61) (67) (74)

Changes in working capital (485) 3,700 (2,665) (1,980) (4,444)

Other operating cash flows (4,108) (6,803) (408) (429) (452)

Cash flow from operati ons 7,193 5,564 6,204 11,579 13,016

Capital expenditures (6,492) (2,198) (2,000) (2,000) (2,000)

Change in investments (5,083) 518 (2,000) 0 0

Other investing cash flows (69) 645 269 296 326

Cash flow from invest ing (11,643) (1,035) (3,731) (1,704) (1,674)

Equities issued 0 0 6,667 0 0

Debt raised/repaid 10,890 1,827 (4,500) (5,500) (5,500)

Interest expenses (3,628) (4,358) (4,240) (3,690) (3,140)

Dividends paid (2,998) (1,868) 0 0 (1,844)

Other financing cash flows 0 (85) 0 0 0

Cash flow from financ ing 4,264 (4,484) (2,073) (9,190) (10,484)

Changes in cash and cash eq (186) 46 400 685 857

Closin g cash and cash eq 139 117 517 1,202 2,060


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AshokLeyland_Religare_121114