1QFY2018 Result Update | Automobile

July 25, 2017

Ashok Leyland

BUY

CMP

`105

Performance Highlights

Target Price

`124

Quarterly highlights (Standalone)

Investment Period

12 Months

Y/E March (` cr)

1QFY18 1QFY17

% chg (yoy) 4QFY17

% chg (qoq)

Net Sales

4,238

4,259

(0.5)

6,618

(36.0)

Stock Info

EBITDA

306

482

(36.5)

730

(38.2)

Sector

Automobile

EBITDA margin (%)

-410 bps

-381 bps

Adj. PAT

111

291

(61.7)

476

(76.6)

Market Cap (` cr)

30,699

Source: Company, Angel Research

Net Debt (` cr)

1,233

Results below estimates: ALL reported 0.5% decline in the top line to `4,238cr

Beta

1.4

while 62% yoy decline in the adj. PAT to `111cr. Though sales beat the cons.

52 Week High / Low

109/74

estimates, bottom line missed the estimates by 27% due to the higher RM costs

Avg. Daily Volume

1,403,777

and overheads. This was a one-off quarter due to GST and BSIV led disruption.

Face Value (`)

1.0

The results are not comparable due to merger of foundry business with itself.

BSE Sensex

32,228

Realizations increase due to price hike: While the sales were weak during the

Nifty

9,965

quarter (volumes declined by 8.6% yoy), per unit realization was higher by 8.8%

Reuters Code

ASOK.BO

yoy as company has taken the price hike due to the transition to the BSIV fuel

Bloomberg Code

AL@IN

norms. The MHCV volumes during the quarter were down by 17% while LCV

volumes were up 21% yoy.

Margins decline due to higher RM costs: Owing to the 10% growth in the RM

Shareholding Pattern (%)

costs/unit, gross margins declined by 80bps. EBITDA declined by 36.5% yoy to

Promoters

51.3

`306cr, while margins declined sharply to 7.2% vs. 11.3% in 1QFY17 and 11.0%

MF / Banks / Indian Fls

9.4

in 4QFY17. Company reported PAT at `126cr, adjusted for exceptional items

FII / NRIs / OCBs

22.2

(impairment of loss in a subsidiary and exchange loss), PAT is at `111cr. The

result clearly shows that slower sales growth and higher input /operating prices

Indian Public / Others

17.1

have impacted the numbers in the quarter.

Positive guidance by management: The management has guided of strong

Abs. (%)

3m 1yr 3yr

demand in the remainder of the year owing to the new technology iEGR. It also

Sensex

7.7

14.8

27.4

expects to launch new LCV every quarter. Company took 7-10% hike in April-17

Ashok Leyland

18.1

8.2

173.1

owing to the BSIV transition and has taken another hike in 1QFY18 to offset

higher input prices. Company has indicated of `500cr capex in FY18.

Valuation and outlook: We expect company to report CAGR of 11%/17% in the

3 year price chart

volumes/revenue over next two years. We maintain our Buy on the stock with a price

120

target of `124 - 20x of FY2019E EPS `6.2 (10.8x FY2019E EV/EBITDA multiple).

100

Key financials (Standalone)

Y/E March (` cr)

FY2016

FY2017

FY2018E FY2019E

Net Sales

18,937

20,019

23,339

27,240

% chg

39.6

5.7

16.6

16.7

Adjusted net profit

1,200

1,559

1,360

1,819

% chg

16.4

213.9

11.2

33.7

EBITDA (%)

11.9

11.0

10.1

10.8

EPS (`)

1.4

4.3

4.6

6.2

Source: Company, Angel Research

P/E (x)

76.6

24.4

22.6

16.9

P/BV (x)

5.7

5.0

4.5

4.0

RoE (%)

7.2

20.0

23.6

RoCE (%)

22.6

20.4

21.6

26.9

EV/Sales (x)

1.6

1.5

1.3

1.1

EV/EBITDA (x)

13.1

13.2

12.5

9.8

Shrikant Akolkar

Source: Company, Angel Research; Note: CMP as of July 25, 2017

022-3935 7800 Ext: 6846

Please refer to important disclosures at the end of this report

Ashok Leyland | 1QFY2018 Result Update

Exhibit 1: Quarterly financial performance (Standalone)

Y/E March (` cr)

1QFY18

1QFY17

% chg (yoy)

4QFY17

% chg (qoq)

Net Sales

4,238

4,259

(0.5)

6,618

(36.0)

Consumption of RM

2,942

2,925

0.6

4,760

(38.2)

(% of sales)

69.4

68.7

(0.8)

71.9

Staff costs

438

358

22.2

412

6.3

(% of sales)

10.3

8.4

6.2

Purchase of traded goods

552

494

11.7

716

(22.9)

(% of sales)

13.0

11.6

10.8

Total Expenditure

3,932

3,777

4.1

5,888

(33.2)

Operating Profit

306

482

(37)

730

(58.1)

OPM (%)

7.2

11.3

11.0

Interest

8.3

(13.4)

Depreciation

132

121

9.2

139

(5.3)

Other income

(0.3)

(4.8)

PBT (excl. Extr. Items)

176

366

588

Extr. income/expense

PBT (incl. Extr. Items)

176

366

(52.0)

588

(70.1)

(% of sales)

4.1

8.6

8.9

Provision for taxation

125

(216)

(% of PBT)

(37)

Reported PAT

126

241

(47.5)

804

(84.3)

Adj PAT

111

291

(61.7)

476

(76.6)

Adj. PATM

2.6

6.8

7.2

Equity capital (cr)

285

Adjusted EPS (`)

0.4

1.0

1.7

Source: Company, Angel Research

Exhibit 2: Quarterly volume performance

(units)

1QFY18

1QFY17

% chg (yoy)

4QFY17

% chg (qoq)

MH&CV

19,877

24,027

(17.3)

38,643

(48.6)

LCV

8,618

7,138

20.7

8,978

(4.0)

Total volume (ex. Dost)

28,495

31,165

(8.6)

47,621

(40.2)

Source: Company, Angel Research

July 25, 2017

Ashok Leyland | 1QFY2018 Result Update

 ALLs MHCV volumes declined by 17% yoy during the quarter due to the BSIV

transition.

 Realization/vehicle increased by

10% yoy to

`14.87 lakh, as company

increased prices on the back of roll out of BSIV vehicles.

 RM cost per vehicle increased by 10% yoy to ` 10.32lakh. This was due to

increase in the raw material costs.

 Market share expansion continued on the back of higher proportion of the fast

growing heavy trucks and geographical expansion. ALL’s market share

improved to 34.7% in 1QFY18.

Exhibit 3: Volume decline due to BSIV transition...

Exhibit 4: ..led to decline in MHCV share in volume mix

60,000

100

50,000

40,000

30,000

20,000

10,000

(10)

(20)

Overall Volumes

yoy chg %

MHCV (%) LCV (%)

Source: Company, Angel Research

Exhibit 5: Net sales declines 0.5% yoy

Exhibit 6: Realisation & contribution trend

1,700,000

500,000

7,000

80.0

70.0

450,000

1,500,000

6,000

60.0

5,000

50.0

400,000

1,300,000

4,000

40.0

350,000

30.0

3,000

1,100,000

20.0

300,000

2,000

10.0

900,000

0.0

250,000

1,000

-10.0

700,000

200,000

-20.0

Net sales (` cr)

Growth %

Realisation/vehicle (`)

Contribution/vehicle (`)

Source: SIAM, Angel Research

 Company has indicated improving exports and more focus on LCV business

by launch of new product every quarter.

 Aftermarket revenue during the quarter grew 34% yoy.

July 25, 2017

Ashok Leyland | 1QFY2018 Result Update

Exhibit 7: Sharp decline in margin due to higher costs

Exhibit 8: Bottom-line takes severe beating

900.0

600.0

800.0

500.0

700.0

600.0

400.0

500.0

300.0

400.0

300.0

200.0

100.0

0.0

(2)

(100.0)

(200.0)

(4)

EBIDTA (` cr)

Margin %

Net Profit (` cr)

Margin %

Source: Company, Angel Research

Conference call - Key highlights

 Company expects ~10% domestic M&HCV volume growth on the back of

higher GDP growth and higher infra spending in FY18E. It also expects higher

growth in LCV business.

 It has indicated that vehicles with iEGR engines have seen positive response.

The iEGR enabled vehicles are better and ~20K-30K cheaper than SCR

engine enabled vehicles.

 While company took multiple price hikes in this calendar year, ALL has

indicated that it may take further price hikes to offset increase in the input

prices. It is taking another 1% hike from August-17.

 FY17E Capex unchanged at `500cr

 Company’s market share increased to 34.7% in 1QFY18.

 Due to higher RM prices, company reported decline in the operating margins.

July 25, 2017

Ashok Leyland | 1QFY2018 Result Update

Investment arguments

Volumes recovery in FY18E: While ALL reported weak set of numbers in 1QFY18,

the first two months of the quarter cumulatively saw 19.4% yoy decline in the

volumes due to the BSIV transition. In the June-17, company saw 11% growth in

the revenues. ALL further expects the higher volume growth in the remainder of the

year. It also expects to launch new LCV every quarter in FY18E which will also help

in higher sales. ALL has a market share of 34.7% in the 1QFY18 and expects to do

well going ahead with its new technology iEGR.

Pure CV play: ALL is a pure CV play and is expected to benefit from government’s

push to improve infrastructure. The MHCV segment, accounts for 3/4^th of ALLs total

volumes and has grown at a 3 year CAGR of 11% by FY16. We expect the

momentum to continue, in FY18E and FY19E as economic outlook improves.

Return ratio to improve: ALL has taken 4% price hike in January, 7-10% hike in

April-17 (owing to the BSIV transition) and has taken another hike in 1QFY18 to

offset higher input prices. We expect ALL’s margins to remain at the current levels

for new two years (>10%). This level of margins is significantly higher than the

margins seen during FY12-FY15 when automobile industry was going through a

period of slower growth. Owing to this, company is expected to see improvement

in RoE profile. We expect ALL’s average RoE to remain at ~21.8% over next two

years indicating strong improvement in return ratios.

Outlook and valuation

We expect company to report CAGR of 11%/17% in the volumes/revenue over next

two years. We maintain our Buy on the stock with a price target of `124 - 20x of

FY2019E EPS `6.2 (10.8x FY2019E EV/EBITDA multiple).

Exhibit 9: Key assumptions

(units)

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

MH&CV

60,342

77,660

109,762

113,295

118,890

133,162

LCV

28,995

27,242

30,695

31,770

38,428

46,119

Total volume (units)

89,337

104,902

140,457

145,065

157,318

179,281

% yoy chg

(22.1)

17.4

33.9

3.3

8.4

14.0

Source: Company, Angel Research

Company background

Ashok Leyland Ltd (ALL) is the country's second largest CV manufacturer. The

company has a strong presence in the MHCV segment, with a domestic market

share of ~35% as of 1QFY2018. ALL enjoys a dominant position in southern

India, and has been focusing on expanding its presence in northern and western

India by increasing its touch points in the region. The company intends to increase

its market share in trucks by launching new products under Guru and Partner

range. It also has increased focus on exports and LCV business.

July 25, 2017

Ashok Leyland | 1QFY2018 Result Update

Profit and loss statement (Standalone)

Y/E March (` cr)

FY2016

FY2017

2018E

2019E

Total operating income

18,937

20,019

23,339

27,240

% chg

39.6

5.7

16.6

16.7

Total Expenditure

16,683

17,816

20,972

24,287

Cost of Materials

13,195

13,957

16,530

19,602

Personnel

1,385

1,531

1,789

1,689

Others Expenses

2,103

2,328

2,653

2,996

EBITDA

2,255

2,203

2,367

2,953

% chg

119.6

(2.3)

7.5

24.8

(% of Net Sales)

11.9

11.0

10.1

10.8

Depreciation& Amortisation

488

518

519

515

EBIT

1,767

1,685

1,848

2,437

% chg

189.5

(4.6)

9.7

31.9

(% of Net Sales)

9.3

8.4

7.9

8.9

Interest & other Charges

248

155

135

106

Other Income

118

136

201

232

(% of PBT)

7.2

8.2

10.5

9.0

Share in profit of Ass.

Recurring PBT

1,637

1,666

1,914

2,563

% chg

379.6

1.8

14.9

33.9

Prior Period & Extra. Exp.

810

335

PBT (reported)

827

1,330

1,914

2,563

Tax

437

107

553

743

(% of PBT)

52.9

8.0

28.9

29.0

PAT (reported)

390

1,223

1,360

1,819

Add: Share of earnings of ass.

Less: Minority interest (MI)

PAT after MI (reported)

390

1,223

1,360

1,819

ADJ. PAT

1,200

1,559

1,360

1,819

% chg

16.4

213.9

11.2

33.7

(% of Net Sales)

6.3

7.8

5.8

6.7

Basic EPS (`)

1.4

4.3

4.6

6.2

Fully Diluted EPS (`)

1.4

4.3

4.6

6.2

% chg

16.4

213.9

11.2

33.7

July 25, 2017

Ashok Leyland | 1QFY2018 Result Update

Balance sheet statement (Standalone)

Y/E March (` cr)

FY2016

FY2017

2018E

2019E

SOURCES OF FUNDS

Equity Share Capital

285

293

Reserves& Surplus

5,123

5,842

6,522

7,431

Shareholders Funds

5,407

6,126

6,814

7,724

Minority Interest

Total Loans

2,415

2,145

1,745

1,345

Other liabilities

326

219

163

191

Deferred Tax Liability

753

741

Total Liabilities

8,901

9,231

9,464

10,001

APPLICATION OF FUNDS

Gross Block

5,279

5,858

6,441

7,122

Less: Acc. Depreciation

487

887

1,402

1,972

Net Block

4,792

4,971

5,039

5,150

Capital Work-in-Progress

206

Investments

1,980

2,879

2,100

2,200

Current Assets

5,925

5,744

7,214

8,460

Inventories

1,625

2,501

2,686

3,134

Sundry Debtors

1,251

860

1,599

1,866

Cash

1,593

912

736

899

Loans & Advances

712

709

910

1,062

Other Assets

745

762

1,284

1,498

Current liabilities

4,296

5,183

5,543

6,464

Net Current Assets

1,629

561

1,671

1,996

Deferred Tax Asset

424

614

Mis. Exp. not written off

Total Assets

8,901

9,231

9,464

10,001

July 25, 2017

Ashok Leyland | 1QFY2018 Result Update

Cash flow statement (Standalone)

Y/E March (` cr)

FY2016

FY2017

2018E

2019E

Profit before tax

390

1,223

1,914

2,563

Depreciation

488

518

515

570

Change in Working Capital

(179)

190

(763)

Interest / Dividend (Net)

203

135

106

Direct taxes paid

(441)

(348)

(553)

(743)

Others

1,223

484

Cash Flow from Operations

1,683

2,155

1,248

2,548

(Inc.)/ Dec. in Fixed Assets

(170)

(378)

(418)

(681)

(Inc.)/ Dec. in Investments

534

(1,099)

257

(315)

Cash Flow from Investing

364

(1,477)

(161)

(996)

Issue of Equity

Inc./(Dec.) in loans

(783)

(870)

(448)

(373)

Dividend Paid (Incl. Tax)

(154)

(325)

(680)

(910)

Interest / Dividend (Net)

(268)

(164)

(135)

(106)

Cash Flow from Financing

(1,205)

(1,359)

(1,263)

(1,389)

Inc./(Dec.) in Cash

842

(681)

(176)

164

Opening Cash balances

751

1,593

912

736

Closing Cash balances

1,593

912

736

899

July 25, 2017

Ashok Leyland | 1QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

Ashok Leyland

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

July 25, 2017