3QFY2017 Result Update | Automobile

February 13, 2017

Ashok Leyland

BUY

CMP

`93

Performance Highlights

Target Price

`111

Quarterly highlights (Standalone)

Investment Period

12 Months

Y/E March (` cr)

3QFY17 3QFY16

% chg (yoy) 2QFY17

% chg (qoq)

Net Sales

4,431

4,114

7.7

4,622

(4.1)

Stock Info

EBITDA

454

444

2.3

536

0.0

Sector

Automobile

EBITDA margin (%)

(55 bps)

(136 bps)

Market Cap (` cr)

26,452

Adj. PAT

250

217

14.8

294

196.0

Net Debt (` cr)

(1,211)

Source: Company, Angel Research

Beta

1.2

Overall good results during tough times: Ashok Leyland reported 7.7% growth in

52 Week High / Low

113/74

top line and 14.8% growth in the bottom line. Net realization grew by 1.3% yoy to

Avg. Daily Volume

1,330,069

`13.20 lakh per vehicle. Operating profit grew by 2.2% to `454cr in Q3FY17;

Face Value (`)

1.0

EBITDA margins declined by 55bps yoy to 10.25% vs. 10.80% in Q3FY16. The

BSE Sensex

28,334

decline in EBITDA margins was due to higher discounts and increase in raw

Nifty

8,794

material prices. Reported PAT declined by 13% yoy to `185.9cr due to loss of

Reuters Code

ASOK.BO

`67.3cr on swap contracts. Adjusted PAT grew by 14.8% yoy to 249.6cr. The

Bloomberg Code

AL@IN

company during the quarter saw 6% yoy growth in its total volumes to 32,838.

This came despite industry witnessed negative impact of demonetisation. The

MHCV volumes grew by 9% while LCV volumes declined by 2%.

Shareholding Pattern (%)

Promoters

50.4

Outlook and valuation While demonetisation has negatively impacted the

automobile industry, we are expecting faster recovery in the volumes with

MF / Banks / Indian Fls

8.9

improving liquidity. The quantum of recovery cannot be assessed at this time. We

FII / NRIs / OCBs

28.7

forecast ALL’s volume growth of 8% and 9% in FY18E and FY19E. Company has

Indian Public / Others

12.0

taken a 4% price hike in January hence we believe that margins are likely to see

minor expansion going ahead. We forecast average 21% ROE for FY18E and

Abs. (%)

3m 1yr 3yr

FY19E showing significant improvement from its ROE profile in FY16. The

Sensex

5.6

23.4

39.1

improving consumer sentiment and government’s initiative to boost the

Ashok Leyland

9.0

17.4

506.7

infrastructure would play out positively for Ashok Leyland. Overall we expect 10%

and 13% CAGR in revenue and net profit over next two years. We value the stock at

19x of FY2019E EPS `5.8 and maintain buy rating with price target of `111.

3 year price chart

Key financials (Standalone)

120.0

100.0

Y/E March (` cr)

FY2015

FY2016

2017E

2018E

2019E

80.0

Net Sales

13,562

18,822

20,021

21,915

24,076

60.0

% chg

36.4

38.8

6.4

9.5

9.9

40.0

Adjusted net profit

234

1,111

1,294

1,514

1,655

20.0

0.0

% chg

375.1

16.4

17.0

9.3

EBITDA (%)

7.7

11.6

11.9

11.6

EPS (`)

1.2

2.5

4.5

5.3

5.8

Source: Company, Angel Research

P/E (x)

79.0

36.6

20.4

17.5

16.0

P/BV (x)

5.2

4.8

4.2

3.8

3.4

RoE (%)

6.5

13.1

20.6

21.5

21.0

RoCE (%)

7.2

21.1

20.2

21.2

21.7

Shrikant Akolkar

EV/Sales (x)

1.9

1.4

1.3

1.1

1.0

022-3935 7800 Ext: 6846

EV/EBITDA (x)

25.7

11.8

11.1

9.6

8.7

[email protected]

Source: Company, Angel Research; Note: CMP as of February 10, 2017

Please refer to important disclosures at the end of this report

Ashok Leyland | 3QFY2017 Result Update

Exhibit 1: Quarterly financial performance (Standalone)

Y/E March (` cr)

3QFY17

3QFY16

% chg (yoy)

2QFY17

% chg (qoq)

9MFY17

% chg (yoy)

Net Sales

4,431

4,114

7.7

4,622

(4.1)

13,312

12,964

2.7

Consumption of RM

3,134

2,875

9.0

3,134

0.0

9,198

8,994

2.3

(% of sales)

70.7

69.9

67.8

69.1

69.4

Staff costs

362

347

4.1

369

(2.1)

1,089

1,053

3.5

(% of sales)

8.2

8.4

8.0

8.2

8.1

Purchase of traded goods

481

447

7.8

583

(17.4)

1,558

1,614

(3.4)

(% of sales)

10.9

12.6

11.7

12.4

Total Expenditure

3,977

3,670

8.4

4,086

(2.7)

11,845

11,660

1.6

Operating Profit

454

444

2.3

536

(15.3)

1,467

1,304

12.5

OPM (%)

10.3

10.8

11.6

11.0

10.1

Interest

(48.4)

(8.2)

193

(48.9)

Depreciation

119

(0.1)

126

(5.4)

366

356

2.8

Other income

(40)

(243.1)

(205.3)

25.3

PBT (excl. Extr. Items)

264

293

415

1,094

827

Extr. income/expense

PBT (incl. Extr. Items)

264

293

(9.9)

415

(36.4)

1,094

827

32.2

(% of sales)

6.0

7.1

9.0

8.2

6.4

Provision for taxation

120

323

297

(% of PBT)

29.5

27.0

29.0

29.5

35.9

Reported PAT

186

214

(13.0)

294

(36.9)

771

530

45.4

Adj PAT

250

217

14.8

294

835

619

Adj. PATM

5.6

5.3

6.4

6.3

4.8

Equity capital (cr)

285

Adjusted EPS (`)

0.9

0.8

1.0

2.9

2.2

Source: Company, Angel Research

Exhibit 2: Quarterly volume performance

(units)

3QFY17

3QFY16

% chg (yoy)

2QFY17

% chg (qoq)

9MFY17

% chg (yoy)

MHCV passenger

25,284

23,176

9.1

25,341

(0.2)

74,652

74,513

0.2

MHCV goods

7,554

7,752

(2.6)

8,100

(6.7)

22,792

21,950

3.8

Total volume (ex. Dost)

32,838

30,928

6.2

33,441

(1.8)

97,444

96,463

1.0

Source: Company, Angel Research

February 13, 2017

Ashok Leyland | 3QFY2017 Result Update

 ALLs MHCV volumes grew by

9% yoy during the quarter showing

demonetisation has not led to a negative impact on its MHCV business. The

industry, during this period grew by 3%.

 Realization/vehicle declined by

1.3% yoy to

`13.20 lakh, as company

increased discounts from `2.5 lakh per vehicle to ~`3.3 lakh per vehicle.

 RM cost per vehicle increased by 2.6% yoy to ` 9.54 lakh. This was due to

increase in the raw material costs.

 ALL has continued to increase its market share on the back of higher

proportion of the fast growing heavy trucks and geographical expansion. ALL’s

market share improved from 30.1% in Q3FY16 to 33.7% in Q3FY17.

Exhibit 3: Volume grew despite demonetisation

Exhibit 4: MHCVs share in product mix rises yoy

50,000

100

40,000

30,000

20,000

10,000

(10)

(20)

Overall Volumes

yoy chg %

MHCV (%)

LCV (%)

Source: Company, Angel Research

Exhibit 5: Net sales growth at 7.7%

Exhibit 6: Realisation & contribution trend

7,000

80.0

17,00,000

4,50,000

70.0

6,000

60.0

15,00,000

4,00,000

5,000

50.0

4,000

40.0

13,00,000

3,50,000

30.0

3,000

20.0

11,00,000

3,00,000

2,000

10.0

0.0

9,00,000

2,50,000

1,000

-10.0

-20.0

7,00,000

2,00,000

Net sales (` cr)

Growth %

Realisation/vehicle (`)

Contribution/vehicle (`)

Source: SIAM, Angel Research



Company has indicated of greater focus on exports, LCV and aftermarket

business going ahead.

February 13, 2017

Ashok Leyland | 3QFY2017 Result Update

Exhibit 7: EBITDA margin declines due to higher costs

Exhibit 8: Bottom-line continues to improve yoy

600.0

350.0

300.0

500.0

250.0

400.0

200.0

300.0

150.0

200.0

100.0

50.0

0.0

(2)

(50.0)

(100.0)

(4)

EBIDTA (` cr)

Margin %

Net Profit (` cr)

Margin %

Source: Company, Angel Research

Conference call - Key highlights

 Company reported 9% yoy growth in its MH&CV (bus + truck) volumes

whereas LCV volumes saw 2.5% yoy decline

 During the quarter, exports revenue was at `388cr and company expects

export revenue contribution to be ~25% of sales in next 4-5 years.

 FY17E Capex at `500cr

 Company’s market share increased from 30.1% in Q3FY16 to 33.7% in

Q3FY17

 During the quarter company reported higher discounts of ~ `3.30 lakh.

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

 While in Q3, company was not able to pass on the prices, it has increased

prices by ~4% in January.

 Company has indicated of higher LCV sales going ahead and expects to

increase its aftermarket share from 10% to 15%.

Investment arguments

Volumes recovery in FY18E: ALL continues to report a good set of volumes. The

Implementation of BSIV standards is also expected to be positive for the stock and

company expects pre-buying in next few months. This implies that the volumes are

expected to recover faster, shrugging off the demonetisation impact. We remain

positive on its volume growth. Company has also indicated to increase its LCV

market share to ~30% with new product launches in coming years.

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 and we expect

further price hikes as company anticipates volume growth on the back of

February 13, 2017

Ashok Leyland | 3QFY2017 Result Update

implementation of new emission standards. We expect ALL’s margins to remain at

the current levels for new two years (11.6%). 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

~21.2% over next two years indicating strong improvement in return ratios.

Outlook and valuation

While demonetisation has negatively impacted the automobile industry, we are

expecting faster recovery in the volumes with improving liquidity. The quantum of

recovery cannot be assessed at this time. We forecast ALL’s volume growth of 8%

and 9% in FY18E and FY19E. Company has taken a 4% price hike in January

hence we believe that margins are likely to see minor expansion going ahead. We

forecast average 21% ROE for FY18E and FY19E showing significant improvement

from its ROE profile in FY16. The improving consumer sentiment and

government’s initiative to boost the infrastructure would play out positively for

Ashok Leyland. Overall we expect 10% and 13% CAGR in revenue and net profit

over next two years. We value the stock at 19x of FY2019E EPS `5.8 and maintain buy

rating with PT of `111 (11x FY2019E EV/EBITDA multiple).

Exhibit 9: Key assumptions

(units)

FY2013

FY2014

FY2015

FY2016E

FY2017E

FY2018E

MH&CV

79,694

60,342

77,660

109,762

112,674

122,821

LCV

34,917

28,995

27,242

30,695

31,980

33,904

Total volume (units)

114,611

89,337

104,902

140,457

144,654

156,725

% yoy chg

12.4

(22.1)

17.4

33.9

3.0

8.3

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 ~34% as of Q3FY2017. 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.

February 13, 2017

Ashok Leyland | 3QFY2017 Result Update

Profit and loss statement (Standalone)

Y/E March (` cr)

FY2015

FY2016

2017E

2018E

2019E

Total operating income

13,562

18,822

20,021

21,915

24,076

% chg

36.4

38.8

6.4

9.5

9.9

Total Expenditure

12,536

16,656

17,748

19,352

21,333

Cost of Materials

9,965

13,262

13,692

14,977

16,528

Personnel

1,184

1,399

1,626

1,759

1,933

Others Expenses

1,386

1,995

2,430

2,615

2,872

EBITDA

1,027

2,166

2,273

2,564

2,743

% chg

778.3

111.0

4.9

12.8

7.0

(% of Net Sales)

7.7

11.6

11.9

11.6

Depreciation& Amortisation

416

444

459

486

EBIT

610

1,722

1,814

2,078

2,257

% chg

(334.6)

182.2

5.3

14.5

8.6

(% of Net Sales)

4.6

9.3

9.7

9.6

Interest & other Charges

394

274

133

134

Other Income

124

110

159

219

241

(% of PBT)

36.5

7.0

8.6

10.1

10.2

Share in profit of Ass.

Recurring PBT

341

1,559

1,840

2,163

2,364

% chg

(157.2)

356.7

18.1

17.5

9.3

Prior Period & Extra. Exp.

(101)

389

PBT (reported)

442

1,169

1,840

2,163

2,364

Tax

107

447

547

649

709

(% of PBT)

24.3

38.3

29.7

30.0

PAT (reported)

335

722

1,294

1,514

1,655

Add: Share of earnings of ass.

Less: Minority interest (MI)

PAT after MI (reported)

335

722

1,294

1,514

1,655

ADJ. PAT

234

1,111

1,294

1,514

1,655

% chg

(149.1)

375.1

16.4

17.0

9.3

(% of Net Sales)

1.7

5.9

6.5

6.9

Basic EPS (`)

1.2

2.5

4.5

5.3

5.8

Fully Diluted EPS (`

1.2

2.5

4.5

5.3

5.8

% chg

375.1

16.4

17.0

9.3

February 13, 2017

Ashok Leyland | 3QFY2017 Result Update

Balance sheet statement (Standalone)

Y/E March (` cr)

FY2014

FY2015

FY2016

2017E

2018E

2019E

SOURCES OF FUNDS

Equity share capital

266

285

Reserves & surplus

4,182

4,834

5,230

6,006

6,763

7,590

Shareholders’ Funds

4,448

5,119

5,514

6,290

7,048

7,875

Total loans

Deferred tax liability

4,690

3,350

2,659

2,709

2,759

2,509

Other long term liabilities

142

137

151

165

Long term provisions

624

611

589

Total Liabilities

9,833

9,178

8,903

9,725

10,546

11,138

APPLICATION OF FUNDS

Gross block

8,672

8,555

8,747

9,178

9,716

10,306

Less: Acc. depreciation

3,012

3,300

3,693

4,152

4,638

5,153

Net Block

5,660

5,256

5,054

5,026

5,078

5,153

Capital work-in-progress

182

120

Goodwill

2,790

2,649

1,918

2,000

2,100

2,200

Investments

4,177

5,287

6,338

7,242

8,408

9,314

Long term loans and adv.

1,189

1,399

1,731

2,147

2,478

2,716

Other noncurrent assets

1,299

1,243

1,251

1,342

1,475

1,617

Current assets

751

1,568

1,911

2,431

2,762

Cash

643

892

741

764

840

921

Loans & advances

1,035

1,002

1,048

1,078

1,184

1,298

Other

3,193

4,234

4,535

4,656

5,133

5,622

Current liabilities

984

1,053

1,803

2,586

3,274

3,692

Net current assets

217

101

Misc. exp. not written off

Total Assets

9,833

9,178

8,903

9,725

10,546

11,138

February 13, 2017

Ashok Leyland | 3QFY2017 Result Update

Cash flow statement (Standalone)

Y/E March (` cr)

FY2015

FY2016

2017E

2018E

2019E

Profit before tax

442

1,169

1,840

2,163

2,364

Depreciation

416

444

459

486

515

Change in Working Capital

705

(128)

(410)

(62)

Interest / Dividend (Net)

367

229

133

134

Direct taxes paid

(50)

(441)

(547)

(649)

(709)

Others

(104)

402

Cash Flow from Operations

1,777

1,676

1,475

2,072

2,332

(Inc.)/ Dec. in Fixed Assets

(211)

(147)

(415)

(518)

(590)

(Inc.)/ Dec. in Investments

314

537

(112)

(207)

(214)

Cash Flow from Investing

103

390

(527)

(725)

(804)

Issue of Equity

667

Inc./(Dec.) in loans

(1,401)

(799)

(236)

Dividend Paid (Incl. Tax)

(154)

(518)

(757)

(827)

Interest / Dividend (Net)

(406)

(296)

(133)

(134)

Cash Flow from Financing

(1,140)

(1,249)

(605)

(828)

(1,197)

Inc./(Dec.) in Cash

740

817

343

520

331

Opening Cash balances

751

1,568

1,911

2,431

Closing Cash balances

751

1,568

1,911

2,431

2,762

February 13, 2017

Ashok Leyland | 3QFY2017 Result Update

Key ratios

Y/E March

FY2014

FY2015

FY2016

2017E

2018E

2019E

Valuation Ratio (x)

P/E (on FDEPS)

841.7

79.0

36.6

20.4

17.5

16.0

P/CEPS

60.9

35.2

22.7

15.1

13.2

12.4

P/BV

5.9

5.2

4.8

4.2

3.8

3.4

Dividend yield (%)

206.6

97.8

51.1

34.9

32.0

EV/Sales

2.9

1.9

1.4

1.3

1.1

1.0

EV/EBITDA

242.5

25.7

11.8

11.1

9.6

8.7

EV / Total Assets

2.2

2.0

1.9

1.8

1.6

1.4

Per Share Data (`)

EPS (Basic)

0.1

1.2

2.5

4.5

5.3

5.8

EPS (fully diluted)

0.1

1.2

2.5

4.5

5.3

5.8

Cash EPS

1.5

2.6

4.1

6.2

7.0

7.5

DPS

0.0

0.5

1.0

1.8

2.7

2.9

Book Value

15.6

18.0

19.4

22.1

24.8

27.7

Returns (%)

ROCE

(2.8)

7.2

21.1

20.2

21.2

21.7

Angel ROIC (Pre-tax)

(4.1)

12.0

36.7

35.7

39.4

41.6

ROE

0.7

6.5

13.1

20.6

21.5

21.0

Turnover ratios (x)

Asset Turnover (Gross Block)

1.1

1.6

2.2

2.3

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

(6)

February 13, 2017

Ashok Leyland | 3QFY2017 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)

February 13, 2017