Results miss estimates: Ashok Leyland (ALL)s 2QFY2016 results have come in
below our estimates on account of a lower-than-anticipated top-line.
Revenue grew by a robust 54% yoy and by 29% on a sequential basis to
Rs4,940cr, but still, is below our estimate of Rs5,281cr. Volumes grew strongly by
51% yoy, led by a sharp 64% yoy growth in the MHCV segment. However, the
blended realization grew only marginally; it came in at Rs14.08 lakh/unit, up 2%
yoy, declined 4% sequentially, and is below our estimate of Rs15 lakh/unit. Lower
proportion of defence supplies and exports led to a sequential dip in the
realisation. Operating margin at 12% is at a record five-year high, improving
sharply by 490bp yoy, and is broadly in line with our estimates of 12.6%. Soft
commodity prices, better product mix (with greater proportion of higher-tonnage
vehicles) and cost control initiatives implemented by the company enabled ALL to report
a double-digit margin. The adj net profit, at Rs292cr, missed our estimate of Rs355cr.
Outlook and valuation: ALL results were below estimates primarily due to lower
realization on account of unfavourable mix. However, we expect the mix to be
favourable in 2HFY2016 due to higher defence supplies and recovery in exports
which would boost realisations. Given the improvement in fleet operators’
sentiments due to revival in the economy, improvement in profitabilities due to
falling diesel prices, and policy action initiated in the infrastructure and the mining
space, the MHCV demand would continue to grow in double digits. The MHCV
industry is clearly in an up-cycle and we estimate ~17% CAGR in volume over
FY2015- FY2017. Also, a better mix (higher proportion of MHCVs), reduction in
record high discounts due to volume growth, and operating leverage would result in
margin expansion, going forward. We expect operating margin to improve from 7.6% in
FY2015 to 11.6% in FY2017 (in line with the margins witnessed in the previous up-cycle in
FY2011). We maintain our Buy on the stock with a revised price target of Rs111 (based on
13x FY2017 EV/EBIDTA).

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