Results in line with estimates: Ashok Leyland Ltd (ALL)’s 3QFY2016 results have
come in in line with our estimates. Revenues grew 22% yoy to Rs4,085cr, driven
mainly by a 23% yoy growth in volumes. MHCV segment volumes (constituting
80% of total volumes) grew strongly by 27% yoy while volumes in the LCV
segment grew by 9% yoy. Realisation/vehicle declined marginally by 1% yoy
mainly due to slight deterioration in the product mix. The operating margin
improved by 340bp yoy to 10.5% given the leverage due to strong volume growth
and soft commodity prices. Margins were slightly lower than our estimate of 11%.
The EBIDTA at Rs430cr was in line with our expectations of Rs440cr. During the
quarter, the company incurred an exceptional loss of Rs6.5cr (Rs5cr due to
diminution in value of investments in JV/Subsidiary and Rs1.5cr due to loss on sale
of immovable property). The Adjusted PAT, at Rs205cr, is in line with our estimate
of Rs196cr.
Outlook and valuation: 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, we
expect demand for MHCVs to continue to grow in double digits. The MHCV
industry is clearly in an up-cycle and we estimate ~20% 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 the operating margin to improve from 7.6%
in FY2015 to 11.4% in FY2017 (in line with the margins witnessed in the previous up-cycle
in FY2011). We reiterate our Buy on the stock with a price target of Rs111 (based on 13x

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