Ashok Leyland: Net sales declined 17.5% YoY to INR30.8b

22 May 2014

4QFY14 Results Update | Sector:

Automobiles

Ashok Leyland

BSE SENSEX

24,374

Bloomberg

Equity Shares (m)

M.Cap. (INR b) / (USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

S&P CNX

7,276

AL IN

2,660.7

76.9/1.3

30/12

15/67/4



Financials & Valuation (INR Billion)

Y/E Mar

Net Sales

EBITDA

Adj PAT

EPS (INR)

Gr. (%)

BV/Sh.(INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

2014 2015E 2016E

99.4 116.5 147.3

1.7

-4.8

-1.8

16.7

-10.7

-1.6

1.7

6.5

-0.5

-0.2

16.3

-1.1

3.9

1.8

10.4

2.5

1.0

16.7

5.8

8.2

30.3

1.7



CMP: INR29



TP: INR34

Buy

Margins rebound strongly, guides market revival 2Q onwards

Ashok Leyland’s (AL’s) net sales declined 17.5% YoY to INR30.8b (est. INR27.2b),

led by volume decline of 24.8%, while realizations rose 9.7% YoY (up 11.2% QoQ).

EBITDA margin improved from -5% in 3QFY14 to 6% in 4QFY14 (est. 2.3%). Loss

before extraordinary item and tax stood at INR163m (est. INR1.6b).

AL booked a profit of INR3.8b on sale of non-core long term investments/assets.

Considering the weak financial performance, company refrained from declaring

dividend for FY14 (first time in 15 years, INR0.6/share in FY13).

AL, for the first time, reported consolidated financial performance. Consolidated

net sales stood at INR115b, with EBITDA margin of 3.7%. Loss before extraordinary

item and tax stood at INR8.2b (v/s INR6b for standalone).

Management commentary on results

Management believes the worst is over. Recovery is likely 2QFY15 onwards.



AL largely retained its MHCVs share in FY14, despite higher competition.



Company aggressively worked on cost reduction measures and working capital

reduction.



Continue to focus on various restructuring initiatives to improve operational

efficiency and leaner balance sheet.

Valuation and view:

Our industry interactions indicate that MHCVs cycle is

bottoming out. Typically, MHCVs demand rebounds sharply with an economic

recovery. AL is best placed among CV OEMs to play the CV upcycle. We will review our

estimates post the con-call scheduled tomorrow at 11am (# 91 22 3915 5460).

Maintain

Buy.



-16.1 -158.2

Jinesh Gandhi

(Jinesh@MotilalOswal.com); +91 22 3982 5416

Chirag Jain

(Chirag.Jain@MotilalOswal.com); +91 22 3982 5418

Investors are advised to refer through disclosures made at the end of the Research Report.

Ashok Leyland

Strong turnaround in operational performance with margins of 6%



AL’s volume declined 24.8% (up 41.6% QoQ), reflecting weak macro-economic

environment. MHCV volumes have dropped by 20% YoY (on 23% drop last year),

while LCV volumes were down by 35% YoY.

Average realizations improved by 9.7% YoY (up 11.2% QoQ) to INR1.18m/unit

(est INR1.05m/unit) driven by mix change in favour of MHCVs.

As a result, net sales declined by 17.5% YoY (up 57.5% QoQ) to INR30.8b (est

INR27.2b)

RM cost declined by 440bp sequentially (50bp YoY) to 75.3%, driven by product

mix change.

Staff cost and other expenditure declined sequentially by 420bp and 230bp

reflecting operating leverage and cost reduction benefits

EBTIDA margins improved from

negative

5% in 3QFY14 to 6% (est 2.3%). Lower

LCV volumes (under Nissan JV), sharp sequential growth coupled with cost

reduction measures would have helped to report strong rebound in margins.

PBT loss (before extraordinary) stood at INR163m (est INR1.6b).

AL booked profit of INR3.8b on sale of non-core long term investments/assets.

Considering weak financial performance, AL has not paid dividend for FY14

(FY13 dividend stood at INR0.6/share).

Drop in MHCV volumes moderating (%)

13.3

4.6

5.0

AL’s MHCV volumes rises QoQ on seasonality (‘000 unit)

-8.8

-3.2

(10.5)

(20.2)

(23.3)

(24.9)

(26.4)

(27.1)

(29.0)

Source: Company, MOSL

Product mix change in favour of MHCVs drives realizations

Realization (INR '000/unit)

Share of LCVs (under Nissan JV) declines sharply QoQ (%)

Volumes (ex Dost)

Dost

100 99

FY12

FY13

FY14

Source: Company, MOSL

22 May 2014

Ashok Leyland

Strong rebound in margins on higher volumes, mix change

EBITDA (INR m)

9.7 10.6

7.2

10.9

8.0

10.1

4.3 5.3

6.0

1.0

2.2

-5.0

EBITDA Margins (%)

RM cost declines on product mix change

RM (% of net sales)

73.6 74.0 74.4 72.8 72.8

72.1

71.9

75.8 75.5 76.3

75.3

79.7

FY12

FY13

FY14

FY12

FY13

FY14

Source: Company, MOSL

Maintained MHCV market share in FY14, despite competition



Management believes that worst is over. With stable government, management

expects MHCV cycle to revive, starting likely 2QFY15 itself.

Aggressive network expansion over last few years helped AL to retain MHCV

market share in FY14, despite higher competition.

AL has worked aggressively on reducing the break-even level through cost

reduction measures, while continuing to invest in new products.

During FY14, AL booked a profit of INR5b on sale of few investments and non-

core assets and reduced working capital drastically to generate cash.

Continue to focus on various re-structuring initiative to improve operational

efficiency and leaner balance sheet.

AL largely maintains its market share despite competition

Dom. MHCV market share (%)

22.5

27.9

23.3

25.7

23.6

26.1

25.5

4QFY14 registers increase in MHCV market share QoQ

Dom. MHCV market share (%)

26.2

25.4

29.8

22.5

23.1

27.8

FY13

FY14

FY10

FY11

FY12

FY13

FY14

Source: Company, SIAM, MOSL

Valuation and view



Our industry interaction indicates that MHCV cycle is bottoming-out.

Typically, MHCV demand rebounds sharply with economic recovery. During the

last two major cycles, MHCV demand posted a CAGR of 23%.

Ashok Leyland (AL) is best placed among CV OEMs to play the CV upcycle.

At our current estimates, AL trades at 30.3x FY16E EPS of INR1, 1.9x FY16E P/B

and 11.3x FY16E EV/EBITDA, assuming FY16 being year of recovery.

We will review our estimates post the con-call scheduled tomorrow at 11am

(# 91 22 3915 5460). Maintain

Buy.

22 May 2014

Ashok Leyland

Ashok Leyland| Story in Charts: Best play on CV cycle recovery

Past cycle suggest ~23% volume CAGR from bottom to top of the cycle

M&HCV Volumes ('000 units)

400

300

200

100

Volumes went 3.5x

or ~23% CAGR

IIP Growth (%) - RHS

Volumes decline Volumes to grow

~4% CAGR

~20% CAGR

Source: Company, MOSL

Expect AL’s MHCVs to rebound strongly over FY14-16E

Dom. Ind. MHCV ('000 units)

15.0

7.5

Growth (%)

20.0

Higher volumes, discount reduction to drive margins

EBITDA (INR m)

10.2

7.0

5.6

7.1

EBITDA Margins (%)

(22.7)

FY12

FY13

(25.5)

FY14

FY15E

FY16E

FY12

FY13

FY14

0.5

FY15E

FY16E

Source: Company, MOSL

Capex/investments to moderate significantly (INR m)

Capex

Depreciation

Focused on reducing debt levels (INR m)

54,000

2,530

1,578

38,642

10,000

1,250

Source: Company, MOSL

22 May 2014

Ashok Leyland

Ashok Leyland: an investment profile

Company description

Ashok Leyland (AL), the flagship company of Hinduja

Group, is the 2nd largest MHCV with ~26% market share

and the largest Bus manufacturer in India. To expand its

product offerings, AL has entered into 50:50 JV with

Nissan for LCVs and John Deere for construction

equipment.

Recent developments



Management indicated that worst is over with

recovery in volumes likely 2QFY15 onwards

Considering weak financial performance, AL has

refrained from declaring dividend for FY14 (first

time in 15 years, INR0.6/share in FY13).

At our current estimates, AL trades at 30.3x FY16E

EPS of INR1, 1.9x FY16E P/B and 11.3x FY16E

EV/EBITDA, assuming FY16 being year of recovery.

Maintain Buy with a target price of INR34 (2.2x

FY16E P/B).

We believe MHCV cycle is bottoming-out and could

rebound sharply. Typically, MHCV demand

rebounds sharply with economic recovery. During

the last two major cycles, MHCV demand posted a

CAGR of 23%.

Over the longer term, we expect MHCV industry to

grow at a healthy rate of 1.2-1.5x of IIP growth.

While several new entrants have entered the

Industry, the industry is expected to remain largely

duopolistic in nature over the near to medium term.

Valuation and view



Key investment arguments



Our interactions with industry participants indicate

that the worst seems to be over.

Typically, MHCV demand rebounds sharply with

economic recovery. During the last two major

cycles, MHCV demand posted a CAGR of 23%.

AL, best placed to play the CV up-cycle

Levers for stock's performance include sharp

volume-led EBITDA growth, significant FCF

generation through measured capex and

investments, balance sheet de-leveraging and

monetization of non-core assets.

Delay in recovery in the MHCV demand would

continue to impact performance.

Intensifying competition, particularly from Daimler

and Volvo-Eicher could materially alter the duopoly

industry structure.

-158.2

30.3

-1.1

5.8

18.0

11.1

EIM

32.3

21.5

54.9

50.7

26.8

32.0

21.9

14.0

TTMT

9.1

6.5

-7.3

60.5

26.1

27.8

3.8

2.7



Sector view



Key investments risks



Comparative valuations

P/E (x)

EPS Gr (%)

RoE (%)

EV/EBITDA (x)

FY15E

FY16E

FY15E

FY16E

FY15E

FY16E

FY15E

FY16E

EPS: MOSL forecast v/s consensus (INR)

MOSL

Forecast

-0.2

1.0

Consensus

Forecast

0.0

1.4

Variation

(%)

316.7

-27.6

FY15

FY16

Target price and recommendation

Current

Price (INR)

Target

Price (INR)

Upside

(%)

17.2

Reco

Buy

Shareholding pattern (%)

Mar-14

Promoter

Domestic Inst

Foreign

Others

41.6

13.2

26.6

18.6

Dec-13

41.0

12.2

27.8

19.0

Mar-13

38.7

13.1

31.4

16.9

Stock performance (1-year)

22 May 2014

Ashok Leyland

Financials and valuation (Standalone)

22 May 2014

Ashok Leyland

NOTES

22 May 2014

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ASHOK LEYLAND LTD

Disclosures

Ashok Leyland

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