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Ashok Leyland's Q4FY18 results (Outperformer) - Muted operating performance; Positive outlook

4QFY18 result highlights

PAT above est; Operating performance a tad weaker: Ashok Leyland’s Q4FY18 PAT at Rs6.7bn (+40% yoy) was ~3% ahead of consensus. While the operating margins were a bit weaker than expectations, the other income (+43% yoy) was higher and lower tax rate (28.4% in 4QFY18 v/s 31.6% in 3QFY18).

Revenues in-line; Margins a bit weak: Revenues at Rs 87.7bn (in-line) grew by 33% yoy due to a 23% yoy jump in volumes on a low base (q4FY17 had been impacted by demonetization). However, realizations declined 2% qoq reflecting weaker product mix and a lower proportion of defence business. EBITDA margins at 11.8% (up 7-bps qoq) were below estimates (consensus: 12.3%). While the RM cost showed a modest uptick on account of higher commodity costs, the other expenses rose 60bps qoq despite a strong 23% sequential improvement in revenues.

Concall highlights: (a) Management expects M&HCV industry to grow by  10-12% in FY19 led by shift to higher tonnage vehicles (+25 Tons) as hub and spoke model gains traction. Growth in FY20 will be led by pre buying in 2HFY20 on shift to BSVI (b) AL has taken a price increase of 2% in April-18 .It indicated it will increase prices going forward to offset RM cost increase (c) Discounting levels had come off in 4QFY18 sequentially. However, discounting has firmed up post March-18. (d) Management indicated that impact of relaxation in overloading ban in UP and Rajasthan has limited impact of 1-2% for AL volumes. (e) BS VI is likely to lead to 6-8% price increases on average.(f) AL has planned an investment of Rs4bn over the next 3 years in the LCV business to launch new products up to 7.5 tonnes in FY20.

Key positives: Higher other income and lower tax rate

Key negatives: Decline in realisations sequentially and lack of operating leverage benefits

Changes in estimates: We cut our FY19/20 estimates by 8%/4% respectively

Valuations & view

Our analysis of peak to peak volume growth suggests that the CV cycle may not have yet peaked. Further, Ashok Leyland continues to enhance its competitive position with new product launches/ expansion of its dealership network. Hence, we maintain an outperformer rating with a target price of Rs160. However, we note that risks from key macro-economic factors (rising crude oil prices, higher interest rates) could potentially place at risk the high M&HCV volume growth rate expectations.