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MOSL: ASHOK LEYLAND (Buy)-Higher staff cost, one-off costs, negative operating leverage hurt EBITDA margin

​Ashok leyland: Higher staff cost, one-off costs, negative operating leverage hurt EBITDA margin

(AL IN, Mkt Cap USD4.7b, CMP INR103, TP INR118, 15% Upside, Buy)

• Price increase offsets sharp decline in volumes: AL’s revenue declined 0.5% YoY (36% QoQ) to INR42.4b (in-line). The 8.6% YoY (40% QoQ) decline in volumes to 28.45k units was offset by 8.9% YoY (7% QoQ) increase in realization to INR1.49m (v/s our estimate of INR1.5m). AL took price increase of 10-14% to offset BS-4 and commodity cost pressures.
• Higher staff cost, one-offs, negative operating leverage impact margins: EBITDA margin declined 410bp YoY (380bp QoQ) to 7.2% (v/s our estimate of 10%), led by increase in staff cost, one-off marketing costs and negative operating leverage. EBITDA declined 36.5% YoY (58% QoQ) to INR3.06b (v/s our estimate of INR4.27b), translating into 59% YoY decline in adjusted PAT to INR1.2b (v/s our estimate of INR2.07b).
• Key takeaways from conference call: (a) Outlook – expects strong recovery in volumes from August 2017; (b) Planning price increase of 1% from August 2017; (c) Exports to grow at 25% in FY18; (d) Planning to double warranty to four years across product range; (e) Capex for FY18 at ~INR5b + Investments in subsidiaries and JVs; (f) Spare parts business grew 34% YoY and contributed ~6% to sales; targeting to increase spares contribution to 10-15% in few years; (g) Operating working capital under control at 8 days.