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MOSL: ASHOK LEYLAND (Buy)-In-line-HFL’s merger drives tax write-back, boosting PAT-Upgrade EPS

​Ashok Leyland: In-line; HFL’s merger drives tax write-back, boosting PAT; Upgrade EPS

(AL IN, Mkt Cap USD4.2b, CMP INR92, TP INR117, 28% Upside, Buy)

• Price increase drives revenues: AL merged with Hinduja Foundries (HFL) w.e.f. 1 October 2016. Net revenues rose 10.8% YoY to INR66.2b, as volumes grew by ~8% YoY (+45% QoQ) and realizations by ~2.1% YoY to INR1.39m/unit (est. of INR1.33m) due to price hikes and HFL merger. FY17 revenues grew 6%, driven by 3.4%/2.3% increase in volumes/realizations.
  
• Lower exports, defense revenue restrict EBITDA margin: EBITDA declined 7% YoY (+61% QoQ) to INR7.3b (in-line), translating into a margin of 11% (est. of 11.5%). Adj. for HFL merger, EBITDA margin was in line at 11.2%. Higher commodity costs and lower revenues from exports/defense resulted in RM cost increasing 150bp YoY (+250bp QoQ). AL had tax write-back of ~INR2.16b, as it fully availed benefit of HFL’s accumulated losses. Adj. PAT declined 16% YoY to INR4.28b (in-line). AL provided for non-performing investments (Optare and Albonair), resulting in net EO loss of ~INR3.5b.
  
• Key takeaways from the call: a) Outlook: Domestic CV industry to grow 10-15% in FY18, based on visibility on infrastructure and mining, although 1Q would be muted. b) Price increase of 4% from mid-Feb'17 and ~11.5% from Apr-17 which largely covers cost inflation. c) Net debt reduced to ~INR4b (net cash excluding HFL’s debt). d) BS-3 Inventory: AL has converted ~2,000 trucks (1,400 already cleared by ARAI) of total ~12k inventory. e) Capex in FY18 at INR5-5.5b (including investments).