MOSL: ASHOK LEYLAND (Buy)-Above est. led by cost control-Focus on reducing inventory and cost
ASHOK LEYLAND: Above est. led by cost control; Focus on reducing inventory and cost
(AL IN, Mkt Cap USD2.9b, CMP INR69, TP INR95, 38% Upside, Buy)
- High discounts and mix impact realizations: AL's volumes declined 6% YoY; M&HCV volumes dropped 10% YoY while LCV volumes grew 11% YoY. Realization declined ~3.5% QoQ/YoY to INR1.43m/unit (est. INR1.47m/unit), reflecting lower contribution of M&HCV and defense, and higher discounts. Net revenue dropped 9.2% YoY to INR56.8b (v/s est. INR58.3b).
- Margins beat on lower staff costs: RM costs declined 280bp QoQ (+100bp YoY) to 70% (in-line), reflecting favorable mix and lower commodity prices, but higher discounts. EBITDA margins declined ~130bp YoY (-170bp QoQ) to 9.4% (v/s est. 8.5%). Margin beat was driven by lower-than-estimated staff costs (flat YoY, -12.7% QoQ). Higher tax restricted adj. PAT to ~INR2.4b (v/s est. ~INR2.4b), a decline of ~44% YoY (~63% QoQ).
- Key takeaways from concall: (a) Demand environment uncertain; demand should remain weak until underlying businesses don't recover. (b) Exports have been a challenge due to end-market issues. Focus is on gaining traction in project orders. LHD vehicles should be ready in couple of quarters, thereby expanding addressable markets. (c) Target of reducing cost by ~INR5b (or 1.5-2pp of sales) by revisiting all cost heads. (d) Weak demand has led to inventory build-up of 1-1.5 months at dealer level. AL will calibrate production in 2QFY20 to normalize inventory by Sep'19.
- Valuation: We cut our EPS estimate for FY20/FY21 by 25%/18% to factor in volume weakness. Unlike the previous cycles, AL is currently on a strong footing (lean cost structure and net cash balance sheet) and is focused on adding new revenue/profit pools. Valuations at 15.7x FY21 EPS and 6.9x EV/EBITDA are reasonable in view of the downcycle in earnings. Maintain Buy with TP of INR95.
Ashok Leyland Limited is a holding company. The Company is engaged in Commercial vehicles and related components. Through its subsidiaries, it is engaged in manufacturing and trading in Medium and Heavy Commercial Vehicle, Light Commercial Vehicles, Passenger vehicles, automotive aggregates, vehicle financing and engineering design services. It offers a range of 18 to 80-seater buses under categories, such as city application and electric buses. It offers a range of trucks, which include long haul trucks, mining and construction trucks, and distribution trucks. It designs, develops and manufactures defense vehicles for armed forces. It offers Light Vehicles, which include DOST, PARTNER, STiLE and MiTR. It offers power solutions for electric power generation, agricultural harvester combines, earth moving and construction equipment, and marine and other non-automotive applications. It has operations in India, Sri Lanka, Bangladesh, Mauritius, the Middle East and Africa.
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