MOSL: ASHOK LEYLAND (Buy)-Adverse mix, discounts hurt margins-CEO to resign w.e.f. Mar’19
Ashok Leyland: Adverse mix, discounts hurt margins; CEO to resign w.e.f. Mar’19
(AL IN, Mkt Cap USD4.8b, CMP INR119, TP INR147, 24% Upside, Buy)
- Volumes driven by M&HCV, LCV: Volumes grew ~27% YoY (+23% QoQ), led by M&HCV (volumes up 22% YoY) and LCV (volumes up 42% YoY) segments. Realization declined 1.3% QoQ (-1.2% YoY) to INR1.46m/unit (our estimate: ~INR1.48m), reflecting a weaker mix. Revenue grew 25% YoY (+22% QoQ) to INR76b (our estimate: INR76.7b). We estimate ~16%/~25% growth in revenue/PAT in FY19, implying residual growth of 6%/-2% YoY for 2HFY19.
- Mix, discounts hurt profitability: Gross margin of 27.3% (-310bp QoQ, -190bp YoY) was below our estimate of 29.5%, led by a weaker mix (lower tonnage and defence sales) and higher discounts. However, lower other expenses (lower warranty cost) diluted the impact of weaker mix, resulting in EBITDA margin expansion of 20bp QoQ (+50bp YoY) to 10.6% (our estimate: ~11.1%). However, lower other income and higher tax led to PAT of ~INR4.7b (+41% YoY; our estimate: ~INR5.2b).
- Mr Dasari, MD & CEO, will resign w.e.f 31st March 2019. Mr Dheeraj Hinduja, Chairman, will take over as Executive Chairman with immediate effect. Mr Hinduja will play an active role during the transitory period.
- Key concall takeaways: (a) Demand has slowed down over the last few weeks, but this is likely to be temporary; some weakness may persist over the next six months in the run up to the general elections. (b) Discounting remains very high, with 2QFY19 average discount of ~INR400-410k/unit (v/s ~INR375k in 1Q). (c) Global experience of transition to EURO 6 suggests 30% growth in pre-buy year. (d) Inventory at ~2 months (incl. 16-18 days at dealer level).
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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