MOSL: ASHOK LEYLAND (Buy)-Mix, price hike and LCV merger drive margins-Guides for muted 1HCY19
Ashok Leyland: Mix, price hike and LCV merger drive margins; Guides for muted 1HCY19
(AL IN, Mkt Cap USD3.3b, CMP INR80, TP INR110, 37% Upside, Buy)
- Lower volume and realization impacts revenues: Volumes declined 6% YoY (-16% QoQ) as M&HCV volumes declined 16.5% YoY, while LCV volumes grew 28% YoY. Realizations declined 1.5% QoQ (-6% YoY) to INR1.44m/unit, (est. of INR1.45m), reflecting weaker M&HCV mix and higher discounts. AL took a price hike of ~1.5% in Nov'18. Revenue grew 12% YoY (-17% QoQ) to INR63.3b (in-line). For 9MFY19, revenue/EBITDA/PAT grew 15%/22%/45%.
- Margin beat led by mix, price hike and LCV merger: Gross margin of 29.9% as against our est. of 27.8% (+200bp QoQ, -40bp YoY), was led by product mix (higher spares and LCV sales). However, higher other expenses at 11.7% (est. 11%) partially diluted impact of the rich mix, resulting in EBITDA margin decline of 60bp QoQ (-140bp YoY) to 10.3%, as against our est. of 8.6%. Further, lower tax due to the LCV merger benefit of INR840m restricted PAT decline to 21% YoY at INR3.9b, as against our est. of INR3b.
- Key takeaways from the concall: (a) CV Industry growth guidance was maintained at 10-15% for FY19; however, the next six months are expected to be muted. Expect strong growth due to BS6 related pre-buying in FY20, to be reflected from 3QFY20, (b) Expect minimum 150bp cost savings due to modularity program in FY21, (c) There was a price hike of 2% in Jan'19, in addition to the hike of 1.5% in Nov'18, (d) LCVs revenue contribution is now higher than buses (9% v/s 7% for buses in 3Q); focus is on plugging the product gap in LCVs to drive market share, and (e) Spares business is growing at 28-30% and focus is to increase penetration further from 30% for off-warranty vehicle to ~60%.
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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