Ashok Leyland - 2QFY2016 Result Update - Angel Broking

Results miss estimates: Ashok Leyland (ALL)'s 2QFY2016 results have come in below our estimates on account of a lower-than-anticipated top-line. Revenue grew by a robust 54% yoy and by 29% on a sequential basis to Rs. 4,940cr, but still, is below our estimate of Rs. 5,281cr. Volumes grew strongly by 51% yoy, led by a sharp 64% yoy growth in the MHCV segment. However, the blended realization grew only marginally; it came in at Rs. 14.08 lakh/unit, up 2% yoy, declined 4% sequentially, and is below our estimate of Rs. 15 lakh/unit. Lower proportion of defence supplies and exports led to a sequential dip in the realisation. Operating margin at 12% is at a record five-year high, improving sharply by 490bp yoy, and is broadly in line with our estimates of 12.6%. Soft commodity prices, better product mix (with greater proportion of higher-tonnage vehicles) and cost control initiatives implemented by the company enabled ALL to report a double-digit margin. The adj net profit, at Rs. 292cr, missed our estimate of Rs. 355cr.

Outlook and valuation: ALL results were below estimates primarily due to lower realization on account of unfavourable mix. However, we expect the mix to be favourable in 2HFY2016 due to higher defence supplies and recovery in exports which would boost realisations. Given the improvement in fleet operators' sentiments due to revival in the economy, improvement in profitabilities due to falling diesel prices, and policy action initiated in the infrastructure and the mining space, the MHCV demand would continue to grow in double digits. The MHCV industry is clearly in an up-cycle and we estimate ~17% CAGR in volume over FY2015- FY2017. Also, a better mix (higher proportion of MHCVs), reduction in record high discounts due to volume growth, and operating leverage would result in margin expansion, going forward. We expect operating margin to improve from 7.6% in FY2015 to 11.6% in FY2017 (in line with the margins witnessed in the previous up-cycle in FY2011). We maintain our Buy on the stock with a revised price target of Rs. 111 (based on 13x FY2017 EV/EBIDTA).

Shares of ASHOK LEYLAND LTD. was last trading in BSE at Rs.87.55 as compared to the previous close of Rs. 86.8. The total number of shares traded during the day was 1909199 in over 6917 trades.

The stock hit an intraday high of Rs. 88 and intraday low of 84.2. The net turnover during the day was Rs. 165369282.

Source : Equity Bulls

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