Ashok Leyland - Good but not good enough - Elara Capital

• Rating : Sell
• Target Price : INR 53
• Downside : 12%
• CMP : INR 60 (as on 30 April 2010)

Good but not good enough

Adjusted EBITDA margins at 13.2% below expectations

There was no significant jump in in Ashok Leyland's (AL) EBITDA margins (up just 180 bps QoQ) despite clocking substantially higher volumes (up 68% QoQ and more than doubled YoY). The company maintained that there was a forex loss related one-off in its other expenses for the quarter to the tune of INR 280mn. However, it now appears like a recurring feature since the forex loss/gain has been booked under this head for all recent quarters. Hence, we treat it as an operating expense. We have treated Auto Expo and Uttarakhand plant related expenses of INR100 mn as one-offs hence the EBITDA margins to the extent has gone up 30 bps.

EBITDA margins peak in Q4FY10, volumes closer to peak too

We take this quarter as a peak quarter as far as the company's EBITDA margins are concerned since input costs have already started to inch northwards while the capacity utilisation is set to drop going forward with a drop in volumes sequentially, and an increase in capacities (the company's guidance of 10% plus EBITDA margins substantiate our stance). Volumes, going forward, are unlikely to show any major improvement from Q4FY10's monthly run-rate (9,000 units per month).

Outlook and valuation; expensive at 15x FY12

The company has built in excess capacities (capacity of 150,000 units p.a as against our sales volume forecast of 75,000 and 85,000 units for FY11E and FY12E, respectively). This, we believe, would restrict its PAT growth as higher interest cost (result of additional debt to fund Uttarakhand plant) and even a higher depreciation cost (once the additional capacities are capitalised) would pull back the improvement at the operating level. We revise our EPS estimate for FY12E marginally upwards to INR4. The stock is currently trading at 15X FY12 earnings which appear expensive. We change our recommendation from Reduce to 'SELL' with a target price of INR 53 (13x FY12 earnings), 12% downside from CMP of INR 60.

Source : Equity Bulls

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