Published on 15/12/2018 11:09:09 AM | Source: Motilal Oswal Securities Ltd

Buy Ashok Leyland Ltd For Target Rs. 147.00 - Motilal Oswal

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Adverse mix, discounts hurt margins; CEO to resign w.e.f. Mar’19

* 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 prebuy year. (d) Inventory at ~2 months (incl. 16-18 days at dealer level).

* Valuation view:

We lower FY19/20E EPS by 4%/1% as we cut our margin estimate. We expect a muted 2HFY19 performance due to a high base and some impact of liquidity issue. Maintain Buy with a TP of ~INR147 [9x Mar’21 EV/EBITDA + INR13/sh for stake in HLF post 20% HoldCo discount].


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