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Published on 17/12/2018 10:57:20 AM | Source: Emkay Global Financial Services Ltd

Buy Ashok Leyland Ltd For Target Rs. 152.00 - Emkay

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Healthy quarter; maintain Buy

* Revenue grew 26% yoy to Rs76.1bn (Emkay est: Rs78.5bn; Consensus est: Rs77.4bn), supported by 27% growth in volumes. We expect revenue to grow at 17% over FY18-20E, driven by volume growth of 15%.

* EBITDA margin expanded 20bps qoq to 10.6% (Emkay est: 11%; Consensus est: 10.9%), which came in below our estimate due to commodity price inflation and adverse product mix. In order to mitigate the impact of commodity price inflation, the company increased product prices by ~3% in Sep-Oct’18.

* The resignation of Mr. Vinod Dasari, MD and CEO, has come as a negative surprise, and it can affect the performance of the stock in the near term. Chairman Mr. Dheeraj Hinduja has assumed an executive role until the appointment of a new MD and CEO.

* Mr. Hinduja has reiterated the company’s long-term targets, and focus remains on segments such as LCVs, Exports, Defense and Spares, with an objective to de-risk the company from the cyclicality of the domestic M&HCV business.

* We have marginally increased our FY19E EPS by 3% to Rs6.3 on a 2% increase in volume assumption. Our FY20E EPS remains broadly unchanged at Rs8.

* We have built in revenue/earnings CAGR of 17%/22% over FY18-20E, with an ROE of ~26% and an average free cash flow of ~Rs18bn. We maintain our Buy rating, with a TP of Rs152 (Rs151 earlier), based on 10x FY20E EV/EBITDA and the value of the investment in Hinduja Leyland Finance at Rs6/share.

Earnings call highlights

* Mr. Vinod Dasari, MD and CEO, has resigned after a 14-year stint with the company to pursue personal interests. He would continue to be with the company until March 31, 2019. In view of this development, Mr. Hinduja has stepped in as the Executive Chairman with immediate effect. He will continue in that position until a new MD and CEO is appointed.

* Long-term targets reiterated by Executive Chairman: 1) To be among Top-10 in global cargo M&HCVs and top-5 in global passenger MHCVs; 2) To pursue leadership position in India; 3) Increase the revenue share of non-cyclical businesses; and 4) Increase the contribution of the overseas business to one-third of revenues.

* Domestic M&HCV volume outlook for the industry: FY19 growth is expected at 15- 20%. FY20 growth is expected to be strong due to pre-buying and can be as high as ~30%. FY21 volume performance could be challenging, but continuing demand for Tippers and the potential implementation of the scrappage policy can provide support.

* New products: The company has introduced products based on in-line pumps in 6x2 and 8x2 multi-axle vehicles. The 41T rigid truck will be introduced in Q3FY19. New LCVs — with tonnage between 4T and 9T — will be introduced in the next 12-18 months.

* NBFC financing issues: Near-term demand could be adversely affected by the ongoing liquidity crunch. AL’s captive financing arm, Hinduja Leyland Finance, finances ~10% of its sales, and rest is financed by other banks and NBFCs. No bank or NBFC contributes more than 15% of the total financing.

 

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