Ashok Leyland - LKP Securities

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Feb 2, 2018 - Reduction in capex guidance may negate the reducing positives from the PN plant. Reduction in debt may add
February 2, 2018

Outperformer

Ashok Leyland Industry: Auto and Auto Components | Industry View: Positive

Result Update

Multiple macro levers to act as drivers Significantly higher than expected set of numbers

Stock Data Current Market Price (₹)

122

Ashok Leyland (ALL) reported 60.5% yoy and 17.6% qoq growth in the topline. Volume

Target Price (₹)

144

growth was at 42% yoy and the realizations were up by 7% yoy. The company reported a slight

Potential upside (%)

0.3% cut in market share as there was a supply chain constraint across the industry. Margins

Reuters

however, came in at 11.1%, 80 bps higher yoy, and 80 bps higher qoq despite heavy discounts

18 ASOK.BO

Bloomberg

AL.IN 1

FV (₹)

prevailed in the quarter. A better product mix and operating leverage led to the margin

Market Cap Full (₹ bn)

outperformance. RM prices went up during the same time along with employee costs. Below

52-Week Range (₹)

364 133 / 81

the operating level, other income fell qoq, while depreciation expenses grew 13% yoy. Due to reduction in tax sops in Pantnagar with application of CGST, the tax rate moved up to 31.7%. Net profits surged by 80% yoy on adjusted basis at ₹4.5 bn. MHCV cycle revival becomes starker, macro positives to augment well..

What’s Changed FY2018E EPS (₹)

From 4.15 to 5.13

FY2019E EPS (₹)

From 5.90 to 7.30

FY2020E EPS (₹)

9.63

Ashok Leyland (ALL)’s volumes grew by 42% on good monsoon and macro-economic

..

development catching speed. The discounting was also high in this quarter as competition

Shareholding Pattern

implemented huge discounts, which made ALL to go without taking any price hikes Additionally, strict anti-loading laws implemented in UP and Rajasthan led to higher demand for trucks in these two states. Demand shift towards higher tonnage trucks (>37 T) led to some supply constraints in the quarter across the industry. But management mentioned that going forward, this will become smooth as there is flexibility in the assembly lines. In some of the

From 127 to 144

12 month Price Target (₹)

Insurance 1.2%

Others 14.7%

FI's / Banks 4.7%

northern states like UP and NCR region road building activity has picked up pace, due to which

Promoter 51.3%

FPI 22.6%

MHCV demand is increasing. Some of the companies in the FMCG, chemical, oil sectors have

MF's 5.5%

asked the MHCV players to upgrade their fleet, which would stimulate demand. There has been a pick up in the mining activities too in the country which is driving tipper demand. Going forward, new launches may help volumes to recover along with GOI’s planned initiatives regarding various infrastructure projects such as the Bharat Mala project and good monsoon leading to higher agricultural produce. On the LCV side of the business, the new launch of

Fiscal YE YE Mar

FY17

Revenues (₹bn)

FY19E

FY20E

11.0%

9.8%

10.8%

11.4%

Dost+ along the existing LCVs Boss and Guru are elevating the LCV business (market share of

PAT (%)

6.1%

5.5%

6.3%

7.0%

28-29% up from 13-14% a year ago). On the exports front the company targets to increase its

Adj EPS (₹)

4.75

5.13

7.30

9.63

12.7%

7.9%

42.3%

32.0%

contribution from current 10% to 15% in the next 3-5 years by anchoring strongly in Africa, CIS

EBITDA (%)

FY18E

200.19 265.24 327.72 391.60

EPS growth (%) P/E (x)

25.7

23.8

16.7

12.7

countries, Middle East and Latam and entering new markets like Far East. Through further

P/B(x)

5.7

5.0

4.2

3.5

expansion of network the Aftermarket revenues (20% market share, which the company

EV/EBITDA (x)

16.0

13.5

9.8

7.6

ROCE (%)

22.1%

24.9%

32.4%

37.0%

ROE (%)

20.0%

20.8%

25.2%

27.7%

1.4%

1.7%

2.4%

3.2%

expects to take upto 50% in a year or two) are also targeted well by the company now. In the defense business, the company has secured government tender under which ALL will add ₹500-600 cr to the topline. While Q4 may lead to some uncertainty considering high base of last year when BS IV related prebuying had taken place. However, with the kind of momentum taking place currently, we expect this to have a little impact on the volumes. In line with the strong Q3, we have increased our volume outlook at 17.2%/15.9%/13.8% for FY18E/19E/20E. Margins picture looks lucrative on product mix and operating leverage The company’s transition to IEGR engines post BS IV implementation led to price hike to the tune of 10-14% in Q1. But in Q2 and Q3, the industry discount level moved up leading to arrest of any price hikes. However, there was a steep growth in volumes as the CV cycle started moving up from August and operating leverage led to a surge in margins by about 100 bps

Ashwin Patil [email protected] +91 22 6635 1271

Dividend yield (%)

Relative Price Performance 150 140 130 120 110 100 90 80 70 60 Feb-17

Jun-17 Ashok Leyland

Oct-17 S&P Bse Sensex

Ashok Leyland

qoq and 80 bps yoy. This was despite input costs tightening. The company is done with disposing off the BS III vehicles which are just 500-600 to be exported as compared to 10,000 at the start of FY 18. This would minimize negative impact on margins. Higher volumes going forward may lead to better product mix (demand shift towards >37T trucks, tippers and MAVs). Increasing RM prices may have a lesser bearing on the margins as volumes are expected to surge on low base. High margin vehicle demand from defense sector may further bolster margins. Defying the industry trend, ALL has taken a price hike of 1-1.5% in January, which would further assist margin growth. Reduction in capex guidance may negate the reducing positives from the PN plant. Reduction in debt may add to this and augur well at the bottomline. Financial Highlights Q3 FY18

Q2 FY18

% qoq

Q3 FY17

% yoy

Total income

71,132

60,469

17.6%

44,309

60.5%

Raw Material Cost

50,818

43,074

18.0%

31,338

62.2%

4,918

4,825

1.9%

3,616

36.0%

All fig in ₹ mn

Staff Cost Other Expenses

7,518

6,452

16.5%

4,813

56.2%

Total Expenses

63,254

54,351

16.4%

39,767

59.1%

EBITDA

7,877

6,118

28.8%

4,542

73.4%

EBITDA margin (%)

11.1%

10.1%

100 bps

10.3%

80 bps

380

556

-31.7%

235

61.4%

1,350

1,411

-4.3%

1,193

13.2%

335

410

-18.3%

311

7.6%

PBT

6,572

4,853

35.4%

3,274

100.8%

Total tax

2,080

1,484

N/A

778

N/A

Adjusted PAT

4,492

3,369

33.3%

2,496

80.0%

-

(26)

N/A

(637)

NA

4,492

3,342

34.4%

1,858

141.7%

Other Income Depreciation Interest

Exceptional items Reported PAT

Outlook and valuation Volume growth gained pace in Q3 as several structural positives came into action. Ban on overloading in the country’s two big states of UP and Rajasthan, demand from various corporates to improve the fleet, mining activity gathering momentum and defense order from government will keep driving MHCV growth. In occurrence of implementation of cash for clunkers scheme, the MHCV business may get even higher benefit. LCV business has been a star performer for ALL. Now with a 28-29% market share the company with its strong product portfolio targets to capture bigger pie of the high demand market. On the margin front, better product mix in the form of higher tonnage vehicles, price hikes and operating leverage may reduce the impact of higher input costs. At the bottomline, reducing benefits from the PN plant may get offset by lower capex and debt. We remain positive on the stock while introducing FY 20E estimates and increasing FY18E and FY19E estimates. We now have a target of ₹144 valued at 15x FY20E earnings (PE of 12.7x at current levels). Q3 FY18

Q2 FY18

Q1 FY18

Q4 FY17

Q3 FY17

Q2 FY17

Q1 FY17

Q4 FY16

Avg Price Realisation (net)

1,412,660

1,479,398

1,494,175

1,398,569

1,320,243

1,346,722

1,663,838

1,727,454

Material cost / unit (₹)

All figs in ₹

1,092,653

1,053,819

1,037,455

1,006,013

954,373

937,155

1,192,945

1,232,766

Staff cost / unit (₹)

105,743

118,046

154,302

87,031

110,117

110,413

96,211

148,933

Other Expn / unit (₹)

161,646

157,856

194,482

151,271

146,583

174,364

179,509

189,317

1,360,042

1,329,721

1,386,239

1,244,315

1,211,073

1,221,933

1,468,665

1,571,015

169,374

149,677

107,937

154,254

138,330

160,449

212,618

192,609

96,577

82,419

44,616

132,179

75,999

86,091

128,820

94,470

Total Expn / unit (₹) EBITDA per unit PAT per unit

LKP Research

2

Ashok Leyland

Financials Income statement

Balance sheet FY17

FY18E

FY19E

FY20E

Total Revenues

200,186

265,243

327,718

391,600

EQUITY AND LIABILITIES

Raw Material Cost

139,572

188,323

229,403

272,162

Shareholder's funds

Employee Cost

15,309

21,750

27,856

32,503

Share capital

7,536

7,536

7,536

7,536

Other Exp

23,279

29,177

35,066

42,293

Reserves and surplus

50,879

59,634

72,092

88,539

EBITDA

22,025

25,994

35,394

44,642

Total networth

61,261

70,097

82,555

99,002

11.0%

9.8%

10.8%

11.4%

Non current liabilities Long term borrowings and provisions Deferred tax liabilities

12,788

10,988

9,188

6,888

1269

1269

1269

1269

YE Mar (₹.mn)

EBITDA Margin(%) Other income

1363

1650

1775

1900

Depreciation

5,179

5,249

4,971

4,681

Interest

1554

1400

1207

950

16,655

20,995

30,991

40,912

8.3%

7.9%

9.5%

10.4%

3,137

6,403

10,227

13,501

13,518

14,592

20,764

27,411

6.8%

5.5%

6.3%

7.0%

PBT PBT Margin(%) Tax Adj PAT Adj PAT Margins (%) Exceptional items

(1,287)

0.0

0.0

0.0

PAT

12,231

14,592

20,764

27,411

6.1%

5.5%

6.3%

7.0%

PAT Margin (%)

YE Mar (₹. mn)

FY17

FY18E

FY19E

FY20E

Current liabilities Short term borrowings

1986

2186

2286

2786

Current liabilities and provisions

35,365

46,791

56,519

67,543

Other current liabilities

24,460

34,155

43,995

54,717

Total equity and liabilities

137,994 166,351 196,677 233,069

ASSETS Net block

46,562

51,313

53,342

55,661

Capital work in progress

1,576

3,076

4,076

5,076

Intangible assets

3,630

5,130

6,630

7,130

Non current investments

Key Ratios

Long term loans and advances

627

427

327

177

YE Mar

Long term investments

27,006

30,506

34,506

39,406

Total non current assets

79,400

90,451

98,880 107,450

FY17

FY18E

FY19E

FY20E

4.75

5.13

7.30

9.63

Current assets

6.6

7.0

9.0

11.3

Inventories

25,011

28,377

37,710

47,722

34.8

Trade receivables

8,599

13,807

17,957

23,603

Cash and cash bank

9,119

9,624

11,710

17,757

Per Share Data (₹) Adj. EPS CEPS BVPS DPS

21.5 1.7

24.6 2.1

29.0 2.9

3.9

Growth Ratios(%)

Short term loans and advances

Total revenues

5.7%

32.5%

23.6%

19.5%

Other current assets

EBITDA

-2.3%

18.0%

36.2%

26.1%

Total current assets Total Assets

35

145

180

100

7,060

10,174

13,468

17,166

58,595

75,899

97,796 125,619

137,994 166,351 196,677 233,069

PAT

12.7%

7.9%

42.3%

32.0%

EPS Growth

12.7%

7.9%

42.3%

32.0%

PE

25.7

23.8

16.7

12.7

YE Mar (₹. mn)

P/CEPS

18.6

17.5

13.5

10.8

PBT

P/BV

5.7

5.0

4.2

3.5

Depreciation

EV/Sales

1.8

1.3

1.1

0.9

Interest

16.0

13.5

9.8

7.6

Inventory days

45.6

55.0

60.0

64.0

Other operating activities

Recievable Days

15.7

19.0

20.0

22.0

Payables day

55.7

58.0

58.0

59.0

ROCE

22.1%

24.9%

32.4%

37.0%

Other investing activities

ROE

20.0%

20.8%

25.2%

27.7%

Cash flow from investing (b)

Dividend payout

40.0%

40.0%

40.0%

40.0%

Inc/dec in borrowings

(9,842)

(1,800)

(1,800)

1.4%

1.7%

2.4%

3.2%

Dividend paid (incl. tax)

(4,893)

(5,837)

(8,305) (10,964)

(1,400)

(1,207)

Valuation Ratios (x)

EV/EBITDA

Cash Flow

Operating Ratios (Days)

Profitability Ratios (%)

Dividend yield Source: Company, LKP Research

FY17

FY18E

FY19E

FY20E

12,231

14,592

20,764

27,411

5,179

5,249

4,971

4,681

1,554

1,400

1,207

950

Chng in working capital

(2,328)

1,446

12,636

6,151

Tax paid

(1,070)

20,350

481

10,352

Cash flow from operations (a)

21,547

36,634

29,832

36,044

Capital expenditure

(3,783) (11,500)

(8,000)

(8,000)

Chng in investments

Other financing activities Cash flow from financing (c) Net chng in cash (a+b+c) Closing cash & cash equivalents

LKP Research

(6,403) (10,227) (13,501)

5,981

(10,959)

(3,000)

(3,500)

(3,500)

(249)

(6,833)

(4,933)

(4,283)

(14,991) (21,333) (16,433) (15,783)

(1,554) (16,288)

(2,300) (950)

(9,037) (11,313) (14,214)

(9,732)

6,264

2,086

6,047

3,360

9,624

11,710

17,757

3

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