'Equalweight' on Ashok Leyland, but target price cut: Barclays

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Ashok Leyland’s Q2 results were better than expectations with revenues of Rs 2,550 crore. (AP) Ashok Leyland’s Q2 results were better than expectations with revenues of Rs 2,550 crore. (AP)
SummaryWe maintain 'equalweight' rating on Ashok Leyland, but reduce our price target to Rs 14

We maintain 'equalweight' rating on Ashok Leyland, but reduce our price target to R14 (R15 earlier) given the sluggish volumes in H1 (down 25%). As a result, we once again cut our volume estimates by 11% and 8% for FY14e and FY15e. Our revised price target is based on 6x EV/ebitda + R3 per subs), with profits declining by 46% and 19% for FY14e and FY15e.

Ashok Leyland’s Q2 results were better than expectations with revenues of Rs 2,550 crore (versus expectation of R2,390 crore) and an ebitda margin of 2.2% (versus expectation of 1%). The improvement in margin was primarily on back of higher realisations and cost reduction. However, higher-than-expected interest costs partly offset the operational gains resulting in a net PBT loss of Rs 140 crore (in line with expectation).

Volumes showed sequential improvement, but not enough. In Q2, M&HCV volumes stood at 15,913 units (up 7% q-o-q, down 25% y-o-y), resulting in domestic market share improving from 23% in Q1 to 28% last quarter. Management indicated that the sharp decline in industry volumes (down 25% in H1 FY14) continued to create pricing pressures with average discounts rising to R1.7 lakh per unit last quarter from R1.4 lakh per unit in Q1.

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