Ashok Leyland Ltd (ALL) reported Q4 profit after tax of R2.3 bn, which was above our estimate as the Ebitda (earnings before interest taxes depreciation and amortisation) margin came in double digits at 10.1% (+310 basis points, quarter-on-quarter) due to the benefits of operating leverage.
View: While Ashok Leyland (Neutral) is benefitting from the recovery in the CV (commercial vehicle) cycle, we suggest investing in the stock on price corrections, given that valuations at current levels are elevated.
Demand Outlook: The management has guided for industry growth of 10-15% in FY16e. A pick-up in mining/infrastructure activity will drive growth. ALL expects to grow ahead of the industry, given its rising exports. Over the year, Ashok Leyland’s domestic market share expanded to 28.5% in the M/H (medium/ heavy) CV segment (+270 bp year-on-year), driven by healthy growth in the southern markets as well as market share gains in other regions.
Defence: Currently, the defence segment accounts for $100m in revenue (5% of sales). The management expects this segment to be a growth driver over the medium term as the government is expected to grant new orders.
Margins: While the Ebitda margin at 10.1% (+310 bp q-o-q) benefitted from operating leverage, the benefits from commodity prices will likely flow through in FY16e. While discounts remain elevated in the industry, Ashok Leyland has been able to take price hikes over the quarter. Currently, the Uttarakhand facility accounts for 35-40% of production.
Subsidiaries/JVs: The company took an impairment of R2,242m relating to the write-down on certain platforms at the Nissan JV. They are in the process of identifying a buyer for their German subsidiary–Albonair.
Debt levels: The working capital over the quarter turned negative, which has resulted in net debt reducing to R.26 bn. The gearing ratio has fallen to 0.6x (times).
Price target: We are raising our EPS (earnings per share) estimates by 25% over FY16/17 to factor in the healthy Q4 financials/ outlook. We set a revised Mar’16 PT (price target) of R70, based on 14.5x forward P/E (at a 25% premium to the historical average, the multiple factors in the CV recovery coupled with improved operating performance/market share at the company).
We would invest in the stock on price corrections (valuations moderate by 10% as the risk-reward will then be more favourable).
Key risks: include a sharp recovery in the investment cycle on the upside, a favourable response to new launches by competition on the downside.