Short term headwinds, structural story intact; Accumulate November 09, 2017 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating Accumulate Price Rs115 Target Price Rs125 Implied Upside 8.7% Sensex 33,251 Nifty 10,309 (Prices as on November 09, 2017) Trading data Market Cap. (Rs bn) 328.4 Shares o/s (m) 2,845.9 3M Avg. Daily value (Rs m) 1299.9 Major shareholders Promoters 51.37% Foreign 23.41% Domestic Inst. 10.45% Public & Other 14.77% Stock Performance (%) 1M 6M 12M Absolute (7.0) 39.2 26.3 Relative (11.4) 28.1 4.2 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 5.1 6.1 (16.4) 2020 6.5 7.2 (9.3) Price Performance (RIC: ASOK.BO, BB: AL IN) (Rs) 140 120 100 80 60 40 20 0 Nov 16 Jan 17 Mar 17 Source: Bloomberg May 17 Jul 17 Sep 17 Nov 17 Ashok Leyland s (AL) Q2FY18 operating performance slightly missed estimates with EBITDA margin lowering 150bps YoY (however, up 290bps QoQ) to 10.1% (PLe: 11%). Operating margins for the quarter were adversely impacted on account of (a) heavy discounting by competitors, (b) aggressive pricing for exports in order to push the unsold BS III inventory (c) loss of some excise duty benefits (~5%) from the Pantnagar plant owing to GST implementation. Overall volume growth for AL in Q2 was ~23% YoY and realisations grew 6.7% YoY, leading to a strong revenue growth of ~31% YoY to Rs60.5bn (PLe: Rs62bn). M&HCV growth during the quarter was ~24% YoY where LCVs grew ~18% YoY. While the management expects the M&HCV industry to grow 5 10% YoY in the current fiscal, we expect ~5% M&HCV volume growth for AL in FY18e. The company also booked a minor one off loss in the quarter adjusting for which, AL s profit in Q2FY18 was Rs3.4bn, up 17% YoY (however, marginally lower than expected). With strong recovery in volumes in Q2 and further recovery expected in Q3 (while Q4FY18 may be impacted by the high base on account of pre buying in Q4FY17), AL should register decent growth in the current fiscal. The company is however, likely to report further improved performance in FY19/20, on the back of strict overloading restrictions, better freight availability, increased government focus on infrastructure spend and pre buying ahead of BS VI implementation in 2020. In the longer term, management also expects significantly higher contribution from Non India CV segments, i.e. defence and exports. With the CV cycle unlikely to have peaked, we believe that volume growth should recover in H2FY18E. We maintain an Accumulate rating on the stock with a target price of Rs125 (based on an 11x Sep19E EV/EBITDA). Key financials (Y/e March) 2017 2018E 2019E 2020E Revenues L s Q2FY18 (Rs m) vehicle sales grew a 200,187 strong 22.6% 220,401 YoY to ~41K 251,520 units. Of 294,171 this, Growth M&HCVs (%) surged ~24% YoY (up a robust 5.7 58% QoQ) while 10.1 LCVs were 14.1 higher ~18% 17.0 EBITDA YoY. (Rs m) 22,025 22,689 26,865 32,726 PAT (Rs m) 15,585 12,511 14,450 Contd...2 18,411 EPS (Rs) 5.5 4.4 5.1 6.5 Growth (%) 29.9 (19.7) 15.5 27.4 Net DPS (Rs) 1.6 1.8 2.0 2.3 Profitability & Valuation 2017 2018E 2019E 2020E EBITDA margin (%) 11.0 10.3 10.7 11.1 RoE (%) 27.0 19.4 20.2 22.8 RoCE (%) 20.7 15.6 16.7 19.1 EV / sales (x) 1.7 1.5 1.2 1.0 EV / EBITDA (x) 15.5 14.3 11.5 9.0 PE (x) 21.1 26.2 22.7 17.8 P / BV (x) 5.4 4.8 4.4 3.8 Net dividend yield (%) 1.4 1.5 1.7 1.9 Source: Company Data; PL Research Q2FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
With volumes growth of ~23% YoY and realisations improving 6.7% YoY, AL posted a strong 30.8% YoY rise in revenues to Rs60.5bn (PLe: Rs62bn). Operationally, the performance was lower than expected as EBITDA margin lowered ~150bps YoY (however, was up 290bps QoQ) to 10.1% (PLe: 11%). EBITDA growth for the quarter was at 14% YoY to Rs6.12bn. EBITDA per vehicle was however, dipped 7% YoY (up ~39% QoQ). The decline in EBITDA margin was mainly due to lower gross margins, down 240bps YoY and 180bps QoQ. Staff costs were stable YoY but lower 230bps QoQ while other expenses as a % of sales were down 190bps YoY and 230bps QoQ respectively. Gross profit per vehicle was lower ~5% YoY in Q2FY18. The company also booked a one time loss amounting to Rs26mn on account of swap contracts, adjusting for which, the profit was at ~Rs3.4bn, up 17% YoY. Conference call highlights The management expects the M&HCV industry to grow by 5 10% YoY in the current fiscal where AL is also expected to grow in line with the industry (we are factoring in ~7% YoY growth in FY18e). Pantnagar plant excise benefits (expiring in Mar 20) which were ~13% before GST have now gone down to 8.2% (decision regarding the SGST portion forming 42% still pending). Average discount per truck for the company over Q2FY18 was ~Rs350K against ~Rs320K in Q1FY18, while other players have given discounts upto Rs450K in the quarter. The company has taken a 1% price hike in Oct 17 where industry discounts seem to continue in Q3 too. Exports for the quarter were mainly to Sri Lanka, Bangladesh and UAE, at low margins in order to push the unsold BS III inventory (75% cleared now). The LCV segment earned ~8 9% EBITDA margins in the quarter and the company has planned to launch 6 7 new products in the category over the next 12 months. Revenue from spare parts for the quarter stood at ~Rs3bn again. Capex guidance over the next 3 years stands at ~Rs5 6bn per year, mainly on account of debottlenecking of capacities, new launches, etc. Hinduja Foundries was EBITDA positive for the quarter, earning an operating margin of ~8%. November 09, 2017 2
Exhibit 1: Q2FY18 Result Overview (Rs m) Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Net Revenues 60,469 46,224 30.8 42,378 102,847 88,812 15.8 Raw Materials 43,074 31,337 37.5 29,423 72,497 60,642 19.5 % of Net Sales 71.2 67.8 69.4 70.5 68.3 Personnel 4,825 3,692 30.7 4,376 9,201 7,273 26.5 % of Net Sales 8.0 8.0 10.3 8.9 8.2 Manufacturing & Other Exp 6,452 5,830 10.7 5,516 11,968 10,770 11.1 % of Net Sales 10.7 12.6 13.0 11.6 12.1 Total Expenditure 54,351 40,859 33.0 39,315 93,666 78,685 19.0 EBITDA 6,118 5,365 14.0 3,063 9,181 10,128 (9.3) EBITDA Margin (%) 10.1 11.6 7.2 8.9 11.4 Depreciation 1,411 1,261 11.9 1,321 2,733 2,471 10.6 EBIT 4,707 4,104 14.7 1,741 6,448 7,657 (15.8) Interest Expenses 410 339 20.9 366 777 677 14.6 Non operating income 557 316 76.1 384 941 759 23.9 Extraordinary Expenses 26 NA 152 179 NA Extraordinary Income 66 NA 562 NA PBT 4,827 4,146 1,607 6,433 8,301 (22.5) Tax Total 1,484 1,202 23.4 492 1,976 2,449 (19.3) Tax Rate (%) Total 30.7 29.0 6.0 30.6 30.7 29.5 4.1 Reported PAT 3,343 2,944 13.5 1,114 4,457 5,852 (23.8) Adj. PAT 3,369 2,885 16.8 1,252 4,618 5,346 (13.6) Source: Company Data, PL Research Exhibit 2: Operating Metrics (Rs m) Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Sales Volume (nos) 40,985 33,440 22.6 28,494 69,479 64,605 7.5 Net Realisation/Vehicle 1,475,391 1,382,298 6.7 1,487,254 1,480,257 1,374,699 7.7 Material cost / vehicle 1,050,964 937,102 12.2 1,032,596 1,043,431 938,655 11.2 Gross Profit / vehicle 424,427 445,196 (4.7) 454,658 436,825 436,044 0.2 Employee cost /vehicle 117,723 110,408 6.6 153,589 132,432 112,582 17.6 Other expenses / vehicle 157,430 174,355 (9.7) 193,583 172,257 166,701 3.3 EBITDA/vehicle 149,273 160,433 (7.0) 107,487 132,136 156,762 (15.7) Net Profit/vehicle 82,201 86,274 (4.7) 43,923 66,465 82,746 (19.7) Source: Company Data, PL Research November 09, 2017 3
Income Statement (Rs m) Net Revenue 200,187 220,401 251,520 294,171 Raw Material Expenses 139,573 156,431 175,935 204,229 Gross Profit 60,614 63,970 75,585 89,942 Employee Cost 15,309 16,530 18,864 21,769 Other Expenses 23,279 24,751 29,855 35,448 EBITDA 22,025 22,689 26,865 32,726 Depr. & Amortization 5,179 5,680 7,014 7,464 Net Interest 1,554 1,287 1,555 1,609 Other Income (1,992) 1,534 1,634 1,740 Profit before Tax 13,301 17,257 19,931 25,394 Total Tax 1,070 4,746 5,481 6,983 Profit after Tax 12,231 12,511 14,450 18,411 Ex Od items / Min. Int. (3,354) Adj. PAT 15,585 12,511 14,450 18,411 Avg. Shares O/S (m) 2,845.9 2,845.9 2,845.9 2,845.9 EPS (Rs.) 5.5 4.4 5.1 6.5 Cash Flow Abstract (Rs m) C/F from Operations 19,134 31,719 25,713 30,110 C/F from Investing (17,252) (9,000) (4,000) (6,000) C/F from Financing (8,695) (6,267) (7,247) (8,012) Inc. / Dec. in Cash (6,812) 16,452 14,467 16,098 Opening Cash 15,931 9,120 25,571 40,038 Closing Cash 9,119 25,571 40,038 56,136 FCFF 17,769 20,887 20,317 25,805 FCFE 15,068 20,887 20,317 25,805 Key Financial Metrics Growth Revenue (%) 5.7 10.1 14.1 17.0 EBITDA (%) (2.3) 3.0 18.4 21.8 PAT (%) 29.9 (19.7) 15.5 27.4 EPS (%) 29.9 (19.7) 15.5 27.4 Profitability EBITDA Margin (%) 11.0 10.3 10.7 11.1 PAT Margin (%) 7.8 5.7 5.7 6.3 RoCE (%) 20.7 15.6 16.7 19.1 RoE (%) 27.0 19.4 20.2 22.8 Balance Sheet Net Debt : Equity 0.2 (0.1) (0.2) (0.4) Net Wrkng Cap. (days) 1 1 (1) Valuation PER (x) 21.1 26.2 22.7 17.8 P / B (x) 5.4 4.8 4.4 3.8 EV / EBITDA (x) 15.5 14.3 11.5 9.0 EV / Sales (x) 1.7 1.5 1.2 1.0 Earnings Quality Eff. Tax Rate 8.0 27.5 27.5 27.5 Other Inc / PBT 8.2 8.9 8.2 6.9 Eff. Depr. Rate (%) 8.8 8.4 9.7 9.7 FCFE / PAT 96.7 166.9 140.6 140.2 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 61,261 67,778 75,377 86,081 Total Debt 21,449 21,449 21,449 21,449 Other Liabilities 1,269 2,769 2,769 2,769 Total Liabilities 83,978 91,995 99,595 110,298 Net Fixed Assets 51,284 53,087 51,073 47,609 Goodwill 483 Investments 28,789 30,789 29,789 31,789 Net Current Assets 3,423 8,120 18,733 30,900 Cash & Equivalents 9,120 25,571 40,038 56,136 Other Current Assets 48,319 54,203 61,399 69,833 Current Liabilities 54,016 71,654 82,704 95,068 Other Assets Total Assets 83,979 91,995 99,595 110,298 Quarterly Financials (Rs m) Y/e March Q3FY17 Q4FY17 Q1FY18 Q2FY18 Net Revenue 45,163 66,179 42,378 60,469 EBITDA 4,541 7,299 3,063 6,118 % of revenue 10.1 11.0 7.2 10.1 Depr. & Amortization 1,313 1,395 1,321 1,411 Net Interest 453 423 366 410 Other Income 258 404 384 557 Profit before Tax 2,395 5,855 1,607 4,827 Total Tax 778 1,093 484 1,484 Profit after Tax 1,617 4,762 1,123 3,343 Adj. PAT 2,190 4,788 1,260 3,366 Key Operating Metrics Passenger M&HCV sales (units) 22,602 22,381 24,269 26,667 Goods M&HCV sales (units) 90,690 96,022 104,238 117,009 Dost volumes (units) 31,441 35,162 41,468 47,282 Other LCV sales (units) 333 1,640 2,111 2,558 Total volume (units) 145,066 155,205 172,085 193,517 Realisation per vehicle (Rs) 1,352,495 1,394,075 1,437,178 1,495,961 Gross margin per vehicle (Rs) 417,837 412,168 439,229 464,777 EBITDA per vehicle (Rs) 151,830 146,189 156,117 169,111 Profit per vehicle (Rs) 107,436 80,611 83,969 95,137 Source: Company Data, PL Research. November 09, 2017 4
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