Ashok Leyland (AL) reported a healthy operating performance in Q2FY17, which was boosted by higher contribution from non‐India CV segments (exports, defence, and aftermarket). While AL’s sales decline was 6.9% YoY, EBITDA margin was a healthy 11.6% and adjusted profit was Rs2.9bn (better than expectation of Rs2.4bn).
While volume decline was 10.4% YoY, realisations grew by 3.9% YoY, which led to income decline of 6.9% YoY to Rs46.2bn. M&HCV decline during Q2FY17 was 15.1% YoY, while LCV growth was at 8% YoY. Management expects annual long‐term CV industry growth at 12‐15%. We expect 10.3% volume CAGR for AL over FY16‐18e. Growth estimate for AL in H2 is 20%.
EBITDA margin in Q2FY17 was 11.6% (lower 100bps YoY), as EBITDA fell 14% YoY to Rs5.37bn. Interest cost reduction continued the trend from Q1FY17. This helped arrest the adjusted profit decline (adjusted for exchange gain and exceptional expenses) to Rs2.9bn, a fall of 10% YoY.
While growth in CV demand is expected to continue, with the higher base, the pace will be lower in FY17 and FY18 (from the 25.4% CAGR over FY14‐16). An improving balance sheet position and benefits of operating leverage provide financial stability. However, the merger of Hinduja Foundries with AL will be negative for the latter from an earnings perspective initially. We maintain ‘Accumulate’, with a price target of Rs94, based upon a PE of 18x FY18 EPS.
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