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1QFY2016 Result Update | Automobile

August 14, 2015

Ashok Leyland ACCUMULATE


CMP `89
Performance Highlights Target Price `94
Quarterly highlights (Standalone) Investment Period 12 Months
Y/E March (` cr) 1QFY16 1QFY15 % chg (yoy) 4QFY15 % chg (qoq)
Net Sales 3,841 2,478 55.0 4,506 (14.7)
EBITDA 389 101 286.8 457 (15.0) Stock Info
EBITDA margin (%) 10.1 4.1 600 bp 10.1 - Sector Automobile
Adj. PAT 159 (48) - 238 (33.1)
Source: Company, Angel Research
Market Cap (` cr) 25,315
Net Debt (` cr) 1,432
Results beat estimates on robust operating performance: Ashok Leyland (ALL)s
Beta 1.4
1QFY2016 results have come in ahead of our as well as consensus estimates on
52 Week High / Low 90/34
back of strong operating performance.
Avg. Daily Volume 1,573,727
Revenues grew by a robust 55% yoy to `3,841cr, broadly in line with our Face Value (`) 1.0
estimates of `3,742 cr. Volumes grew strongly by 42% yoy, led by a sharp growth BSE Sensex 28,067
in both the MHCV and LCV segments. Blended realization grew by 10% yoy led
Nifty 8,519
by a better product mix (higher proportion of MHCVs) and price hikes. Operating
Reuters Code ASOK.BO
margin, at 10.1%, improved sharply by 600bp yoy, beating our estimate of 8.5%.
Bloomberg Code AL@IN
Soft commodity prices, better product mix (higher tonnage and defence vehicles)
and cost control initiatives enabled ALL to report a double-digit margin (similar to
4QFY2015), despite a sequential drop in volumes. Given the operating Shareholding Pattern (%)
performance beat, Adj Net Profit at `159cr was ahead of our estimates of `119cr. Promoters 38.8
Outlook and valuation: ALLs MHCV volumes (accounting for 80% of the total MF / Banks / Indian Fls 16.7
volumes) have rebounded sharply in FY2015, reporting a growth of 29% as FII / NRIs / OCBs 20.2
against a double-digit decline in the last two years. Fleet operators sentiments Indian Public / Others 24.3
have improved considerably on the back of revival in the economy, improvement
in their profitabilities due to falling diesel prices, and policy action initiated in the
infrastructure and the mining space. Also, ALL has significantly increased Abs. (%) 3m 1yr 3yr
distribution network in non South regions leading to market share gains. ALL is likely Sensex 3.2 7.5 58.3
to outpace industry and we estimate a 20% CAGR in volume over FY2015- FY2017. Ashok Leyland 24.7 156.3 287.6
Also, a better mix (higher proportion of MHCVs), reduction in record high discounts
due to volume growth, and operating leverage would result in margin expansion. We 3 year price chart
expect operating margin to improve from 7.6% in FY2015 to 11.1% in FY2017 100
(margins witnessed in the previous upcycle in FY2011). We maintain Accumulate on
80
the stock with a revised price target of `94 (based on 12x FY2017 EV/EBIDTA).
60
Key financials (Standalone)
40
Y/E March (` cr) FY2014 FY2015 FY2016E FY2017E
20
Net Sales 9,943 13,562 17,850 20,852
% chg (20.3) 36.4 31.6 16.8 0
Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Feb-15

Aug-15

Adjusted net profit (476) 234 903 1,237


% chg - - 285.9 37.0
EBITDA (%) 1.7 7.6 10.6 11.1 Source: Company, Angel Research
EPS (`) (1.8) 0.8 3.2 4.3
P/E (x) - 108.3 28.1 20.5
P/BV (x) 5.3 4.9 4.6 4.3
RoE (%) (10.7) 4.6 16.4 20.8
RoCE (%) (6.0) 5.6 16.8 21.7
Bharat Gianani
EV/Sales (x) 2.7 2.0 1.5 1.3
022-3935 7800 Ext: 6817
EV/EBITDA (x) 163.1 26.1 14.2 11.4
Bharat.gianani@angelbroking.com
Source: Company, Angel Research; Note: CMP as of August 14, 2015

Please refer to important disclosures at the end of this report 1


Ashok Leyland | 1QFY2016 Result Update

Exhibit 1: Quarterly financial performance (Standalone)


Y/E March (` cr) 1QFY16 1QFY15 % chg (yoy) 4QFY15 % chg (qoq) FY15 FY14 % chg (yoy)
Net Sales 3,841 2,478 55.0 4,506 (14.7) 13,562 9,943 36.4
Consumption of RM 2,312 1,543 49.9 2,826 (18.2) 8,574 6,334 35.4
(% of sales) 60.2 62.3 62.7 63.2 63.7
Staff costs 330 283 16.7 332 (0.6) 1,184 1,000 18.4
(% of sales) 8.6 11.4 7.4 8.7 10.1
Purchase of traded goods 355 273 29.9 452 (21.4) 1,391 1,269 9.6
(% of sales) 9.2 11.0 10.0 10.3 12.8
Other expenses 455 278 63.5 438 3.8 1,381 1,181 16.9
(% of sales) 11.8 11.2 9.7 10.2 11.9
Total Expenditure 3,453 2,377 45.2 4,049 (14.7) 12,530 9,783 28.1
Operating Profit 389 101 286.8 457 (15.0) 1,032 160 543.6
OPM (%) 10.1 4.1 10.1 7.6 1.6
Interest 77 106 (28.0) 88 (13.2) 394 453 (13.1)
Depreciation 104 103 1.0 110 (5.2) 416 377 10.4
Other income 27 39 (30.0) 37 (27.3) 119 73 63.5
PBT (excl. Extr. Items) 235 (70) 296 341 (597)
Extr. income/expense 0 0 (8) 101 506 (80.0)
PBT (incl. Extr. Items) 235 (70) (433.4) 288 (18.4) 442 (91)
(% of sales) 6.1 (2.8) 6.4 3.3 (0.9)
Provision for taxation 76 (23) 58 107 (121)
(% of PBT) 32.2 31.9 19.6 31.5 20.2
Reported PAT 159 (48) (432.2) 230 (30.7) 335 29 1039.5
Adj PAT 159 (48) 238 234 (476)
Adj. PATM 4.1 (1.9) 5.3 1.7 (4.8)
Equity capital (cr) 285 266 285 285 266
Adjusted EPS (`) 0.6 (0.2) 0.8 0.8 (1.8)
Source: Company, Angel Research

Exhibit 2: 1QFY2016 Actual vs Angel estimates


Y/E March (` cr) Actual Estimates Variation (%)
Net Sales 3,841 3,742 2.7
EBITDA 389 317 22.8
EBITDA margin (%) 10.1 8.5 160 bp
Adj. PAT 159 119 33.6
Source: Company, Angel Research

Exhibit 3: Quarterly volume performance


(units) 1QFY16 1QFY15 % chg (yoy) 4QFY15 % chg (qoq) FY15 FY14 % chg (yoy)
MHCV passenger 5,167 3,950 30.8 6,449 (19.9) 20,722 19,328 7.2
MHCV goods 16,314 10,959 48.9 19,840 (17.8) 56,938 40,967 39.0
Total volume (ex. Dost) 21,481 14,909 44.1 26,289 (18.3) 77,660 60,295 28.8
LCV 6,673 4,963 34.5 7,829 (14.8) 26,904 28,213 (4.6)
Total volume (incl. Dost) 28,154 19,872 41.7 34,118 (17.5) 104,564 88,508 18.1
Source: Company, Angel Research

August 14, 2015 2


Ashok Leyland | 1QFY2016 Result Update

ALLs volumes continued to improve, reporting double-digit growth for the


fourth consecutive quarter. During 1QFY2016, volumes grew by a robust 42%
yoy. The MHCV segment continued to outperform, growing by 44% yoy while
the LCV volumes grew 35% yoy on a low base of the corresponding period of
last year.

Realisation/vehicle grew 9% yoy to `1,467,553, led by higher proportion of


MHCVs and price hikes. Contribution/vehicle grew 25% yoy to `448,550,
given the favorable product mix.

During 1QFY2016, ALL gained market share in the MHCV space due to
higher proportion of the fast growing heavy trucks and geographical
expansion. ALLs MHCV market share improved 460bp yoy to 30%. MHCV
truck market share improved 460bp yoy to 29.2%. Similarly, ALLs market
share in the MHCV passenger segment increased 440bp yoy to 33.2%.

Exhibit 4: Double digit volume growth continues Exhibit 5: Realisation & contribution jump yoy
35,000 50 1,700,000 500,000
30,000 40
1,500,000 450,000
25,000 30
400,000
20 1,300,000
20,000
10 350,000
15,000 1,100,000
0
300,000
10,000 (10)
900,000 250,000
5,000 (20)
0 (30) 700,000 200,000
1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16
Overall Volumes yoy chg % Realisation/vehicle Contribution/vehicle

Source: Company, Angel Research Source: Company, Angel Research

Exhibit 6: Proportion of MHCVs continue to rise yoy Exhibit 7: Domestic market share trend
100 50
17.4

17.9
19.1
21.2

21.5
21.7
24.0
24.3

33.7

80 40

60 30
82.6

82.1
80.9
78.8

78.5
78.3
76.0
75.7

40 20
66.3

20 10

0 0
1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16
1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

MHCV LCV MHCV Passenger MHCV Goods Overall MHCV

Source: SIAM, Angel Research Source: SIAM, Angel Research

ALL maintained its double-digit margin for the second consecutive quarter,
reporting a margin of 10.1% in 1QFY2016. Higher proportion of MHCVs and
operating leverage led to the steep margin improvement.

ALLs profits continue to improve led by a strong operating performance.

August 14, 2015 3


Ashok Leyland | 1QFY2016 Result Update

Exhibit 8: EBITDA margin improves sharply yoy Exhibit 9: Bottom-line continues to improve yoy
500 12 300 10

10
400 200
8 5
300
6 100
200 0
4
0
100 2

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16
(5)
0 (100)
0
(2)
1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16
(10)
(100) (200)
(4)

(200) (6) (300) (15)


EBIDTA (` cr) Margin % Net Profit (` cr) Margin %

Source: Company, Angel Research Source: Company, Angel Research

Conference call Key highlights


The MHCV industry continued to grow in double digits for the third consecutive
quarter. During 1QFY2016, the industry grew 23% yoy. Better freight
availibility, improved fleet operator profitability (due to firm freight rates and
reduction in diesel prices) coupled with huge pent up demand (on account of
consecutive double-digit decline in FY2013 and FY2014) have led to robust
industry growth.

ALL continued to outperform the MHCV industry, reporting a volume growth of


44% as against an industry growth of 23%, during 1QFY2016. Consequently,
ALLs market share improved from 25.4% in 1QFY2015 to 30% in
1QFY2016. ALL has significantly improved its presence in non-South markets
by expanding its distribution network. ALLs market share in the non-South
markets currently stands at 20%.

The discounting levels in the MHCV industry continue to inch up. As per the
company, ALL has seen the discounting per vehicle shoot up from `1.75 lakh
in 2HFY2015 to `2.1 lakh in 1QFY2016.

ALL undertook a price hike of about 1% in the MHCV space in April 2015.

Commodity prices are expected to remain soft in the medium term given the
weakness in China.

ALL is focusing on increasing exports in order to reduce dependence on the


domestic market. ALL is targeting to increase the contribution of export from
15% of turnover to about one third of revenues over the next three to five
years.

The excise free Pantnagar plant, having a capacity of 50,000 units per
annum, has reached utilization levels of 75%.

The BS4 emission norms would be implemented across the country from
1.4.2017. The new emission norms are likely to increase the vehicle cost by
`60,000 to `70,000. ALL is ready for the new emission standards and expects
some pre-buying before the new norms come into effect.

The vehicle inventory remains under control and well within the normal range
of 1 month.

ALL has guided for a spending of `500cr for FY2016. This would include the
capex on new product introductions and maintenance capex along with
investments in subsidiaries.

August 14, 2015 4


Ashok Leyland | 1QFY2016 Result Update

Investment arguments
Double-digit volume growth over medium term as ALL would be a direct
beneficiary of the improving CV cycle: ALL is a pure CV play and is poised to
report strong double digit growth (~20% over FY2015-FY2017), given the uptrend
in the CV cycle. The MHCV segment, accounting for 80% of ALLs total volumes,
has undergone a sharp improvement in FY2015 (industry grew 16% yoy).
Improvement in fleet operators sentiments on back of better economic outlook,
and increase in profitability due to fall in diesel prices, would lead to continued
improvement in demand. The MHCV industry has shown improvement after a gap
of three years and we believe the industry would remain in an upcycle in the
medium term. Further we also expect improvement in the LCV segment in FY2016
on back of gradual improvement in sentiments.

EBITDA margin to improve amid volume improvement and operating leverage: We


expect ALLs margins to improve sharply in FY2016/FY2017 and reach the pre-
down cycle levels. We estimate ALLs margins to improve from 7.6% in FY2015
and reach ~11% in FY2017 (margin levels reported by the company in FY2011 up
cycle). We believe the margin improvement would be driven by: (a) steep
improvement in MHCV volumes, (b) reduction in discounting levels. Currently the
discount/vehicle at `2 lakh is at record levels and is expected to come down with
pick-up in demand, (c) benefits of operating leverage, given the sharp
improvement in volumes.

Outlook and valuation

ALLs MHCV volumes (accounting for 80% of the total volumes) have rebounded
sharply in FY2015, reporting a growth of 29% as against a double-digit decline in
the last two years. Fleet operators sentiments have improved considerably on the
back of revival in the economy, improvement in their profitabilities due to falling
diesel prices, and policy action initiated in the infrastructure and the mining space.
Also, ALL has significantly increased distribution network in non South regions
leading to market share gains. ALL is likely to outpace industry and we estimate a
20% CAGR in volume over FY2015- FY2017. Also, a better mix (higher proportion
of MHCVs), reduction in record high discounts due to volume growth, and
operating leverage would result in margin expansion. We expect operating margin to
improve from 7.6% in FY2015 to 11.1% in FY2017 (margins witnessed in the previous
upcycle in FY2011). We maintain Accumulate on the stock with a revised price target of
`94 (based on 12x FY2017 EV/EBIDTA).

Exhibit 10: Key assumptions


(units) FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E
MHCV passenger 26,312 23,472 19,328 20,722 23,416 25,992
MHCV goods 67,425 55,442 40,976 56,938 74,216 85,265
LCV 7,593 34,918 28,205 26,904 31,318 35,065
Total volume (units) 101,990 114,612 88,509 104,564 128,950 146,322
% yoy chg 8.4 12.4 (22.8) 18.1 23.3 13.5
Source: Company, Angel Research

August 14, 2015 5


Ashok Leyland | 1QFY2016 Result Update

Company background
Ashok Leyland Ltd (ALL) is the country's second largest CV manufacturer. The
company has a strong presence in the MHCV segment, with a domestic market
share of ~28% as of FY2015. ALL enjoys a dominant position in southern India,
with an ~50% market share, and is currently focusing on expanding its presence in
northern and western India by increasing its touch points in the region. The
company, through its JV with Nissan Motor and John Deere, intends to expand its
product portfolio and has launched Dost to tap the growing LCV demand, and a
backhoe loader used in the construction industry.

August 14, 2015 6


Ashok Leyland | 1QFY2016 Result Update

Profit and loss statement (Standalone)


Y/E March (` cr) FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E
Total operating income 12,904 12,481 9,943 13,562 17,850 20,852
% chg 13.0 (3.3) (20.3) 36.4 31.6 16.8
Total expenditure 11,807 11,650 9,777 12,536 15,957 18,527
Net raw material costs 9,464 9,123 7,603 9,965 12,552 14,752
Employee expenses 1,036 1,087 1,000 1,184 1,460 1,535
Other 1,030 1,140 925 1,386 1,945 2,240
EBITDA 1,098 831 167 1,027 1,893 2,325
% chg (9.6) (24.2) (81.0) 516.4 84.4 22.8
(% of total op. income) 8.5 6.7 1.7 7.6 10.6 11.1
Depreciation & amortization 353 381 377 416 429 429
EBIT 745 451 (530) 466 1,454 1,949
% chg (21.3) (39.5) NA NA 212.1 34.1
(% of total op. income) 5.8 3.6 (5.3) 3.4 8.1 9.3
Interest and other charges 255 377 453 394 324 313
Other income 201 397 67 124 157 183
Recurring PBT 690 471 (597) 341 1,297 1,766
% chg (13.9) (31.8) NA NA 279.9 36.2
Extraordinary income/(exp.) 4 271 506 101
PBT 686 200 (91) 442 1,297 1,766
Tax 124 37 (121) 107 394 530
(% of PBT) 18.1 18.5 132.2 24.3 30.4 30.0
PAT (reported) 566 434 29 335 903 1,237
ADJ. PAT 562 163 (476) 234 903 1,237
% chg (10.7) (71.0) NA NA 285.9 37.0
(% of total op. income) 4.4 1.3 (4.8) 1.7 5.1 5.9
Basic EPS (`) 2.1 1.6 0.1 1.2 3.2 4.3
Adj. EPS (`) 2.1 0.6 (1.8) 0.8 3.2 4.3
% chg (10.7) (71.0) NA NA 285.9 37.0

August 14, 2015 7


Ashok Leyland | 1QFY2016 Result Update

Balance sheet statement (Standalone)


Y/E March (` cr) FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E
SOURCES OF FUNDS
Equity share capital 266 266 266 285 285 285
Reserves & surplus 3,942 4,189 4,182 4,834 5,209 5,649
Shareholders Funds 4,208 4,455 4,448 5,119 5,493 5,934
Total loans 2,395 3,505 3,884 2,591 2,500 2,400
Deferred tax liability 490 527 407 510 510 510
Other long term liabilities 4 2 2 2 4 4
Long term provisions 77 79 68 79 125 146
Total Liabilities 7,174 8,568 8,809 8,301 8,632 8,994
APPLICATION OF FUNDS
Gross block 7,256 7,991 8,699 8,555 8,705 8,855
Less: Acc. depreciation 2,343 2,709 3,012 3,300 3,729 4,158
Net Block 4,914 5,282 5,686 5,256 4,976 4,698
Capital work-in-progress 548 689 155 120 155 155
Goodwill - - -
Investments 1,534 2,338 2,790 2,649 2,990 3,340
Long term loans and adv. 608 480 673 983 982 1,147
Other noncurrent assets 7 12 33 19 60 75
Current assets 4,304 4,297 3,471 4,285 6,560 7,863
Cash 33 14 12 751 326 514
Loans & advances 810 967 801 569 1,506 1,856
Other 3,461 3,315 2,659 2,964 4,728 5,493
Current liabilities 4,741 4,529 3,999 5,011 7,091 8,284
Net current assets (438) (233) (528) (726) (531) (421)
Misc. exp. not written off - - -
Total Assets 7,174 8,568 8,809 8,301 8,632 8,994

August 14, 2015 8


Ashok Leyland | 1QFY2016 Result Update

Cash flow statement (Standalone)


Y/E March (` cr) FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E
Profit before tax 690 471 (91) 442 1,297 1,766
Depreciation 353 381 303 287 429 429
Change in working capital 22 (47) 274 609 (620) 78
Others 407 359 (325) 146 9 (159)
Other income (201) (397) -
Direct taxes paid (124) (37) 121 (107) (394) (530)
Cash Flow from Operations 1,147 730 281 1,377 720 1,584
(Inc.)/Dec. in fixed assets (755) (876) (174) 178 (185) (150)
(Inc.)/Dec. in investments (304) (803) (452) 141 (342) (350)
Other income 201 397 - - - -
Cash Flow from Investing (859) (1,282) (626) 319 (526) (500)
Issue of equity 0 (1) - 19 - -
Inc./(Dec.) in loans 47 1,110 379 (1,293) (91) (100)
Dividend paid (Incl. Tax) 309 187 - (128) (528) (796)
Others (793) (761) (37) 446 - -
Cash Flow from Financing (436) 534 342 (957) (619) (896)
Inc./(Dec.) in cash (148) (18) (2) 740 (426) 189
Opening Cash balances 180 32 14 12 751 326
Closing Cash balances 32 14 12 751 326 514

August 14, 2015 9


Ashok Leyland | 1QFY2016 Result Update

Key ratios
Y/E March FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E
Valuation Ratio (x)
P/E (on FDEPS) 42.4 159.8 NA 108.3 28.1 20.5
P/CEPS 26.2 44.8 NA 39.0 19.0 15.2
P/BV 8.2 5.3 5.3 4.9 4.6 4.3
Dividend yield (%) 1.1 0.7 NA NA 1.8 2.7
EV/Sales 2.1 2.1 2.7 2.0 1.5 1.3
EV/EBITDA 25.2 30.5 163.1 26.1 14.2 11.4
EV / Total Assets 3.9 3.1 3.1 3.2 3.1 2.9
Per Share Data (`)
EPS (Basic) 2.1 0.6 (1.8) 0.8 3.2 4.3
EPS (fully diluted) 2.1 0.6 (1.8) 0.8 3.2 4.3
Cash EPS 3.4 2.0 (0.4) 2.3 4.7 5.9
DPS 1.0 0.6 - - 1.6 2.4
Book Value 10.9 16.7 16.7 18.0 19.3 20.9
Dupont Analysis
EBIT margin 5.8 2.0 (5.3) 3.4 8.1 9.3
Tax retention ratio 0.8 0.9 (0.3) 0.8 0.7 0.7
Asset turnover (x) 2.3 1.5 1.1 1.8 2.1 2.5
ROIC (Post-tax) 10.9 2.6 1.9 4.7 12.2 16.1
Cost of Debt (Post Tax) 8.8 9.9 NA 11.5 9.0 9.1
Leverage (x) 0.2 0.8 0.8 0.3 0.3 0.2
Operating ROE 11.4 (3.1) NA 2.8 13.1 17.5
Returns (%)
ROCE (Pre-tax) 10.6 2.8 (6.0) 5.6 16.8 21.7
Angel ROIC (Pre-tax) 12.8 2.8 (6.0) 6.2 17.5 23.0
ROE 13.8 3.2 (10.7) 4.6 16.4 20.8
Turnover ratios (x)
Asset Turnover (Gross Block) 1.9 1.5 1.1 1.6 2.1 2.4
Inventory / Sales (days) 63 55 44 45 45 45
Receivables (days) 34 42 48 48 48 48
Payables (days) 108 123 144 145 145 145
WC cycle (ex-cash) (days) (6) (26) (52) (52) (52) (52)
Solvency ratios (x)
Net debt to equity 0.2 0.8 0.8 0.3 0.3 0.2
Net debt to EBITDA 0.8 4.0 20.9 1.4 0.9 0.5
Interest Coverage (EBIT / Int.) 2.9 0.6 (1.2) 1.2 4.5 6.2

August 14, 2015 10


Ashok Leyland | 1QFY2016 Result Update

Research Team Tel: 022 - 39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com

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Disclosure of Interest Statement Ashok Leyland


1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
over 12 months investment period): Reduce (-5% to -15%) Sell (< -15)

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