Ashok Leyland Q3FY18: Significantly higher than expected set of numbers; Outperformer |

Ashok Leyland (ALL) reported 60.5% yoy and 17.6% qoq growth in the topline. Volume growth was at 42% yoy and the realizations were up by 7% yoy. The company reported a slight 0.3% cut in market share as there was a supply chain constraint across the industry. Margins however, came in at 11.1%, 80 bps higher yoy, and 80 bps higher qoq despite heavy discounts prevailed in the quarter. A better product mix and operating leverage led to the margin outperformance. RM prices went up during the same time along with employee costs. Below the operating level, other income fell qoq, while depreciation expenses grew 13% yoy. Due to reduction in tax sops in Pantnagar with application of CGST, the tax rate moved up to 31.7%. Net profits surged by 80% yoy on adjusted basis at ₹4.5 bn.

Outlook and Valuation

Volume growth gained pace in Q3 as several structural positives came into action. Ban on overloading in the country’s two big states of UP and Rajasthan, demand from various corporates to improve the fleet, mining activity gathering momentum and defense order from government will keep driving MHCV growth. In occurrence of implementation of cash for clunkers scheme, the MHCV business may get even higher benefit. LCV business has been a star performer for ALL. Now with a 28-29% market share the company with its strong product portfolio targets to capture bigger pie of the high demand market. On the margin front, better product mix in the form of higher tonnage vehicles, price hikes and operating leverage may reduce the impact of higher input costs. At the bottomline, reducing benefits from the PN plant may get offset by lower capex and debt. We remain positive on the stock while introducing FY 20E estimates and increasing FY18E and FY19E estimates. We now have a target of ₹144 valued at 15x FY20E earnings (PE of 12.7x at current levels).

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