We retain buy on Ashok Leyland with a target price of R25. The stock is currently trading at 12.5x FY14 net earnings. While the medium and heavy commercial industry is facing subdued sales and high discount levels,we continue to believe that an improvement in the economy and higher corporate spending will boost MHCV volumes,most likely in H2FY14.
For FY14,we expect the MHCV segment to record a positive y-o-y growth of 4%. A recovery in volumes should also bring down the discount levels and help improve margins. However,given the significant divergence between the reported Q1FY14 margins and our estimates,we expect to downgrade our FY14 margin and net earnings estimates,along with the target price,after the conference call.
Ashok Leyland’s Q1FY14 results were below our expectations,but the huge surge in employee costs,other expenses and interest costs needs to be better understood.
Revenue declined 21% y-o-y (due to a 27% y-o-y drop in MHCV volumes) but were in line with our expectations. Net loss for the quarter at R135.2 crore was much wider than our expectation of a loss of R34.3 crore.
Raw material costs as a percentage of net sales were 32 bps below our expectations,resulting in gross margin and gross profit exceeding our estimates by 32 bps and 2%,respectively. However,employee costs and other expenses were significantly ahead of our expectations by 37% and 15%,respectively.