Stock Market Result Update on Ashok Leyland for 2QFY2012

Stock Market Result Update on Ashok Leyland for 2QFY2012 with a Buy recommendation and a Target Price of `32 (12 months).

Ashok Leyland (AL) reported better-than-expected results for 2QFY2012, driven by higher net average realization and favorable operating leverage. We have revised our volume estimates marginally downwards and built in flat volumes for FY2012. However, we have revised our net sales estimates upwards due to the expected improvement in net average realization. We have also revised our margin estimates upwards to factor in the pricing action and softening commodity prices. We continue to maintain our Buy rating on the stock.

Better-than-expected operating performance: During the quarter, AL reported 14% yoy growth in its top line to `3,095cr, driven by an 18.7% yoy increase in its average net realization. Volume performance, however, was subdued during the quarter, reporting a 3.9% yoy decline. Average net realization improved on account of price increases and higher defense kit and spare parts revenue. On a sequential basis, revenue jumped strongly by 24% as volumes increased by 22.6%. EBITDA margin came in at 10.7%, registering a decline of 58bp yoy; however, it expanded by 128bp qoq, largely due to favorable operating leverage, better-than-expected realization and lower other expenditure. Raw-material cost as a percentage of sales was more or less stable during the quarter, leading to 8.1% yoy (40.8% qoq) growth in operating profit. Net profit, however, declined by 7.8% yoy to `154cr, mainly due to higher interest and depreciation expense. Sequentially, net profit jumped substantially by 78.6%, led by better operating leverage, higher other income and lower tax-rate.

Outlook and valuation: At `28, AL is trading at 10.2x its FY2013E earnings. We maintain our Buy rating on the stock with a revised target price of `32, valuing the stock at 12x its FY2013E earnings.