RESULTS REVIEW 1QFY18 25 JUL 2017

Ashok Leyland
BUY
INDUSTRY AUTOS Gaining ground in tough times
CMP (as on 24 July 2017) Rs 104 Ashok Leyland (AL) posted in-line revenue (-0.5% YoY Highlights of the quarter
to Rs 42.4bn) in 1Q, while margins (-410bps YoY,  Market share trend: Domestic MHCV share increased
Target Price Rs 118 7.2%) came much below estimates. EBITDA at Rs by 370bps YoY to 34.7% in 1QFY18. In the LCV segment,
Nifty 9,966 3.1bn (-37% YoY) was hit by operating de-leverage market share expanded by 113bps YoY at 8%. Discounts
Sensex 32,246 (one-offs in employee costs and other expenses). have come off in 1QFY18 for AL in comparison to its
KEY STOCK DATA
peers. The company is gradually increasing its presence
Despite subdued 1QFY18, management has in states like UP, where predominantly Tata is a leader.
Bloomberg AL IN maintained 10-15% volume growth guidance in FY18,  Bottom-line focus: AL has focussed on generating
No. of Shares (mn) 2,927 led by revival in mining and construction activities. better profitability and curtailing debt via reduction of
MCap (Rs bn) / ($ mn) 304 / 4,730 The company is confident of maintaining double-digit working capital and controlling costs. Management’s
6m avg traded value (Rs mn) 1,156 margin. The newly launched iEGR tech enabled focussed approach is paying off with market share gains
STOCK PERFORMANCE (%) vehicles are helping AL gain market share (cost of in the M&HCV segment and debt at zero level in FY17.
52 Week high / low Rs 110 / 74 SCR vehicles are expensive by Rs 20-30k).  65-70% of the BS-III inventory has been either
converted to BS-4 with retro fitment or sold in export
3M 6M 12M We maintain our positive stance, and expect ~11% market. Company is confident of clearing 100% BS-3
Absolute (%) 19.2 17.2 7.5 volume CAGR over FY17‐19E, led by expanding inventory over next 3-4 months. Currently, BS-4 dealer
Relative (%) 10.5 (0.5) (8.4) distribution network, strong product portfolio and inventory stands at 8-10 days while the company
SHAREHOLDING PATTERN (%) recovery in economic activity. We estimate EPS CAGR inventory is ~9k vehicles with tight control on operating
at 32% over FY17-19E, on account of operating working capital at 8 days.
Promoters 51.29
FIs & Local MFs 8.02
leverage benefit and reduction in interest cost. We  Near-term outlook: Management has indicated weak
have SOTP based TP to Rs 118 (9x EV/EBITDA 19E + wholesales for Jul-17. We expect revival in 2H owing to
FPIs 22.20 pick up in mining and construction activities.
0.5x investment book). Maintain BUY.
Public & Others 18.49
Source : BSE
Financial Summary
(Rs mn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) FY16 FY17 FY18E FY19E
Net Sales 28,495 31,163 (8.6) 47,621 (40.2) 189,373 200,187 227,083 260,555
Abhishek Jain
EBITDA (adj.) 3,061 4,821 (36.5) 7,299 (58.1) 22,546 22,025 24,522 34,250
abhishekkumar.jain@hdfcsec.com
+91-22-6171-7320 APAT 1,238 2,908 (57.4) 4,762 (74.0) 3,795 11,923 14,271 21,448
Diluted EPS (Rs) 0.4 1.0 (57.4) 1.4 (69.0) 1.4 4.3 5.0 7.5
P/E (x) 76.0 24.2 20.7 13.8
Sneha Prashant EV / EBITDA (x) 13.3 13.2 11.7 8.1
sneha.prashant@hdfcsec.com RoE (%) 7.2 20.7 22.0 28.9
+91-22-6171-7336 Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

AL’s top line growth was in Quarterly Financials Snapshot: Standalone

line, with 0.5% YoY decrease (Rs mn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%)
in revenue Volumes (in units) 28,495 31,163 (8.6) 47,621 (40.2)
Net ASP (Rs/veh) 1,487,202 1,366,636 8.8 1,312,868 13.3
8.6% volume de- growth was Revenue 42,378 42,588 (0.5) 66,179 (36.0)
offset by 9% rise in Net ASP Material Expenses 29,425 29,247 0.6 47,604 (38.2)
Employee Expenses 4,376 3,581 22.2 4,118 6.3
Net ASP was up 9%, owing to Other Operating Expenses 5,516 4,939 11.7 7,158 (22.9)
10-14% price hike taken in EBITDA 3,061 4,821 (36.5) 7,299 (58.1)
Apr-17 for GST transition and Depreciation 1,321 1,210 9.2 1,395 (5.3)
BS4 vehicles and higher EBIT 1,740 3,611 (51.8) 5,904 (70.5)
defense mix (1500 units in Other Income 357 882 (59.5) 632 NA
1QFY18) Interest Cost 366 338 8.3 423 (13.4)
PBT 1,731 4,154 (58.3) 6,113 (71.7)
Management indicated it will Tax 492 1,246 (60.5) (2,157) (122.8)
another price hike in August PAT 1,238 2,908 (57.4) 8,270 (85.0)
to take back margins to EO Items (Adj For Tax) 126 - - 3,508 (96.4)
double digit RPAT 1,238 2,908 (57.4) 4,000 (69.0)
Adj EPS 0.4 1.0 (57.4) 1.4 (69.0)
Source: Company, HDFC sec Inst Research
EBIDT margins came in much
lower at 7.2% led by
Margin Analysis: Standalone
operating de-leverage
1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%)
Material Expenses % Net Sales 69.4 68.7 76 71.9 (250)
Employee costs and other
Employee Expenses % Net Sales 10.3 8.4 192 6.2 410
expenses came in higher on
Other Expenses % Net Sales 13.0 11.6 142 10.8 220
account of certain one-offs
EBITDA Margin (%) 7.2 11.3 (410) 11.0 (381)
(expenditure towards global
Tax Rate (%) 28.5 30.0 (155) (35.3) 6,373
conference, payments to
APAT Margin (%) 2.9 6.8 (391) 12.5 (957)
consultants, travel expenses)
Source: Company, HDFC sec Inst Research

HFL was EBITDA negative

(cash positive in June) in
1QFY18 and the management
expects it to be EBITDA
accretive in coming quarters

Page | 2
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

Volume Assumptions
(in units) FY15 FY16 FY17 FY18E FY19E
Domestic MHCV 66,445 98,814 102,313 107,146 120,599
The company is targeting 10-
% YoY 28.2 48.7 3.5 4.7 12.6
15% volume growth in FY18
LCV 27,242 30,695 31,770 36,711 42,218
% YoY (6.0) 12.7 3.5 15.6 15.0
Domestic volumes 93,687 129,509 134,083 143,858 162,817
Management indicated capex
% YoY 15.9 38.2 3.5 7.3 13.2
of Rs 5bn annually for FY18E
Exports 11,218 10,948 10,979 12,296 14,510
% YoY 31.7 (2.4) 0.3 12.0 18.0
We have cut our margin
Total sales 104,905 140,457 145,062 156,154 177,327
estimates for FY18E to factor
% YoY 17.4 33.9 3.3 7.6 13.6
in weak 1QFY18 and sluggish
Source: SIAM, HDFC sec Inst Research
wholesale volumes in Jul-17
SOTP Valuation
Rs mn Value
Investments in the
EBITDA (on Dec-18E) 34,250
subsidiaries would be in
EV/EBITDA (x) 9.0
addition to regular capex, but EV from core business 308,246
it would be very small in Investments (0.5x Dec-18E BV) 12,008
quantum as profitability of Total EV 320,255
these companies are steadily Net Debt (16,973)
improving, so capex Equity value 337,228
requirement is not very high Target price (Rs) 118
Source: HDFC sec Inst Research

Our TP Rs 118 is based on

10.5x on 19E EV/EBIDTA +
0.5x on investment book

Page | 3
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

ASP Improved Led By Price Hikes GM Witnessed Decline Owing To Weaker Mix
Gross margin/vehicle (Rs'000) Gross margin (%) - RHS
AL’s ASP improved due to Net ASP (in Rs '000) % YoY (RHS)
lower discounts and price hike 1,600 15 500 35.0
of 10-14% taken in Apr-17 for 1,500 450
30.0
GST transition and 1,400 10 400
transformation to BS-4 1,300 350 25.0
vehicles 1,200 5 300
1,100 250 20.0
1,000 - 200
15.0
900 150
Higher raw material costs and 800 (5) 100 10.0
lower volume (higher export

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18
mix in 1QFY17) led to lower
gross margins
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

EBITDAM Declined YoY Owing To Neg Oplev Product Mix Saw Shift In Favour Of LCV
EBITDA margin declined by EBITDA/Vehicle (Rs '000) EBITDA margin (%) - RHS MHCV LCV
410bps YoY because of 100%
200.0 14.0

19%
20%
20%
192bps and 142bps YoY

23%

23%
24%

24%
25%

30%
180.0
increase in employee costs 12.0 80%
160.0
and other expenses 140.0 10.0
120.0 60%
8.0
100.0
6.0

81%
80%
80%
80.0 40%

77%

77%
76%

76%
75%

70%
60.0 4.0
Share of MHCVs was lower in 40.0
2.0 20%
20.0
the mix due to transition to
- -
BS-4 vehicles and 0%
1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Page | 4
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

AL’s Market Share In Dom MHCV Increased YoY Tonnage Mix Turned Favourable YoY
Ashok Leyland Tata Motors VECV Others Upto 16T >16 - 25 MT > 25 MT (Rigid)

AL’s market share climbed 100 4 5 5 5 5 6

26.4 - 35MT > 35.MT
7 7 7
YoY /QoQ owing to strong 11
9 12 11 13 12 10 11 12 100
traction in high tonnage truck 80 21 21 23 21 22 18 20
30 31
80 4 4 4 3 4
segment 51
3
16
10
3
60 54 51 50 51 47 46 23 18 13 10
52 49 60 28 26 24 18
26 14
40 23 24 25
40 19 20 22 23 17
20 36 34 34 36 35 20 33 36
30 30 31.0 33 28 29 28 29 32 26 28
- -

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18
1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18
Source: SIAM, HDFC sec Inst Research Source: SIAM, HDFC sec Inst Research

Post restructuring during

FY13‐17, balance sheet is now MHCV Volume Plunged in Q1 Strong FCF To Drive Down AL’s Gearing
much leaner and net debt Dom MHCV 3MMA % (LHS) 1.2
almost Zero 40,000 40 1.0
1.0
35,000 30
0.8
30,000 20
25,000 10 0.6
0.4
20,000 0 0.4
15,000 -10 0.2 0.1 (0.2)
(0.1) (0.1)
10,000 -20 -
5,000 -30
(0.2)
0 -40
(0.4)
Feb-16

Sep-16

Feb-17
Jan-16

Jan-17
Mar-16

Mar-17
Dec-15

Jun-16

Dec-16

Jun-17
Jul-16
Aug-16

Oct-16
Apr-16
May-16

Apr-17
May-17
Nov-16

FY14

FY15

FY16

FY17E

FY18E

FY19E
Source: SIAM, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Page | 5
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

Peer Valuations
Mcap CMP Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%)
Reco TP
(Rs bn) (Rs/sh) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
Maruti Suzuki 2,282 7,555 BUY 8,478 242.9 272.4 353.3 31.1 27.7 21.4 21.9 19.0 14.5 23.2 22.4 26.3
Tata Motors 1,576 464 BUY 542 30.2 34.6 49.3 15.4 13.4 9.4 7.2 5.1 3.9 12.2 12.7 15.8
Bajaj Auto 820 1,389 BUY 1,556 56.6 75.8 86.4 24.5 18.3 16.1 13.8 11.5 9.1 14.4 17.5 17.7
M&M 818 2,827 BUY 3,296 132.3 143.2 167.4 21.4 19.7 16.9 15.4 13.4 11.1 25.3 23.4 24.7
Eicher Motors 782 28,844 BUY 31,934 624.3 804.9 1,010.0 46.2 35.8 28.6 33.7 26.6 21.5 39.4 38.9 39.3
Hero Motocorp 737 3,692 NEU 3,740 169.1 182.1 208.0 21.8 20.3 17.8 14.9 13.7 12.0 35.6 33.9 34.8
Ashok Leyland 304 104 BUY 118 4.3 5.0 7.5 24.2 20.7 13.8 13.2 11.7 8.1 20.7 22.0 28.9
Force Motors 54 4,100 BUY 5,186 137.3 154.2 241.2 29.9 26.6 17.0 20.1 17.4 11.4 11.4 11.5 15.8
SML Isuzu 17 1,140 BUY 1,325 43.4 48.2 66.2 26.3 23.7 17.2 15.6 13.7 10.2 16.9 16.5 20.0
Atul Auto 9 424 BUY 528 17.7 26.2 31.1 23.9 16.2 13.7 13.5 9.5 7.8 23.1 28.5 27.7
Source: Company, HDFC sec Inst Research

Page | 6
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

Income Statement Standalone Balance Sheet Standalone

(Rs mn) FY15 FY16 FY17 FY18E FY19E (Rs mn) FY15 FY16 FY17 FY18E FY19E
Net Revenues 135,622 189,373 200,187 227,083 260,555 SOURCES OF FUNDS
Growth (%) 36.4 39.6 5.7 13.4 14.7 Share Capital - Equity 2,846 2,846 2,846 2,846 2,846
Material Expenses 99,652 131,949 139,573 157,847 177,446 Reserves 48,341 52,296 58,557 65,863 76,844
Employee Expenses 11,860 13,851 15,309 16,313 17,618 Total Shareholders Funds 51,187 55,142 61,405 68,709 79,691
Other Operating Expenses 13,843 21,027 23,279 28,401 31,241 Long Term Debt 33,511 19,951 11,935 7,950 4,950
EBITDA 10,266 22,546 22,025 24,522 34,250 Short Term Debt - - - - -
EBITDA Margin (%) 7.6 11.9 11.0 10.8 13.1 Total Debt 33,511 19,951 11,935 7,950 4,950
EBITDA Growth (%) 778.3 119.6 (2.3) 11.3 39.7 Net Deferred Taxes 5,103 3,291 1,269 1,269 1,567
Depreciation 4,163 4,879 5,179 5,301 5,572 Long Term Provisions & Others 3,537 3,119 6,169 13,443 17,269
EBIT 6,103 17,667 16,846 19,221 28,678 TOTAL SOURCES OF FUNDS 93,338 81,504 80,781 91,371 103,478
Other Income (Including EO APPLICATION OF FUNDS
782 1,176 1,363 1,415 1,627
Items) Net Block 52,556 47,920 49,708 51,982 53,402
Interest 3,473 2,476 1,554 815 516 Goodwill 1,201 547 1,576 992 1,463
PBT 3,413 16,367 16,655 19,821 29,789 Investments 22,404 19,804 20,017 22,017 24,017
Tax (Incl Deferred) 1,074 4,369 1,070 5,550 8,341 LT Loans & Advances 18,945 14,775 15,192 18,167 20,844
RPAT 2,339 11,998 15,585 14,271 21,448 Total Non-current Assets 95,106 83,046 86,492 93,158 99,727
EO (Loss) / Profit (Net Of Tax) (1,009) 8,203 3,662 - - Inventories 13,985 16,250 25,011 26,130 29,982
APAT 3,348 3,795 11,923 14,271 21,448 Debtors 12,427 12,509 8,599 13,687 15,705
APAT Growth (%) 1,039.6 13.3 214.2 19.7 50.3 Cash & Equivalents 11,597 15,931 17,891 16,924 21,923
Adjusted EPS (Rs) 1.2 1.4 4.3 5.0 7.5 Total Current Assets 38,009 44,692 51,504 56,741 67,610
EPS Growth (%) 965.5 16.4 213.9 16.7 50.3 Creditors 28,283 25,877 32,508 32,434 36,462
Source: Company, HDFC sec Inst Research Other Current Liabilities &
11,495 20,358 24,707 26,094 27,399
Provns
Total Current Liabilities 39,778 46,234 57,215 58,528 63,860
Net Current Assets (1,768) (1,542) (5,712) (1,787) 3,749
TOTAL APPLICATION OF FUNDS 93,337 81,504 80,781 91,371 103,478
Source: Company, HDFC sec Inst Research

Page | 7
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

Cash Flow Standalone Key Ratios Standalone

(Rs mn) FY15 FY16 FY17 FY18E FY19E FY15 FY16 FY17 FY18E FY19E
Reported PBT 3,413 16,367 16,655 19,821 29,789 PROFITABILITY (%)
Non-operating & EO items 1,009 (8,203) (3,662) - - GPM 26.5 30.3 30.3 30.5 31.9
Interest expenses 3,473 2,476 1,554 815 516 EBITDA Margin 7.6 11.9 11.0 10.8 13.1
APAT Margin 2.5 2.0 6.0 6.3 8.2
Depreciation 4,163 4,879 5,179 5,301 5,572
RoE 7.0 7.2 20.7 22.0 28.9
Working Capital Change 7,003 5,270 9,298 1,462 612 RoIC (or Core RoCE) 5.6 23.8 33.3 30.4 49.1
Tax Paid (1,074) (4,369) (1,070) (5,550) (8,341) RoCE 6.2 6.7 17.6 19.5 26.6
OPERATING CASH FLOW ( a ) 17,988 16,420 27,954 21,850 28,148 EFFICIENCY
Capex 494 387 (7,971) (6,992) (7,463) Tax Rate (%) 31.5 26.7 6.4 28.0 28.0
Free cash flow (FCF) 18,481 16,807 19,983 14,857 20,685 Fixed Asset Turnover (x) 1.6 3.6 3.4 3.4 3.6
Investments 1,649 2,600 (213) (2,000) (2,000) Inventory (days) 37.6 31.3 45.6 42.0 42.0
Non-operating Income (583) 4,162 (2,272) (2,059) 298 Debtors (days) 33.4 24.1 15.7 22.0 22.0
INVESTING CASH FLOW ( b ) 1,560 7,148 (10,455) (11,051) (9,165) Payables (days) 76.1 49.9 59.3 52.1 51.1
Other Current Liab & Provns
Debt Issuance/(Repaid) (13,416) (13,560) (8,016) (3,985) (3,000) 30.9 39.2 45.0 41.9 38.4
(days)
Interest Expenses (3,473) (2,476) (1,554) (815) (516) Cash Conversion Cycle (days) (5.0) 5.6 2.0 11.9 12.9
FCFE 1,593 770 10,414 10,056 17,169 Debt/EBITDA (x) 3.3 0.9 0.5 0.3 0.1
Share Capital Issuance 6,519 - - - - Net D/E (x) 0.4 0.1 (0.1) (0.1) (0.2)
Dividend (1,541) (3,197) (5,969) (6,965) (10,468) Interest Coverage (x) 1.8 7.1 10.8 23.6 55.6
FINANCING CASH FLOW ( c ) (11,911) (19,234) (15,538) (11,766) (13,984) PER SHARE DATA (Rs)
NET CASH FLOW (a+b+c) 7,637 4,334 1,960 (967) 4,999 EPS 1.2 1.4 4.3 5.0 7.5
Closing Cash & Equivalents 11,598 15,932 17,892 16,924 21,923 CEPS 2.6 3.0 6.0 6.9 9.5
Source: Company, HDFC sec Inst Research Dividend 0.4 1.0 2.1 3.0 2.5
Book Value 18.0 19.4 21.6 24.1 28.0
VALUATION
P/E (x) 88.4 76.0 24.2 20.7 13.8
P/BV (x) 5.8 5.4 4.8 4.3 3.7
EV/EBITDA (x) 31.0 13.3 13.2 11.7 8.1
EV/Revenues (x) 2.3 1.6 1.4 1.3 1.1
OCF/EV (%) 5.7 5.5 9.6 7.6 10.1
FCF/EV (%) 5.8 5.6 6.9 5.2 7.4
FCFE/Mkt Cap (%) 0.5 0.3 3.5 3.4 5.8
Dividend Yield (%) 0.4 0.9 2.0 2.9 2.4
Source: Company, HDFC sec Inst Research

Page | 8
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

RECOMMENDATION HISTORY
Date CMP Reco Target
Ashok Leyland TP 25-Jul-16 97 NEU 92
130
16-Sep-16 81 BUY 104
120 5-Oct-16 81 BUY 91
110 9-Nov-16 91 BUY 101
5-Dec-16 75 BUY 93
100
27-Jan-17 87 BUY 100
90 13-Apr-17 83 BUY 87
80 28-May-17 92 BUY 106
25-Jul-17 104 BUY 118
70
Rating Definitions
Apr-17
Sep-16

Feb-17

Jun-17
Jul-16

Jul-17
Mar-17
Dec-16
Oct-16
Aug-16

Nov-16

Jan-17

May-17
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Page | 9
 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

Disclosure:
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beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities
Ltd. or its associate does not have any material conflict of interest.
Any holding in stock –No
HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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 ASHOK LEYLAND : RESULTS REVIEW 1QFY18

HDFC securities
Institutional Equities
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