We maintain 'equalweight' rating on Ashok Leyland, but reduce our price target to R14 (R15 earlier) given the sluggish volumes in H1 (down 25%). As a result, we once again cut our volume estimates by 11% and 8% for FY14e and FY15e. Our revised price target is based on 6x EV/ebitda + R3 per subs), with profits declining by 46% and 19% for FY14e and FY15e.
Ashok Leyland’s Q2 results were better than expectations with revenues of Rs 2,550 crore (versus expectation of R2,390 crore) and an ebitda margin of 2.2% (versus expectation of 1%). The improvement in margin was primarily on back of higher realisations and cost reduction. However, higher-than-expected interest costs partly offset the operational gains resulting in a net PBT loss of Rs 140 crore (in line with expectation).
Volumes showed sequential improvement, but not enough. In Q2, M&HCV volumes stood at 15,913 units (up 7% q-o-q, down 25% y-o-y), resulting in domestic market share improving from 23% in Q1 to 28% last quarter. Management indicated that the sharp decline in industry volumes (down 25% in H1 FY14) continued to create pricing pressures with average discounts rising to R1.7 lakh per unit last quarter from R1.4 lakh per unit in Q1.