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  • Stock Recommendation: Ashok Leyland Ltd – BUY – TP Rs.128

    Publish date: July 19, 2018

    Earnings update

    In 1QYF19, Ashok Leyland reported robust revenue and earnings growth over same quarter last year. During the quarter, volumes grew by 48% and EBITDA margins witnessed strong expansion. Operating performance came in better than our estimate.

    Key Highlights

    • Revenue in the quarter grew by 47% YoY on strong volume growth. We note that 1QFY18 witnessed significantly weak volumes on account of BSIV transition and GST implementation. EBITDA for the quarter increased by 112% YoY, supported by 48% volume growth and margin expansion. PAT for the quarter came in at Rs3.7bn as against Rs1.1bn in 1QFY18 and was ahead of our estimate of Rs3.3bn

    Valuation & outlook

    New norms announced by the government on load carrying capacity of trucks is expected to impact truck demand in the near term. Over the medium to long term (6-12months), impact of this move on truck demand will to a large extent depend on the implementation of overloading ban. We lower our FY19/FY20 estimates on account of expected impact on demand. We revise our target price lower to Rs128 (earlier Rs160) on earnings downgrade and assigning of lower PE multiple on account of truck demand impact from new norms for truck load carry. Given adequate upside from recent sharp correction in the stock price, we rate the stock as BUY. We believe the stock could remain volatile and under pressure in the near term due to possible near term dip in demand

    Key risks

    Due to lack of full clarity on new axle weight norms, there exist further downside risk to our volume assumption. Lower volumes can negatively impact EBITDA margins. Accordingly earnings could have further downside risk.

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