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Ashok Leyland – Weak + Tata Motors – Surprise Positively

July 28, 2009

Ashok Leyland continues to be adversely affected, given concentration of sales in southern India (coupled with loss of market share in the north and eastern markets). Mgmt had also indicated in the recent analyst meet that its sales were affected by consumers shifting to haulage vehicles, rather than speciality vehicles like tractor trailers, tippers.

Operationally, EBITDA was 86% below forecasts. Sales were ~8% above estimates due to higher realizations (we believe on account of spare parts & engine sales).

Mgmt. guided to single-digit domestic volume growth in FY10 and expects exports to increase to 9,000 units. It also expects to increase its operating margins by 350 bps y/y in FY10. Fully Diluted EPS expectation for FY10 is Rs 1.56 and Rs 2.07 for FY11.

Tata Motors recurring net profit at Rs 1.95bn was well ahead of our expectations (we had forecast a modest loss). The results are buoyed by a lower effective excise duty (7.6% of gross revenues this Q) as production from Uttaranchal increased (~13k units/ month). Material costs as % of revenues were a tad lower than estimates.

Mgmt noted that the company’s operating cash flows in 1Q were Rs20bn – an encouraging trend. Overall debt levels remain high – ~Rs169bn – and are a concern, given the aggressive debt equity ratio (~6x end FY09). Working capital was slightly elevated – inventory has increased to 32 days (from 28), while receivables also rose to 23 days.

Tata Motors is expectd to report an EPS of Rs 8.35 for FY10.

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