>ASHOK LEYLAND (MERRILL LYNCH)

Expensive on muted prospects

Raise forecasts, but retain rating
Q4 results were ahead of expectations, thanks to control over key expense items. Still, operational EBITDA, declined 70% to Rs908mn (BAS-MLe Rs648mn), and high interest outgo restricted recurring net profit to Rs269mn (Rs476mn). As a result, FY09 EBITDA declined 40% to Rs4.69bn (BAS-MLe Rs3.90bn), and net profit Rs2.02bn (Rs1.50bn). We raise forecasts to reflect this surprise. However, re-iterate Underperform on weak prospects, and expensive valuations.

Margin surprise
Q4 margins at 7.5% (down 450bps yoy) was driven by strict control over staff (down 26%), and overheads (down 32%, after adjusting for forex gains included under this item). As a result, the company ended the year with margins at 7.8% (down 240bps). We believe margins will hold up as commodity prices remain soft.

We raise forecasts to reflect the surprise
We raise margin expectations by 180bps to 8.1% for FY10 and 110bps to 8.5% in FY11, and thereby EBITDA forecasts by 33% and 17% in FY10 & FY11 resp. We retain truck volume assumptions of 5% decline in FY10, and 10% growth in FY11.

Business outlook muted
Our CV outlook is muted, on slowing economy and infrastructure related investments. We however are positive on buses (~39% of volumes), as well as light vehicles (Nissan JV operational only in CY11). By FY11, we expect new entrants in CVs. We therefore expect company to lose share in CVs.

Reiterate Underperform with higher PO
Our revised PO of Rs13.4 (earlier Rs11.2), is based on 5x FY10E EV/EBITDA, in line with mid-cycle valuations.

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