Ashok Leyland - Hitting the nadir! LKP research

Q1 results simply dismal

Ashok Leyland (ALL)’s topline was in line with our expectations. Volumes during the quarter dipped by a huge 27% yoy and 37% qoq as the CV industry is going through one of its toughest phases. The company lost market share by 3% on a yoy basis primarily in the south as the southern markets continued to post weak demand. However, net realizations have remained flattish as discounts came down a bit by Rs 25,000 to Rs 1.45 lakh and ALL took a price hike of Rs 18,000. EBITDA margins came in at a dismal all-time low of 1% indicating the sorry state of heavy discounting and adverse product mix. This was a sharp decline of 430 bps qoq, as RM to sales expanded to 75.5% of sales as product mix became unfavorable. Employee costs to sales jumped to 10.9% from 7.6% qoq and 8.9% yoy, however, on absolute basis, there was a decline of 8.5% qoq in employee costs as the company reduced their number of working days, employee strength as well as incurred salary cuts. Other expenses to sales went up to 12.6% from 11.6% qoq and 10.3% as sales declined, but in absolute terms, this cost item declined by 29% qoq and 4% yoy as a lot of cost savings on the admin side as well as marketing side were initiated. Higher interest costs stemming from higher working capital, higher investments in JVs, increased borrowings for product development and Pantnagar facilities tarnished the bottomline. Due to the operational underperformance as well as higher interest costs, ALL posted deep losses to the tune of Rs 1.35bn, biggest loss ever incurred by the company.

Outlook and valuation

We believe the company’s volumes will face pressure in the coming quarters as  economy as well as industrial activity is taking lot of time to revive. With mining ban lifting up in Karnataka gradually and new launches coming from ALL along with good network expansion in markets other than South India, we believe the company would be able to achieve our modest estimate of 2% volume growth in FY 14E. With margins hitting rock bottom, we believe that with new models getting launched, pricing action taken, RM costs coming down and employee costs getting cut, margins will move upwards from Q1 level for sure. On balance sheet side, the company is striving to bring down their inventory levels and working capital in FY 13. ALL has also given a pruned down capex and investment guidance for FY 14E, which would help the company to put up a better show going forward. Although the stock has declined by more than 40% over the last couple of months, with weak volume expectations, we believe that the further growth catalysts for ALL are limited, though balance sheet may improve. We have cut down our earnings forecast for FY 14E/15E by 45%/33% on lower volume expectations than before and have cut down our target price to Rs15.7 from Rs25.7 earlier and rating from Outperformer to Underperformer.

Ways to retire comfortably :CEO and MD, Aviva India: Business Line

To ensure a good lifestyle, you must work out a comprehensive financial plan for retirement

In developed economies like the US, UK and Canada, the State guarantees social security for all citizens post retirement. Compare that to India, where the pension sector is grossly under-developed, with formal pension covering only about 12 per cent of the working population.

What’s worse, there is a good chance that the PF payouts, which seem like an attractive amount now may be rendered insignificant due to inflation.

Therefore, to beat the inflationary pressures and to ensure that you have a comfortable lifestyle post retirement, you must work out a comprehensive financial plan for retirement.

While there are a variety of investment products that you can look at to build a retirement corpus, here’s how insurance plans can be used.

RETIREMENT OR PENSION PLANS

You can invest in retirement or pension plans offered by insurance and mutual fund companies. These plans are long term in nature and you can opt for a relevant plan based on your target corpus and the time horizon.

Pension plans offered by insurance companies give you an option of claiming up to 30 per cent of your sum assured as a lump sum upon maturity, while the rest is paid off as annuity.

You can use this lump sum received to kick-start your retired life in case the provident fund payments are not paid on time. The consequent annuity payouts can be used to take care of your basic household and medical expenses on an ongoing basis.

This apart, with the rising cost of health care, comprehensive health insurance is another must.

Invest in a mediclaim as well as a health insurance policy to make sure that adequate funds are available for your health care needs when you require them.

ENDOWMENT PLANS

Investing in endowment plans by insurance companies can help you save for specific goals like your child’s marriage, buying house. These are insurance-cum-investment plans where you need to pay regular premium for a specified tenure, at the end of which you get a guaranteed accumulated corpus as maturity value.

The advantage of investing in these plans is that even in case of an unfortunate death of the policyholder, the sum assured is paid out to the nominee making sure that the investment or the financial goal does not have to suffer.

In addition to these, you can also look at investing in a combination of Public Provident Funds and fixed deposits. You can also invest in equities either directly or through ULIPs and mutual funds depending on your expertise and risk appetite. Also remember to make provisions for all major liabilities that are likely to crop up post retirement, such as your children’s education.

As you grow older, it’s advisable to cut down on your equity exposure to shield your saving against market volatility. It is for this reason that in most ULIPs, the equity exposure is adjusted to suit your risk profile and your financial goals.

These investment avenues along with your PF and pensions will ensure that you spend your retirement years living the life you always aspired for, without having to worry about the finances.

(The writer is CEO and MD, Aviva India)

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Investment Focus - Franklin US Opportunities Fund: Buy :: Business Line

   

MS on Exide

Quick Comment: Exide posted a good set of numbers with top-line, EBITDA and net income growth of 5% YoY, 13% YoY, and 4% YoY, respectively. Net income was 15% ahead of our expectations and 8% ahead of consensus expectations, according to Bloomberg. The entire beat came from gross margin expansion, reflecting better mix and lower commodity prices. We expect both trends to reverse in part in F2Q as lead prices in INR terms are up 7% currently vs. QE June average. Remain EW.

Top line grew 5% YoY: OEM sales were down across segments during the quarter, so most of top-line growth came from the replacement side. Inverter segment also posted strong growth in April, but it tapered off with the early onset of monsoons.

Gross margin expanded 80bp YoY: F1Q tends to be heavy on inverter sales, and thus the gross margin tends to expand (Exhibit 5). However, we were surprised positively by the quantum of expansion as gross margin rose 80bp YoY and 277bp QoQ. In our view, the expansion was driven by: 1) better product mix (OEMs sales were low so most of the volume came from the replacement side and inverter sales were up QoQ); and 2) the drop in lead prices post the February price hike. Although the company instituted a price hike in early July, it may not be enough to offset the recent rise in commodity prices (given the weak INR).

Overall EBITDA margin expanded from 15% in F1Q13 to 16.1% in F1Q14.

Net income was up 4%: Tax rate rose as other income was low (reflecting of cash payout to buy full control of the insurance business). Overall, net income came at Rs1.6bn up 4%YoY.
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