FinancialGep

May 13, 2015
Stock Update Ashok Leyland Reco: Buy PT: Rs78 CMP: Rs70 Margins touch double digits; Buy maintained with a revised PT of Rs78 Key points Q4FY2015 volume growth at 31.3%; OPM in double digits: Ashok Leyland Ltd (ALL) continued to lead the commercial vehicle (CV) industry in terms of volumes and posted a growth of 31.3% in Q4FY2015. Aided by the volume growth, multiple price increases taken and a richer product mix, the revenues for the quarter rose by 46.4% YoY to Rs4,506 crore. Improved gross profit margin and higher operating leverage enabled ALL to post a double-digit margin of 10.1% after a gap of nine quarters. The company took a write-off of Rs224 crore pertaining to an investment in a joint venture with Nissan which was offset by a gain of Rs215 crore in the sale of immovable property. Adjusted for these items, the net profit for the quarter stood at Rs238 crore as against a loss of Rs12.7 crore in Q4FY2014. Management expects industry volume to grow at 10-15% in FY2016: ALL with a volume growth of 28.2% in FY2015 has outpaced the domestic heavy CV industry, which has grown at 16%. This has expanded its market share by 271BPS to 28.5%. The management has guided for an industry volume growth of 10-15% in FY2016 and expects to maintain the market share at the current levels. Exports are expected to remain strong and grow at 15-20% in FY2016. Additionally, the benefit of relatively benign commodity prices is expected to be visible on the gross profit margin going forward. Maintain Buy with a revised PT of Rs78: We have broadly maintained our volume and profitability estimates for FY2016 and FY2017. The management has done remarkably well to substantially reduce the debt on the balance sheet by Rs2,000 crore in FY2015 through a mix of asset sale and lower working capital. We have raised our earnings estimates for FY2016 and FY2017 by 2.8% and 3.3% respectively to reflect the additional saving on the interest cost. We remain positive on the stock and reiterate our Buy recommendation with a revised price target of Rs78 (earlier Rs76), valuing the core business at 16x FY2017E earnings. Relaxo Footwear Reco: Buy PT: Rs880 CMP: Rs811 PT revised to Rs880; Retain Buy Key points Strong Q4FY2015 performance aided by margin improvement: In Q4FY2015 Relaxo Footwear’s revenue growth of 18.3% was driven by both a volume growth and a premiumisation-led improvement in the product mix. The strong growth in the revenues along with falling prices of raw materials (EVA and other chemicals that are crude derivatives) boosted the OPM by 404BPS in Q4FY2015. Driven by a healthy operating performance and a reduction in the interest cost, the net earnings grew by a strong 95.6% YoY to Rs42.7 crore. Favourable industry dynamics coupled with enduring brands to keep financials strong: With its economical price points (averaging at Rs115) the company is well placed to cash in on the transition towards branded shoes from the unorganised segment. We, thus, expect the company to post a 20.7% revenue CAGR over FY2015-17. Further, the initiatives to improve efficiency and rationalise costs along with stable raw material prices are likely to culminate into a strong 26.2% earnings growth (CAGR) over FY2015-17. Strong re-rating captures healthy fundamentals; Retain Buy: The company’s strong brand equity and wide distribution reach along with a favourable trend in demand and a stable raw material pricing regime are likely to keep the earnings growth buoyant. Given these positives, the stock has witnessed a strong re-rating (6x returns since the initiation of a Buy call by us) and has comprehensively outperformed the market. Though we believe the recent sharp run-up captures the upside in the near term (the stock is trading at 29.7x its FY2017 EPS of Rs27.4), we retain our positive stance on the company due to its structural growth story. We retain our Buy rating with a price target of Rs880.