Forex gains aid improved performance

Q1 results were ahead of expectations, driven by stronger margins and notional gains on forex fluctuation. We have raised earnings forecasts to reflect this performance. However, given our cautious outlook on trucks, as well as capexrelated risks, we maintain our Sell rating on the stock.

Profits exceed expectations

Net profit grew 26% at Rs 907 million (MLe Rs 666 million), aided by Rs 197 million forex gains on USD borrowings. Also, margins improved 102bps to 9.5% ex-forex gains (compared to our expectation of 8.3%), aided by increased seasonal defence supplies. We believe margins will chart an uneven trajectory through the year.

Truck outlook cautious, but raise assumptions on buses

Ashok Leyland’s commercial vehicle (CV) sales rose 7% in Q1, slightly better than the industry. This was mainly driven by a surge in bus sales, which cushioned weak truck demand. We believe that truck volumes will remain subdued, but pick up some time during H2 as the one-time overloading impact gets negated.

Medium term growth expected to be weak

We are raising EPS forecasts by 9% in FY08 and 2% in FY09. Still, we expect EPS growth to be restricted to 3% CAGR over the next 2 years, on the back of muted growth in sales, and higher depreciation and interest.

Reiterate Sell, key risks ahead

Despite a better than expected Q1 and reasonable valuations, we retain our Sell rating on the back of capex related risks – planned outlay of Rs 28 billion over the next 3 years will likely require equity infusion, and also impact return ratios.