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Ashok Leyland (Buy CMP 61 TGT 84)

During Q3FY2011, Ashok Leyland reported its worst performance in the last six quarters. Apart from the lower than expected volume growth, the company reported a sharp jump in staff costs (bonuses paid) and other expenses (U-Truck launch). Higher depreciation and other expenses dented profit after tax (PAT) margins to the second lowest level in the last five years. The Q3FY2011 PAT came 44% lower than our estimate at Rs43.4 crore.
The volume and margin guidance signal the most profitable quarter in Q4FY2011 in the history of the company. The management has maintained its volume guidance at 95,000 units for FY2011 thereby indicating an average monthly run-rate of 10,000 units per month in Q4FY2011.
The management has guided for an 18% volume growth in FY2012. We are positive on the stock after the management’s commentary on the business, although we are revising our earning per share (EPS) estimates downward for FY2011 and FY2012 by 9.6% and 8% respectively. We maintain our Buy recommendation on the stock with a revised target price of Rs84 per share.