Kotak - Vardhaman Textiles, Ashok Leyland

Kotak on Vardhaman Textiles

Vardhman Textiles (VTEX) announced 4QFY07 stand-alone net income of Rs369 mn versus our estimate of Rs409 mn. Despite significantly lower-than-expected EBITDA margins (14.2% versus expected 19.5%), earnings did not decline much as depreciation and interest costs were considerably lower-than-expected. Consolidated adjusted revenues and income for FY2007 were in-line with our estimates at Rs21.6 bn and Rs1.86 bn. However, EBITDA margins were lower than expectations (17.4% versus expected 18.4%) due to low volumes and very low margins in the processed fabric business (EBIT margin of 5.4% as against 10% last year). We expect increasing business pressures from— (a) strong rupee, (2) lower yarn prices and (3) marginally higher cotton cost—will restrict any margin improvement in FY2008. Higher interest and depreciation costs will further depress earnings as company capitalizes a large part of its capex in FY2008. We revise our FY2008 and FY2009 consolidated eps estimate to Rs22.7 and Rs31.6 versus Rs32.7 and Rs44.3, respectively, previously. We reduce our12-month DCF-based target price to Rs220 from Rs325, previously and change our rating to in-line from OP.

Kotak on Ashok Leyland

Ashok Leyland has reported a 3% yoy growth in total sales for the month of May.
However, this growth has been largely driven by the bus segment. The bus segment grew
by 123% yoy and 28% mom in May. Goods M&HCV sales declined 17% yoy and 10% mom in May. CV volumes have declined due to the high interest rates. The decline in volumes is in line with the other major player in the CV industry - Tata Motors, which also reported a 17% decline in M&HCV volumes. Besides, there have been media reports that both the CV manufacturers have indicated a slowdown and have reduced their orders for CV tyres for the months of June and July. This, in our opinion, is a negative for the industry and the company. If the trend continues, the CV industry could witness a slowdown in growth and pose significant downside risks to our estimates. We currently estimate a 2.5% volume growth in FY2008 for Ashok Leyland.