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Ashok Leyland: Another quarter of losses - Views on News from Equitymaster
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Ashok Leyland: Another quarter of losses
Jan 22, 2014

Ashok Leyland announced its results for the quarter and nine month period ended December 2013. The company reported a 19% YoY decline in revenues, and a loss 0f Rs 1.7 bn at the net level. Here is our analysis of the results.

Performance summary
  • Net sales decline by 19% YoY during the quarter on the back of a similar decline in volumes.
  • Company reports a loss at the operating level largely due to higher input costs (as a percentage of sales).
  • Higher finance charges and lower exceptional income lead to an expansion in losses of Rs 1.9 bn at the pre tax level. Net loss stands at about Rs 1.7 bn during the quarter.

Financial performance: A snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 24,064 19,532 -18.8% 87,527 68,666 -21.5%
Expenditure 23,030 20,501 -11.0% 80,746 68,840 -14.7%
Operating profit (EBDITA) 1,034 (969)   6,782 (174)  
EBDITA margin (%) 4.3% -5.0%   7.7% -0.3%  
Other income 141 154 9.3% 508 508 -0.1%
Finance costs 1,071 1,153 7.6% 2,941 3,404 15.7%
Depreciation 931 883 -5.1% 2,808 2,736 -2.6%
Exceptional items 1,552 923 -40.5% 1,552 1,296 -16.5%
Profit before tax 725 (1,928)   3,093 (4,510)  
Tax (17) (256)   256 (1,170)  
Profit after tax/(loss) 741 (1,672)   2,837 (3,340)  
Net profit margin (%) 3.1% -8.6%   3.2% -4.9%  
No. of shares (m)         2,660.7  
Diluted earnings per share (Rs)*       -2.9  
Price to earnings ratio (x)*         NM  
* On a trailing 12-month basis, adjusted for extraordinary items

What has driven performance in 3QFY14?
  • Ashok Leyland's (ALL) total sales volumes stood at 18,453 units during the quarter ended December 2013, as compared to 22,661 units during corresponding quarter last year. The volume decline was largely led by the company's medium and heavy commercial vehicle segment, which witnessed a decline of 27% YoY. The same formed about 58% of overall volumes during 3QFY14 as compared to 65% last year. Sales volumes of the company's light commercial vehicle segment declined by a slower pace of 3% YoY during the quarter.

  • At the operating level, ALL reported an operating loss margin of 5% as expenses declined at a much slower pace as compared to the decline in revenues. Higher input costs coupled with higher employee expenses were the main culprits. Input costs stood at nearly 80% of revenues during 3QFY14 as compared to 71% during corresponding quarter last year, thereby giving an indication of the difficulty in passing on prices. Infact, because the demand conditions have been so poor, heavy levels of discounting have been seen in the CV industry for the past couple of quarters.

    Cost break-up...
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Raw materials/ purchases 17,106 15,568 -9.0% 62,986 52,862 -16.1%
    % sales 71.1% 79.7%   72.0% 77.0%  
    Staff cost 2,617 2,396 -8.4% 7,934 7,524 -5.2%
    % sales 10.9% 12.3%   9.1% 11.0%  
    Other expenditure 3,307 2,537 -23.3% 9,826 8,454 -14.0%
    % sales 13.7% 13.0%   11.2% 12.3%  
    Total expenditure 23,030 20,501 -11.0% 80,746 68,840 -14.7%

  • ALL's losses at the pre-tax level expanded on the back of higher finance charges as well as lower exceptional income as compared to last year. It may be noted that during the quarter gone by, the company announced a VRS scheme towards which it spent nearly Rs 436 m; while exceptional income earned is on the back of profit on sale of long term investments as well as profit on sale of immovable property.

  • As for the 9mFY14 period, ALL's revenues declined by 22% YoY. Operating losses stood at Rs 174 m as compared to a profit of Rs 6.8 bn during 9mFY13. Higher finance charges coupled with a marginal decline in depreciation charges led the company to report a loss of Rs 3.3 bn at the net level.
What to expect?
At the current price of Rs 15, the stock is trading at a multiple of 5 times our estimated FY16 earning per share and 3.4 times our estimate FY16 cash flow per share. Ashok Leyland has been working on restructuring its operations; some of which has begun to bear fruit. For instance, the company has reduced its working capital by around Rs 4.8 bn and has also been selling non-core assets so that the funds can be used to pare down debt. Debt at the end of the quarter stood at Rs 54 bn. The company also expects the sales of its new product launches such as Boss and Captain to ramp up. The CV industry has seen decline in volumes in 7 consecutive months now and this is the worst that the management has seen in a while. There are hopes that this has bottomed out and that recovery should gather steam thereafter although the timing of the same remains uncertain. In the longer term, exports will also be an important growth driver for Ashok Leyland. Currently, these account for 10% of revenues and the company expects the same to ramp up to around one third of revenues in the medium term. Focus will be on Middle East, South East Asia, Africa and Latin America.

As mentioned earlier, the auto industry is cyclical and more so in the case of commercial vehicles as growth is directly linked to that of GDP. Since, it is difficult to predict when a cycle will turn, we nevertheless believe in looking at the average trend over a longer term period. Thus, even if things look quite bleak for Ashok Leyland at present, over a three year period, we still expect volumes to grow at an average of around 8%, the benefits of which will flow to the margins as well. In view of this, we maintain our 'Buy' view on the stock. However, please note that the stock's rating on the Equitymaster Risk Matrix (ERM) is much lower than those featuring in the list of top buys.

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