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Ashok Leyland: Helped by other income - Views on News from Equitymaster

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Ashok Leyland: Helped by other income
Jan 25, 2008

Performance summary
  • Despite a 5% YoY fall in volumes during the quarter, topline jumps a modest 1% YoY, thanks mainly to improved product mix
  • Operating margins have however contracted by 120 basis points due to pressure on costs

  • Bottomline on the other hand, has grown by 14% during the quarter, thanks mainly to profit from stake sale in IndusInd Bank, which has resulted into a near 7 fold jump in other income

  • For the nine-month ended December 2007, bottomline has shown a growth of 7% on the back of a 6% growth in topline, both on a YoY basis.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 17,776 18,001 1.3% 48,772 51,671 5.9%
Expenditure 15,935 16,346 2.6% 44,394 46,589 4.9%
Operating profit (EBDITA) 1,841 1,655 -10.1% 4,378 5,083 16.1%
EBDITA margin (%) 10.4% 9.2%   9.0% 9.8%  
Other income 64 437 588.1% 539 624 15.8%
Interest (net) 26 152 494.5% 35 406 1076.7%
Depreciation 332 408 22.9% 1,024 1,287 25.7%
Profit before tax 1,546 1,531 -1.0% 3,857 4,013 4.0%
Extraordinary income/(expense) (21) (13)   (67) (62)  
Tax 473 316 -33.2% 1,093 1,063 -2.8%
Profit after tax/(loss) 1,053 1,202 14.2% 2,698 2,887 7.0%
Net profit margin (%) 5.9% 6.7%   5.5% 5.6%  
No. of shares (m) 1,323.3 1,330.3   1,323.3 1,330.3  
Diluted earnings per share (Rs)*         3.5  
Price to earnings ratio (x)**         10.8  
(* on trailing twelve months earnings)

What has driven performance in 3QFY08?
  • Ashok Leyland’s overall volumes have de-grown by nearly 6% YoY during the quarter. M&HCVs of the goods kind have seen their off take fall by 13% and have contributed majorly to the decline in overall volumes. Higher interest rates have been keeping truck buyers away from making new purchases and this is having an impact on sales. Passenger carriers, on the other hand, continued to have a good run as domestic volumes improved 11% YoY. Strong demand from both STUs (State Transport Undertakings) as well as private operators has contributed to the positive growth. The company has also managed to improve its market share in this segment. Thus, sales of passenger vehicles along with robust exports (overall growth of 27% YoY) have combined to partially offset the slide in goods carriers during the quarter.

    Segment wise break up of sales…
      3QFY07 3QFY08 Change (%) 9mFY07 9mFY08 Change (%)
    M&HCVs Passenger        
    Domestic 3,385 3,763 11.2% 7,683 13,703 78.4%
    Exports 1,067 1,378 29.1% 2,721 3,250 19.4%
    M&HCVs Goods        
    Domestic 15,154 13,229 -12.7% 44,739 37,100 -17.1%
    Exports 369 424 14.9% 1,556 1,490 -4.2%
    Total M&HCVs        
    Domestic 18,539 16,992 -8.3% 52,422 50,803 -3.1%
    Exports 1,436 1,802 25.5% 4,277 4,740 10.8%
    LCVs        
    Domestic 69 120 73.9% 252 377 49.6%
    Exports 1 29 2800.0% 3 78 2500.0%
    Total        
    Domestic 18,608 17,112 -8.0% 52,674 51,180 -2.8%
    Exports 1,437 1,831 27.4% 4,280 4,818 12.6%
    Grand Total 20,045 18,943 -5.5% 56,954 55,998 -1.7%

  • The topline in value terms has shown a small improvement of 1% YoY during the quarter. This has been made possible due to a better product mix as also greater contribution from sales of spare parts and engines. On the estimates for the full year FY08, the management has said that it is quite confident of selling around 85,000 vehicles, nearly 52% higher than what it has managed to sell during the first nine months and about the same level as its FY07 sales.

  • On the profitability front, a strong 35% jump in employee expenses has seen the operating margins drop by 120 basis points (1.2%). Although what was comforting from the company’s point of view was the fact that raw materials cost as a percentage of sales have come down during the quarter. Other expenses have also shown a decline. However, notwithstanding these improvements, operating profits have fallen 10% YoY.

    cost break up
    (Rs m) 3QFY07 3QFY08 Change
    Raw materials 12,661 12,708 0.4%
    % sales 71.2% 70.6%  
    Staff cost 1,203 1,619 34.5%
    % sales 6.8% 9.0%  
    Other expenditure 1,542 1,447 -6.2%
    % sales 8.7% 8.0%  

  • With the company embarking on a significant capex plan and sitting on a huge inventory, interest costs have jumped nearly six fold during the quarter. Depreciation outgo has also come in higher by 23% YoY. During the quarter, the company offloaded close to 1% stake in group company IndusInd bank and it is the profit from this sale that has enabled the company to post a 14% growth in bottomline during the quarter. Absent the same, the growth would have seen a 23% YoY decline.

What to expect?
At the current price of Rs 37, the stock is trading at a multiple of 6 times our estimated FY10 cash flow. Given that the company’s sales in the last quarter (4QFY08) are expected to be robust, we do not feel any need to downgrade our FY08 estimates. Furthermore, the recent correction in the stock has rendered it attractive from a FY10 perspective. We thus remain positive on the medium term prospects of the company.

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