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Ashok Leyland: Hopes for 4QFY11 to be better - Views on News from Equitymaster
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Ashok Leyland: Hopes for 4QFY11 to be better
Jan 25, 2011

Ashok Leyland has announced its 3QFY11 results. The company has reported a 23% YoY increase in revenues, while profits declined by 57% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by 23% YoY, led by a 14% YoY increase in volumes and an approximate 7% YoY increase in average realisations.
  • Operating profits decline by 20% YoY as operating expenses rise by 28% YoY. Operating margins contract by 4% YoY on the back of higher input and employee costs (as a percentage of sales).
  • Net profits decline by 58% YoY led by a poor operating performance and higher interest and depreciation charges.
  • During 9mFY11, revenues and profits rise by 69% and 66% YoY respectively. Despite an 81% YoY increase in operating profits, net profits increase at a slower pace on the back of a lower other income.


(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 18,175 22,272 22.5% 43,128 72,892 69.0%
Expenditure 16,093 20,612 28.1% 39,212 65,815 67.8%
Operating profit (EBDITA) 2,082 1,660 -20.2% 3,916 7,077 80.7%
EBDITA margin (%) 11.5% 7.5%   9.1% 9.7%  
Other income (0) 17   610 112 -81.6%
Interest (net) 162 475 192.9% 590 1,186 100.9%
Depreciation 513 647 26.2% 1,454 1,902 30.9%
Extraordinary income/(expense) (10) -     (29) -    
Profit before tax 1,397 555 -60.3% 2,453 4,101 67.2%
Tax 351 122 -65.3% 443 770 73.8%
Profit after tax/(loss) 1,046 434 -58.6% 2,010 3,331 65.7%
Net profit margin (%) 5.8% 1.9%   4.7% 4.6%  
No. of shares (m)       1,330.3 1,330.3  
Diluted earnings per share (Rs)*         4.2  
Price to earnings ratio (x)*         14.2  
(* on trailing twelve months earnings; adjusted for extraordinary items)

What has driven performance in 3QFY11?
  • Ashok Leyland (ALL) reported a revenue growth of 23% YoY during the quarter ended December 2010. The revenue growth was led by a 14% YoY increase in volumes and an approximate 7% increase in realisations. As compared to the preceding quarter, volumes declined by nearly one-fourth. As per the management, volume growth came in at a much slower pace due to the market taking time to accept the new emission norms. In addition, the company also felt pressure due to supply chain difficulties and logistics constraints.

    During the quarter, the company sold 18,437 units as compared to 16,129 during the corresponding quarter last year. Barring the LCVs segment, volume growth was seen across. Domestic M&HCVs volumes (both goods and passenger) rose by a slow 2% YoY, while export volumes of these segments increased by a strong 154% YoY. LCV volumes reduced by 37% YoY during the quarter. This segment, however, contributed to nearly 1% of total volumes.

  • ALL's operating profits declined by 20% YoY as operating expenses increased by 28% YoY. This led to a margin contraction of 4% YoY to 7.5%. During the quarter, all of ALL's expenses increased as a percentage of sales. But the expenses which increased the maximum in absolute terms were employee expenses. The sharp 40% YoY increase in employee expenses was on the back of the company playing one-time bonus and ex-gratia costs to the tune of Rs 260 m (all during the month of November 2010). Apart from that, the other expenses also increased on the back of setting and ramping up of the Pantnagar manufacturing facility, increased focus on R&D and also costs related to the launch of the U-Trucks.

    In addition, the company's management also attributed the lower margins to ALL supplying a large numbers of orders for the STU segment, which is typically a low margin business.

    Cost break-up...
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Raw materials 12,960 16,294 25.7% 30,666 53,609 74.8%
    % sales 71.3% 73.2%   71.1% 73.5%  
    Staff cost 1,736 2,439 40.5% 4,852 6,579 35.6%
    % sales 9.6% 11.0%   11.3% 9.0%  
    Other expenditure 1,397 1,879 34.5% 3,694 5,627 52.3%
    % sales 7.7% 8.4%   8.6% 7.7%  

  • ALL's profit before tax fell at a sharper pace as compared to the decline in operating profits during the quarter. This was on the back of a sharp increase in depreciation charges and interest costs. Interest costs were higher for two reasons - no capitalization of interest costs and higher working capital leading to higher short term borrowings. The latter has occurred as debtor payments have increased substantially (Rs 4 to 5 bn due from the Delhi STU).

What to expect?
At the current price of Rs 60, the stock is trading at a multiple of 10.8 times our estimated FY13 earning per share and 7.6 times our estimate FY13 cash flow per share (ResearchPro subscribers, kindly click here.

It seemed as if the quarter ended December 2010 was an aberration for the company considering the sharp increase in expenses and also the issues related to the supply chain and logistics side. The company's management has stuck to its target of 95,000 units for the full year FY11. In the year till date, the company has sold about 66,000 units. As such, it is targeting to sell about 10,000 units per month for the quarter ended March 2011.

While the company's management has stated that it expects the auto industry to grow at a decent pace of 15% YoY next year, it believes that ALL will be able to grow at a slightly faster pace as it would be able to grab some market share.

As for the operating margins going forward, the management believes that ALL will be able to clock margins in excess of 10% going forward. This is on account of two reasons - one being higher volume sales and second being the company increasing prices. It must be noted that during 9mFY10, the company has taken many price hikes. In total, ALL has increased prices by 12%, which is unprecedented.

However, considering factors such as high interest rates, input costs, higher costs of running vehicles, amongst others, we maintain our negative view on the stock at the moment.

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