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Ashok Leyland: A challenging quarter

Jan 25, 2013

Ashok Leyland announced the third quarter results of financial year 2012-2013 (3QFY13). The company reported an 18% YoY fall in revenues, while profits rose by 11% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 18% YoY in 3QFY13 on account of the sluggish conditions in the MHCV market.
  • Operating margins fall by 2.9% to 4.3% in 3QFY13 largely on account of a surge in other expenditure (as percentage of sales).
  • Net profits rise by 11% YoY aided by the extraordinary income during the quarter. Excluding that, the company reports a loss of Rs 821 m at the net level.

Financial performance: A snapshot
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Net sales 29,035 23,805 -18.0% 85,310 86,839 1.8%
Expenditure 26,931 22,782 -15.4% 77,448 80,068 3.4%
Operating profit (EBDITA) 2,104 1,023 -51.4% 7,861 6,771 -13.9%
EBDITA margin (%) 7.2% 4.3%   9.2% 7.8%  
Other income 86 141 64.5% 295 508 72.4%
Interest (net) 603 1,071 77.5% 1,829 2,941 60.9%
Depreciation 866 931 7.5% 2,572 2,808 9.2%
Profit before tax 720 (838)   3,755 1,530 -59.2%
Tax 51 (17)   683 256 -62.5%
Extraordinary item - 1,563   - 1,563  
Profit after tax/(loss) 669 742 10.8% 3,072 2,837 -7.7%
Net profit margin (%) 2.3% 3.1%   3.6% 3.3%  
No. of shares (m)       2,660.7 2,660.7  
Diluted earnings per share (Rs)*         1.4  
Price to earnings ratio (x)*         17.3  
* On a trailing 12 months basis

What has driven the performance in 3QFY13?
  • Ashok Leyland's revenues fell by 18% YoY during the quarter and grew by a meager 2% YoY for the nine month period. This poor performance was on account of the sluggish conditions in the MHCV segment. Not only did volumes fall, but the industry also witnessed heavy discounts all of which took its toll on the topline. Despite this, the company was able to gain market share by 2.5% in the MHCV space largely attributable to gains across regions (barring the South, where it was flat) and the success of newly introduced models.

  • ALL's operating margins shrunk by 2.9% to 4.3% during the quarter largely on account of a substantial rise in other expenditure (as percentage of sales). This was on account of various items such as consultancy fees paid to a consultancy firm for helping improve the company's working capital position, IT related expenses and maintenance and warranty costs. Thus, with operating margins shrinking, operating profits plunged 51% YoY.

    Cost break-up...
    (Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Raw materials 21,487 17,106 -20.4% 62,527 62,986 0.7%
    % sales 74.0% 71.9%   73.3% 72.5%  
    Staff cost 2,723 2,617 -3.9% 7,736 7,934 2.6%
    % sales 9.4% 11.0%   9.1% 9.1%  
    Other expenditure 2,721 3,059 12.4% 7,185 9,148 27.3%
    % sales 9.4% 12.8%   8.4% 10.5%  
    Total 26,931 22,782   77,448 80,068  

  • Although ALL's net profits grew by 11% YoY, this was largely aided by the extraordinary income that it received during the quarter. Excluding that, the company reported a loss of Rs 821 m at the net level and this was mainly due to the decline in both topline and operating profits. What worsened matters further was the surge in interest costs, which rose by 77.5% YoY on account of an increase in working capital loans. The company has been looking to reduce loans on the working capital side.

What to expect?
At the current price of Rs 25, the stock is trading at a multiple of 5.6 times our estimated FY15 earnings per share and 4.1 times our estimated FY15 cash flow per share. As at the end of December 2012, the total debt that stood on Ashok Leyland's books was to the tune of Rs 50 bn and the company is looking to bring this down not only from internal cash generation but also through various divestment activities such as sale of certain investments as well as non core assets. The company is aiming to do this over the next 12 months. On the capex front, ALL intends to spend no more than a total of Rs 6 bn for FY14-FY15 combined. Based on the performance in 9mFY13, we shall have to downgrade our estimates for the full year. Overall, we have a 'Buy' view on the stock.

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