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Ashok Leyland: Mowed down - Views on News from Equitymaster
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Ashok Leyland: Mowed down
Jan 28, 2009

Performance summary
  • Nets sales fall a steep 44% YoY during the quarter, led by 58% decline in overall volumes.
  • Operating margins contract by 90 basis points as higher staff costs take toll
  • Net profits shrink drastically during the quarter, coming off by 84% on a YoY basis as besides operating profits, all the other cost heads also turn adverse
  • Profits for the nine month period fall 53% YoY on the back of an 8% fall in topline


Standalone performance
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 18,001 10,008 -44.4% 51,671 47,511 -8.1%
Expenditure 16,346 9,177 -43.9% 46,589 44,112 -5.3%
Operating profit (EBDITA) 1,655 831 -49.8% 5,083 3,399 -33.1%
EBDITA margin (%) 9.2% 8.3%   9.8% 7.2%  
Other income 437 106 -75.8% 624 512 -17.9%
Interest (net) 152 394 158.4% 406 747 83.8%
Depreciation 408 358 -12.4% 1,287 1,304 1.3%
Profit before tax 1,531 185 -87.9% 4,013 1,860 -53.6%
Extraordinary income/(expense) (13) (22) 75.5% (62) (66)  
Tax 316 (26)   1,063 428 -59.8%
Profit after tax/(loss) 1,202 189 -84.3% 2,887 1,367 -52.7%
Net profit margin (%) 6.7% 1.9%   5.6% 2.9%  
No. of shares (m) 1,323.3 1,330.3   1,323.3 1,330.3  
Diluted earnings per share (Rs)*         4.7  
Price to earnings ratio (x)*         3.1  
(* on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • Facing one of the worst business environments in years, Ashok Leyland’s overall volumes slumped 58% YoY during the quarter. Worst hit was the M&HCV (Medium and Heavy Commercial Vehicles) goods space where domestic volumes plunged 72% over corresponding previous quarter. Steep decline in movement of goods on account of the economic slowdown and difficulties in credit financing were the key reasons behind the poor off take of the company’s commercial vehicles. At 44% YoY, topline growth in value terms isn’t very heartening either but is still better as compared to 58% decline in volumes. This reduced damage is a result of improved sales from the company’s engine and spare sales, thus reflecting a more de-risked portfolio.

    Segment wise break up of sales
      3QFY08 3QFY09 Change (%) 9mFY08 9mFY09 Change (%)
    M&HCVs Passenger        
    Domestic 3,763 2,402 -36.2% 13,703 11,807 -13.8%
    Exports 1,378 1,096 -20.5% 3,250 3,139 -3.4%
    M&HCVs Goods        
    Domestic 13,229 3,694 -72.1% 37,100 26,337 -29.0%
    Exports 424 692 63.2% 1,490 1,760 18.1%
    Total M&HCVs        
    Domestic 16,992 6,096 -64.1% 50,803 38,144 -24.9%
    Exports 1,802 1,788 -0.8% 4,740 4,899 3.4%
    LCVs        
    Domestic 120 74 -38.3% 377 352 -6.6%
    Exports 29 53 82.8% 78 248 217.9%
    Total        
    Domestic 17,112 6,170 -63.9% 51,180 38,496 -24.8%
    Exports 1,831 1,841 0.5% 4,818 5,147 6.8%
    Grand Total 18,943 8,011 -57.7% 55,998 43,643 -22.1%

  • Operating margins during the quarter have come in lower by 0.9%. Staff costs have increased by 4% (as a percentage of sales) over the same quarter last year. But thanks to savings on the raw materials and other expenditure front, the extent of damage was restricted to just 0.9%.

    Cost break-up…
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Raw materials 13,590 7,357 -45.9% 38,729 35,684 -7.9%
    % sales 75.5% 73.5%   75.0% 75.1%  
    Staff cost 1,478 1,225 -17.1% 4,488 4,422 -1.5%
    % sales 8.2% 12.2%   8.7% 9.3%  
    Other expenditure 1,278 595 -53.5% 3,371 4,006 18.8%
    % sales 7.1% 5.9%   6.5% 8.4%  

  • All the remaining cost heads have also moved adversely during the quarter, causing further damage to profitability. Other income has come in lower by 76% YoY as the company had sold some of its stake in a bank in 3QFY08, netting a one off income. In the meanwhile, interest costs have gone up by a huge 158% and this combined with fall in other income and a less than proportionate fall in depreciation charges have caused the bottomline to decline a huge 84% YoY during the quarter.

What to expect?
At the current price of Rs 14, the stock is trading at a multiple of 2.7x its expected FY11 cash flow per share. In view of the worsening environment, we had already projected the company’s bottomline to come lower by 31% in FY09 over FY08. Considering the company’s underperformance vis-à-vis our assumptions, we will have to further lower our estimates for the company. We will soon come out with an updated report on the company.

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