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Ashok Leyland: Heavy-duty performance - Views on News from Equitymaster

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Ashok Leyland: Heavy-duty performance

Jan 31, 2007

Performance Summary
Riding on the continued strong momentum for commercial vehicles (CVs), Ashok Leyland, India’s second largest producer of CVs, has posted yet another set of impressive numbers for the quarter and nine month ended December 2006. The topline growth during the quarter has come in at a buoyant 48% YoY while the bottomline growth has been even higher at 93% YoY, the latter being a consequence of expansion in operating margins and benign interest and depreciation charges. For the nine-month period, both the topline and bottomline growth has stood at 39% YoY. Had it not been for the extraordinary income in 9mFY06, the bottomline growth could have been much higher at 65% YoY.

(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Units sold 13,038 20,051 53.8% 41,253 56,954 38.1%
Net sales 12,012 17,776 48.0% 35,128 48,772 38.8%
Expenditure 10,851 15,935 46.9% 31,915 44,394 39.1%
Operating profit (EBDITA) 1,161 1,841 58.5% 3,214 4,378 36.2%
EBDITA margin (%) 9.7% 10.4%   9.1% 9.0%  
Other income 25 64 157.8% 244 539 120.5%
Interest (net) 79 26 -67.7% 91 35 -62.2%
Depreciation 290 332 14.5% 930 1,024 10.2%
Profit before tax 816 1,546 89.4% 2,437 3,857 58.3%
Extraordinary income/(expense) (21) (31)   238 (100)  
Tax 250 463 84.8% 737 1,060 43.9%
Profit after tax/(loss) 545 1,053 93.1% 1,939 2,698 39.2%
Net profit margin (%) 4.5% 5.9%   5.5% 5.5%  
No. of shares (m) 1,189.3 1,323.3   1,189.3 1,323.3  
Diluted earnings per share (Rs)* 1.6 3.2   2.0 2.7  
Price to earnings ratio (x)**         15.7  
(* annualised,   ** on trailing twelve months earnings)

What is the company’s business?
Ashok Leyland is the second largest manufacturer of medium and heavy commercial vehicles (M&HCV) in India. In FY06, the company had a 27% market share in the M&HCV segment and a marginal presence of 1% in the LCV segment (light commercial vehicles). Apart from CVs, it is also a key player in the passenger bus segment with almost 50% to 55% market share. Land Rover Leyland Investment Holdings (LRLIH) has 51% stake in the company.

What has driven performance in 3QFY07?

Segment wise break up of sales…
  3QFY06 3QFY07 Change (%) 9mFY06 9mFY07 Change (%)
M&HCVs Passenger
Domestic 3,477 3,385 -2.6% 10,027 7,682 -23.4%
Exports 726 1,067 47.0% 1,606 2,721 69.4%
M&HCVs Goods
Domestic 7,900 15,160 91.9% 26,955 44,739 66.0%
Exports 691 369 -46.6% 2,069 1,556 -24.8%
Total M&HCVs
Domestic 11,377 18,545 63.0% 36,982 52,421 41.7%
Exports 1,417 1,436 1.3% 3,675 4,277 16.4%
LCVs
Domestic 244 69 -71.7% 572 253 -55.8%
Exports 0 1 n.a. 24 3 -87.5%
Total
Domestic 11,621 18,614 60.2% 37,554 52,674 40.3%
Exports 1,417 1,437 1.4% 3,699 4,280 15.7%
Grand Total 13,038 20,051 53.8% 41,253 56,954 38.1%

Goods M&HCVs drive the growth yet again: The 48% YoY growth in Ashok Leyland’s topline during the quarter has been driven by a strong 54% YoY jump in volumes. The dream run in the goods M&HCVs segment continued as volumes improved by an incredible 92% YoY, significantly higher than the industry growth rate. While volumes in the passenger M&HCV segment declined yet again, the drop was a mere 3% YoY as compared to double digit declines witnessed in the recent past. As was mentioned earlier, Ashok Leyland’s expertise lies in the heavy multi-axle vehicles, and with demand for these remaining high, the company has continued to gain market share. While exports have grown at a disappointing rate of 1% YoY during the quarter, we believe this could be more driven by supply constraints than demand. Furthermore, poor sales from LCVs are also a cause for concern. But, as the company introduces new models in this segment, we believe volumes should start looking upwards.

Cost break-up…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Raw materials 8,486 13,226 55.8% 24,852 36,332 46.2%
% sales 70.6% 74.4%   70.7% 74.5%  
Staff cost 1,002 1,149 14.7% 3,223 3,644 13.0%
% sales 8.3% 6.5%   9.2% 7.5%  
Other expenditure 1,363 1,561 14.5% 3,839 4,418 15.1%
% sales 11.3% 8.8%   10.9% 9.1%  

Margin expansion a big positive: In an era when other auto players are experiencing margin squeeze, Ashok Leyland’s margin expansion of 70 basis points during the quarter is praiseworthy. While the increase in raw material costs is in line with its peers, it is the savings on the wages and other expenditure front that has helped the company nose ahead. It should be remembered that the company has embarked on a VRS plan and the benefits of the same are being reflected in terms of lower wage costs. Other expenses, as a percentage of sales, have also reduced by a significant 250 basis points.

All round benefits for bottomline: Apart from expansion in operating margins, higher other income, benign depreciation outgo and sharp reduction in interest costs have all helped the bottomline to grow at a faster rate than the operating profit and thus cap off another excellent quarter for the company.

What to expect?
At Rs 48, the stock trades at a multiple of 10.6 times our estimated FY09 earnings. Ashok Leyland is setting up a new plant in Uttaranchal and is also looking to launch several new products. While these are steps in the right direction, given the cyclicality of the industry and company’s track record of underperformance, we believe the current valuations fully reflect the medium term perspective and hence, the risk reward ratio seems to be in favour of the former.

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