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Ashok Leyland: A complete performance - Views on News from Equitymaster

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Ashok Leyland: A complete performance
Feb 1, 2010

Performance summary
  • On the back of doubling of volumes, topline grows by 81% YoY during the quarter
  • Operating profits grow at an even higher rate of 136% YoY as margins expand by 2.7%
  • PAT comes in higher by more than 5 times as lower interest and benign depreciation charges further boost the strong operating performance
  • Bottomline for the nine month period grows 47% YoY on the back of a 10% decline in topline


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 10,045 18,155 80.7% 47,630 43,057 -9.6%
Expenditure 9,171 16,093 75.5% 44,093 39,212 -11.1%
Operating profit (EBDITA) 874 2,062 135.9% 3,536 3,844 8.7%
EBDITA margin (%) 8.7% 11.4%   7.4% 8.9%  
Other income 63 20 -69.0% 375 681 81.6%
Interest (net) 394 162 -58.9% 747 590 -21.0%
Depreciation 358 513 43.3% 1,304 1,454 11.4%
Profit before tax 185 1,407 659.1% 1,860 2,482 33.4%
Extraordinary income/(expense) (34) (10) -71.1% (99) (29)  
Tax (37) 351   394 443 12.5%
Profit after tax/(loss) 189 1,046 454.5% 1,367 2,010 47.1%
Net profit margin (%) 1.9% 5.8%   2.9% 4.7%  
No. of shares (m) 1,330.3 1,330.3   1,330.3 1,330.3  
Diluted earnings per share (Rs)*         1.9  
Price to earnings ratio (x)**         27.2  
* on trailing twelve months earnings

What has driven performance in 3QFY10?
  • A rebound in the country’s economy and pick up in industrial activity has enabled the company to post a strong volume growth of 101% YoY during the quarter. The fact that the demand had collapsed during the same quarter last year also helped matters. The M&HCV segment, where the company virtually derives all of its volumes from grew 138% YoY, roughly in line with the industry and thus, helping the company to retain its market share. In value terms, topline growth of 81% YoY has lagged the volume growth as the company’s sales during the quarter consisted mostly of low value products and not high value products like tractor trailers and MAVs. However, going forward, as sales from these segments improve, growth in value terms should inch closer to the volume growth.

    volumes
      3QFY09 3QFY10 Change (%) 9mFY09 9mFY10 Change (%)
    M&HCVs Passenger        
    Domestic 2,402 1,515 -36.9% 11,807 10,920 -7.5%
    Exports 1,096 (663) -160.5% 3,139 1,380 -56.0%
    M&HCVs Goods        
    Domestic 3,694 (36) -101.0% 26,337 22,607 -14.2%
    Exports 692 1,344 94.2% 1,760 2,412 37.0%
    Total M&HCVs        
    Domestic 6,096 1,479 -75.7% 38,144 33,527 -12.1%
    Exports 1,788 681 -61.9% 4,899 3,792 -22.6%
    LCVs        
    Domestic 74 294 297.3% 352 572 62.5%
    Exports 53 31 -41.5% 248 226 -8.9%
    Total        
    Domestic 6,170 1,773 -71.3% 38,496 34,099 -11.4%
    Exports 1,841 712 -61.3% 5,147 4,018 -21.9%
    Grand Total 8,011 2,485 -69.0% 43,643 38,117 -12.7%

  • Another key feature of the company’s strong performance has been the huge improvement in profitability. Thanks to a sizeable drop in the company’s raw material and staff costs, both as a percentage of sales, operating margins have come in 2.7% higher for the company and the same has boosted its operating profits by 136% YoY. While raw material prices were lower because of drop in commodity prices as compared to same quarter last year, higher economies of scale ensured that fixed costs of production such as staff costs, provided the necessary leverage. Even on a sequential basis, the operating margins have come in higher. But with certain commodities already showing signs of going up in price, the sustainability of the same level of margins remains questionable.
    cost break up
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Raw materials 7,357 12,960 76.2% 35,684 30,666 -14.1%
    % sales 73.2% 71.4%   74.9% 71.2%  
    Staff cost 1,225 1,736 41.7% 4,422 4,852 9.7%
    % sales 12.2% 9.6%   9.3% 11.3%  
    Other expenditure 589 1,397 137.4% 3,987 3,694 -7.3%
    % sales 5.9% 7.7%   8.4% 8.6%  

  • Strong focus on working capital management has ensured that the interest costs of the company have suffered a significant fall of 59% YoY. And with depreciation charges also growing at a much smaller rate of 43% YoY as compared to operating profits, the company’s bottomline is up nearly five-fold during the quarter.

What to expect?
At the current price of Rs 52, the stock trades at a price to cash flow multiple of 9x its estimated FY12 cash flow per share. The company’s performance is broadly in line with our estimates on the bottomline front. However, we may have to revise the numbers on the topline front. But we do not see any significant upsides emerging from such a revision. Since the valuations seem to be fully reflecting the medium term fundamentals of the company, we see very little upside from the current levels.

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