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Ashok Leyland: Strong volumes propel growth - Views on News from Equitymaster
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Ashok Leyland: Strong volumes propel growth
Feb 2, 2012

Ashok Leyland announced the third quarter results of financial year 2011-2012 (3QFY12). The company has reported a 29% YoY increase in revenues, while profits grew by 54% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by 29% YoY largely led by strong growth in volumes.
  • Operating margins remain stable at 7.3%.
  • Strong growth in operating profits coupled with higher other income and lower tax expenses contribute to the 54% YoY growth in net profits.

Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 22,272 28,798 29.3% 72,892 84,699 16.2%
Expenditure 20,619 26,694 29.5% 65,836 76,837 16.7%
Operating profit (EBDITA) 1,654 2,104 27.2% 7,056 7,861 11.4%
EBDITA margin (%) 7.4% 7.3%   9.7% 9.3%  
Other income 23 32 38.9% 133 177 33.0%
Interest (net) 475 550 15.9% 1,186 1,711 44.2%
Depreciation 647 866 33.9% 1,902 2,572 35.2%
Profit before tax 555 720 29.6% 4,101 3,755 -8.4%
Tax 122 51 -58.4% 770 683 -11.3%
Profit after tax/(loss) 434 669 54.3% 3,331 3,072 -7.8%
Net profit margin (%) 1.9% 2.3%   4.6% 3.6%  
No. of shares (m)       1,330.3 2,660.7  
Diluted earnings per share (Rs)*         2.3  
Price to earnings ratio (x)*         11.8  

What has driven performance in 3QFY12?
  • After a tepid performance in the previous two quarters, the third quarter was much better as Ashok Leyland's (ALL) sales during this quarter grew by a healthy 29% YoY. This was led by the 26% YoY growth in volumes and 3% rise in realisations. For the nine months period, total revenues grew by 16% YoY largely led by growth in exports as domestic sales were muted.

  • ALL's operating margins shrunk marginally by 0.1% during the quarter largely on account of a rise in both raw material costs and other expenditure (as percentage of sales). Had it not been for the fall in staff costs, operating margins would have dropped further. Thus, operating profits grew by 27% YoY, a tad lower than the growth in revenues. For the nine months period, growth in operating profits stood at 11% YoY as margins fell by 0.4% to 9.3%.

    Cost break-up...
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw materials 16,294 21,288 30.6% 53,609 62,026 15.7%
    % sales 73.2% 73.9%   73.5% 73.2%  
    Staff cost 2,439 2,723 11.6% 6,579 7,736 17.6%
    % sales 11.0% 9.5%   9.0% 9.1%  
    Other expenditure 1,886 2,683 42.3% 5,648 7,076 25.3%
    % sales 8.5% 9.3%   7.7% 8.4%  
    Total 20,619 26,694   65,836 76,837  

  • Strong growth in operating profits coupled with higher other income and lower tax expenses resulted in the healthy 54% YoY growth in the bottomline. For the nine months period, net profits dipped by 8% YoY on account of a surge in interest costs and depreciation charges. Interest costs rose by 59% YoY on account of an increase in working capital loans. Depreciation charges were higher on account of the Pantnagar plant coming on stream.

What to expect?
At the current price of Rs 27, the stock is trading at a multiple of 7.2 times our estimated FY14 earning per share and 5.4 times our estimate FY14 cash flow per share.

Ashok Leyland has faced some headwinds in the past couple of quarters. While sales in both 1QFY12 and 2QFY12 were hit on account of various issues in the Southern market where the company has a strong presence, growth picked up in the current quarter. Despite strong growth in volumes, there was some weakness witnessed in the bus segment, although the management expects growth to pick up going forward. As for the operating margins, 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. Overall, we maintain our positive view on the stock.

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