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Ashok Leyland: Strong performance continues - Views on News from Equitymaster
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Ashok Leyland: Strong performance continues
Feb 3, 2015

Ashok Leyland announced the third quarter results of financial year 2014-2015 (3QFY15). The company reported a 72% YoY growth in revenues and a net profit of Rs 321 m. Here is our analysis of the results.

Performance summary
  • Net sales grow by 72% YoY in 3QFY15 led by ramp up in volumes and exports.
  • On account of the benefit of operating leverage, the company reports operating margins of 7.1% during the quarter as against a loss in 3QFY14.
  • Led by the strong performance at the topline and operating level, the company reports a net profit of Rs 321 m in 3QFY15 as against a net loss of Rs 1.6 bn in 3QFY14.

Financial performance: A snapshot
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Net sales 19,532 33,610 72.1% 68,666 90,565 31.9%
Expenditure 20,501 31,228 52.3% 68,840 84,679 23.0%
Operating profit (EBDITA) (969) 2,381   (174) 5,886  
EBDITA margin (%) -5.0% 7.1%   -0.3% 6.5%  
Other income 154 193 25.4% 508 681 34.2%
Interest (net) 1,153 982 -14.8% 3,404 3,053 -10.3%
Depreciation 883 999 13.1% 2,736 3,063 11.9%
Profit before tax (2,851) 594   (5,805) 452  
Tax (256) 273   (1,170) 493  
Extraordinary item 923 -   1,296 1,090 -15.9%
Profit after tax/(loss) (1,672) 321   (3,340) 1,048  
Net profit margin (%) -8.6% 1.0%   -4.9% 1.2%  
No. of shares (m)       2,660.7 2,845.9  
Diluted earnings per share (Rs)*         (0.1)  
(* on trailing twelve months earnings and excluding extraordinary items)

What has driven performance in 3QFY15?
  • Ashok Leyland's revenues surged by 72% YoY during the quarter. The MHCV segment, in the last two years, has been badly impacted by the economic slowdown, thereby dragging Ashok Leyland's performance along with it. However, as was the case in 2QFY15, this quarter was a strong one for the company led by a ramp up in volumes most notably exports. Further, because of policies related to the reversal of mining bans and resumption of some stalled infrastructure projects, the MHCV space witnessed better growth this quarter. There was also an improvement in freight rates as well as the overall operations of fleet operators as a result of which demand for MHCVs was much better.

  • ALL's operating margins improved to 7.1% during the quarter on account of benefits of operating leverage, a tight rein on costs and a better sales mix (i.e. higher volumes of tippers and tractors). This is in contrast to the scenario in 3QFY14 when the company reported a loss at the operating level to the tune of Rs 969 m.

  • Led by the strong performance at the topline and operating profit level, the company reported a net profit of Rs 321 m during the quarter as against a loss of Rs 1.6 bn during 3QFY14.
What to expect?
At the current price of Rs 65, the stock is trading at a multiple of 16.5 times our estimated FY17 cash flow per share. Ashok Leyland's efforts on becoming a leaner company and improving its working capital position have been yielding results. The company has been focusing on reducing debt and in this regard it has been selling off non-core assets and also intends to go slow on capex for the next couple of years. As the management also highlighted in its conference call, Ashok Leyland specifically, has invested in strengthening its distribution reach over the last several years and this is now beginning to reap benefits especially with the gradual recovery in the economy.

Having said, assuming that the company's performance considerably ramps up on account of a recovery in the economy which translates into a rise in volumes, valuations do not leave much upside on the table for investors. And hence our view is that investors Sell the stock of Ashok Leyland.

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