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Ashok Leyland: Prospects are brighter

Apr 23, 2001

The shareholders of Ashok Leyland Ltd (ALL) were relieved after the company reported a turnaround in 3QFY01. Due to higher operational efficiencies and improved working capital management the company was able to improve its performance, despite the decline in commercial vehicle volumes. The company reported a net profit of Rs 194 m in 3QFY01 a growth of 104%, as compared to a loss of Rs 47 m in the previous two quarters. This turnaround came when the commercial vehicle industry continued to be on a downturn. The company managed to increase its operating margins by 170 basis points in 3QFY01 and reduce its interest costs by 31% YoY due to prudent working capital management, which led to an improved bottomline.

Recently too there has been good news for the company. Being the pioneer of CNG buses in the country, the company is set to benefit from the recent Supreme Court order that all buses plying in the National Capital Region have to be run on CNG fuel. This has to be achieved latest by September 2001. Ashok Leyland has already received an order of approximately 3,500 CNG bus chassis. Of this the order from Delhi Transport Corporation (DTC) was around 1,100 buses and the rest has come in from private operators. As most of the DTC order has been met by the company in the past few months, in the current year the company is going to be completing its order for the private sector.

In the commercial vehicles sector too the company is likely to see better volumes in FY02 as agriculture growth is expected to report an improvement in the current year, on the premise of a normal monsoon. Due to better prospects for GDP growth in the current year, the demand for commercial vehicles will improve as transportation activity is likely to pick up.

As both of ALL's segments are poised for good growth in the current financial year, the company's stock price performance too is likely to see a re-rating. ALL's share price has come off by 23% since the past one year, and by 59% since January 2000.

ALL will be reporting its 4QFY01 results tomorrow. As volumes in 4QFY01 have continued to be dismal, we feel that the company's gross sales are likely to drop by 4% YoY to Rs 8,288 m in 4QFY01. However due to better operating margins and lower interest costs, the net profit for 4QFY01 is likely to be better by 14% YoY.

For FY01E, we are expecting a net profit of Rs 911 m which translates into an EPS of Rs 7.7. On the current price of Rs 56, it is trading at only 7.2x FY01.

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