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Non-cyclical focus insulates profitability

Apr 28, 2001

Since January 2000, Ashok Leyland Limited (ALL), India's second largest commercial vehicle (CV) manufacturer has a seen a decline of 60 percent in its stock price. This was mainly due to the declining volumes in the commercial vehicle industry since 1QFY01 (first quarter fiscal year 2001). The uneven monsoons led to a decline in agricultural production and the manufacturing industry was sluggish. In addition the implementation of uniform sales tax and rising crude oil prices added to the costs of fleet operators making it unviable for them to make fresh purchases. All this led to a huge decline in demand for commercial vehicles.ALL reported a loss of US$ 1 million in 1HFY01 (first half fiscal year 2001), as its main segments reported a sharp decline. However unlike others, the company has fought back. In a bid to come out of the red, the company has taken its operating cost cutting exercise very seriously and also concentrated in increasing revenues from non-cyclical areas. Hence it managed to report a swift turnaround in its fortunes in 3QFY01 (third quarter fiscal year 2001), with a huge net profit growth of 104 percent year on year.

ALL: fighting market trends
(Rs m)FY00FY01Change
Sales 22,572 22,524 -0.2%
Other Income 87 102 17.1%
Expenditure 20,053 19835-1.1%
Operating Profit (EBDIT) 2,519 2,689 6.8%
Operating Profit Margin (%)11.2%11.9% 
Interest 849 888 4.6%
Depreciation8248847.2%
Profit before Tax9341,0209.2%
Other Adjustments - -  
Tax 148 103 -30.7%
Profit after Tax/(Loss) 786 917 16.8%
Net profit margin (%)3.5%4.1% 

ALL achieved this by concentrating on the fast growing bus segment as the commercial goods vehicle sector went through a tough period. The company’s export efforts too paid off and its revenues from this segment were up 10 percent year on year (YoY) in FY01 (fiscal year 2001). This countered the effects of the declining volumes in the domestic commercial vehicle market. It also shored up its revenues by higher sales in marine and industrial engine application segments and spare parts by increasing its market share in these segments.

On the operational front it managed to curtail its interest costs through prudent working capital management. Its operating margins went upto 11.9 percent in FY01 as compared to 11.2 percent in FY00 as a result of an improvement in its market share, overall cost cutting and higher margins from buses and army vehicle supplies.

As a result ALL has been in the limelight recently. Of all the automobile stocks, ALL has seen a sharp rise in its share price over the past couple of weeks as investors are once again realising its efforts and potential. Considering that in FY01, when the automobile sector was in a slump, ALL has managed to report a substantial growth in its net profit, through a turnaround in 3QFY01 and 4QFY01.

The prospects for ALL in FY02 too are bright. The company's pioneering entry into the compressed natural gas (CNG) bus segment is all set to pay off finally. The recent ruling by the Supreme Court to the Delhi government has enabled this, which provides that by September 2001 all buses plying in the National Capital Region, should be run on CNG fuel.

The potential for Ashok Leyland's bus segment is immense as currently Delhi has an estimated demand for around 10,000 buses more to be run on CNG fuel. As a result ALL has comfortably bagged an order of 2,150 buses in the current year from both private operators and the Delhi Transport Corporation.

Even the company's volumes in the commercial goods vehicle segment is expected to improve in the current year. The goods segment is set for a recovery mainly due to better prospects of GDP growth in the current year (on the premise of better agricultural growth). The agriculture sector is forecasted to growth at about 2% due to expectations of a good monsoon in the current year. If all goes well, then volumes in the goods vehicle segment should definitely recover for ALL in FY02. Besides in the goods segment, as fleet operators have postponed their purchases resulting in their fleet becoming older, FY02 should see some demand from the replacement segment.

 1HFY001HFY013QFY003QFY014QFY004QFY01
Operating margins (%)7.47.08.19.822.923.1
Net margins (%)0.2-0.41.53.212.913.2

ALL continued its supplies of CKD (completely knocked down kits) sets to the Indian army in FY01, to counter the impact of falling CV sales. Hence even though overall volumes for the company were lower in FY01, through a better product mix, the company’s margins were up. In the current year ALL has commenced delivery of specially developed Light Recovery Vehicles (LRV 4x4) to the Indian Army. The first batch of 50 LRVs, from a total order for over 500 vehicles, have already been delivered. The total order is expected to be completed by August 2001.

The company’s concentration on non-cyclical businesses to insulate its future revenues will pay off in years to come.

As mentioned earlier the prospects for ALL's bus segment are already looking bright due to the changing pollution norms. As pollution is becoming an area of prime importance for the country and CNG kits will change the face of things to come, companies like ALL and its closest competitor Telco are bound to benefit.

ALL’s attractive valuations, high dividend yield and the fact that it currently trades at a 47 percent discount to its book value makes it an attractive play on India’s commercial vehicle segment. Its efforts to fight the market trends by garnering up market share from its competitors is commendable. A stock to watch out for in the automobile segment.


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