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Ashok Leyland: Export insulation

May 5, 2003

Ashok Leyland (ASOK) has posted an impressive performance for the full year ended March 2003. While revenues are higher by 19%, net profit has increased by 30% in the same period. The sharp upturn in commercial vehicle (CV) demand has enabled the company to improve its profitability significantly.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Sales 7,681 9,324 21.4% 22,612 26,987 19.3%
Other Income 94 68 -27.7% 180 153 -14.8%
Expenditure 6,378 8,175 28.2% 19,662 23,737 20.7%
Operating Profit (EBDIT) 1,303 1,148 -11.8% 2,951 3,250 10.1%
Operating Profit Margin (%) 17.0% 12.3%   13.0% 12.0%  
Interest 149 116 -21.8% 825 585 -29.1%
Depreciation 258 246 -4.4% 954 1,030 8.0%
Profit before Tax 991 854 -13.8% 1,352 1,788 32.3%
Extraordinary items (7) - - (30) (87) -
Tax 287 190 -33.7% 400 499 24.9%
Profit after Tax/(Loss) 696 663 -4.7% 923 1,202 30.3%
Net profit margin (%) 9.1% 7.1%   4.1% 4.5%  
No. of Shares (m) 118.9 118.9   118.9 118.9  
Diluted earnings per share (Rs)* 23.4 22.3   7.8 10.1  
P/E ratio (x)         10.1  

To highlight the turnaround in CV demand, total industry CV volumes (including light CV and medium CV) was higher by 30% to 191,201 units in FY03. While MHCV volumes have risen by 28%, it has been rebound of sorts for the LCV category, which saw industry demand increasing by 34% in FY03. Though growth is on the higher side, as we had mentioned in our previous articles, it is on a lower base and is unlikely to be sustainable. Compared to a industry growth of 28%, ASOK's domestic volumes have increased by 23% (including buses). Excluding the bus segment, domestic CV volumes are higher by 26%. The reasons for this underperformance are multifold. One, demand was skewed towards the northern markets till 9mFY03, which was a result of postponement of purchases by transport operators in the last two years. Secondly, Telco (the market leader) has been more aggressive on the new products front. The launch of the 'Ex' series of CVs have provided a big boost to Telco's volumes and consequently, ASOK has lost out on market share.

Quarterly trend…
(Nos) 1QFY03 2QFY03 3QFY03 9mFY03 4QFY03 FY03
Domestic 7,229 7,588 7,015 21,832 12,062 33,894
% YoY change 15.8% 15.3% 27.9% 19.2% 31.3% 23.3%
Exports 452 552 761 1,765 785 2,550
% YoY change 127.1% -18.7% 21.4% 17.3% 18.0% 17.5%
Total 7,681 8,140 7,776 23,597 12,847 36,444
% YoY change 19.3% 12.1% 27.2% 19.1% 30.4% 22.8%

The company has outperformed our topline estimates by 4% mainly due to the spurt in bus sales in FY03. While the company's domestic sales are higher by 16%, exports has touched 1,226 units, which represents a 44% rise in the same period. We were conservative on this front due to the poor financial state of the government transport undertakings. However, the passenger segment of the CV industry has recorded a 19% growth in volumes in FY03.

FY03 in snapshot…
(Units) FY02 FY03 Change (%)
MDV Passenger      
Domestic 8,416 9,743 15.8%
Exports 853 1,226 43.7%
Total 9,269 10,969 18.3%
MDV Goods      
Domestic 18,961 23,837 25.7%
Exports 1,153 1,001 -13.2%
Total 20,114 24,838 23.5%
LCV Goods      
Domestic 120 314 161.7%
Exports 164 323 97.0%
Total 284 637 124.3%

Operating margins have declined in FY03 due to strengthening of commodity prices and costs incurred towards new product introductions. However, this has been partially mitigated by further reduction in employee costs arising from the new VRS scheme. ASOK has reduced its workforce by 1,358 during FY03. As expected, the company has taken advantage of a softer interest rate regime to retire some of its high cost debts (average cost of debt in FY02 for ASOK was 13%). This is one of the key factors that has resulted in net profit growing at 30% in FY03 despite higher provision towards the VRS scheme. Against our estimate of Rs 1,244 m, ASOK's reported net profit stands at Rs 1,202 m.

The stock currently trades at Rs 102 implying a P/E multiple of 10.1x FY03 earnings. As far as the industry prospects for FY04 is concerned, we expect demand to grow in the range of 4%-5%. Given the sharp fall in agricultural production in FY03, there will be less goods to transport in FY04. Moreover, the industrial sector growth is likely to peter down, which is one of the key determinant for priming CV demand. Though infrastructure spending and a favorable interest rate scenario are a big positive for the sector, volume growth prospects are challenging. That said, with the road construction project moving towards southern region, ASOK will benefit from any rise in CV demand in this region. On the exports front, the company has won a US$ 46 m (Rs 2,208 m or 8% of FY03 net sales) order for the supply of 3,322 trucks to Iraq, under the UN-approved Oil for Food programme. This will partially negate the impact of a weaker domestic demand and enable the company to post higher profits in FY04.

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