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Ashok Leyland: Changing mix - Views on News from Equitymaster
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  • May 8, 2002

    Ashok Leyland: Changing mix

    Ashok Leyland (ASOK), the No. 2 Indian commercial vehicle (CV) producer, has reported a marginal rise in sales and net profits for the fiscal year ended March 31, 2002. Given the challenging economic scenario, the company's attempt to diversify its revenues stream seems to be paying off.

    (Rs m) FY01 FY02 Change
    Net sales 22,523 22,612 0.4%
    Other Income 102 180 -0.3%
    Expenditure 19,834 19,773 75.6%
    Operating Profit (EBDIT) 2,689 2,839 5.6%
    Operating Profit Margin (%) 11.9% 12.6%  
    Interest 888 743 -16.3%
    Depreciation 884 954 7.9%
    Profit before Tax 1,019 1,322 29.7%
    Tax 103 400 289.4%
    Profit after Tax/(Loss) 917 923 0.6%
    Net profit margin (%) 4.1% 4.1%  
    No. of Shares (m) 118.9 118.9  
    Diluted Earnings per share 7.7 7.8  
    P/E Ratio (x)   13.5  

    ASOK is the market leader in the passenger bus segment and is the key supplier to many of the state transport undertakings (STUs) in India. While its overall market share in the bus segment is 50%, in the STU category, ASOK enjoys a 60% share. However, in FY02, most of the STUs lowered vehicle expansion plan and industry volumes plummeted by 42%. As a result, ASOK's volumes stood at 8,422 units as compared to 12,486 units in FY01, a decline of 33%.

    Market share details…
    (Nos) FY00 FY01 FY02
    Industry 106,261 82,071 84,098
    ASOK 35,374 29,706 27,247
    Market share 33.3% 36.2% 32.4%

    Besides, there has been notable shift in demand as well. While there was a contraction of demand in Southern market, volumes increased notably in Northern states. Contribution from Southern states, as a percentage of CV volumes fell to 28% in FY02 (34% in FY01). Given ASOK's market leadership in southern states like Tamil Nadu, it had an adverse effect on the company's sales. The dismal performance of the bus segment resulted in lower share in the delivery vehicle segment for ASOK.

    The sales mix...
    (Nos) FY01 FY02 Change (%)
    Passenger 12,486 8,422 -32.5%
    Goods 17,393 18,413 5.9%
    Sub-total 29,879 26,835 -10.2%
    % of total 92.0% 90.4%  
    Defense 185 668 261.1%
    % of total 0.6% 2.3%  
    Exports 2,411 2,170 -10.0%
    Total 32,475 29,673 -8.6%

    Despite a 9% fall in volume, sales grew marginally indicating a sharp spurt in average realisation. This was primarily on account of shift to higher tonnage vehicle sales and increased contribution from defense sales, where realisations are significantly higher. Just to put things in perspective, average realisation for the company in FY01 for CVs was around Rs 0.6 m whereas it was as high as Rs 1.5 m for defense vehicles. Operating margins have gone up by 70 basis points and this was primarily led by favorable change in inventory thus lowering operating expenses. Interest costs were lower by 16% as the company is estimated to have retired debt to the tune of Rs 1.8 bn during the year. We expect the company to retire debt worth Rs 2 bn over the next two years and interest costs would continue to show a downward trend. However, higher tax outflow on account of deferred taxation resulted in subdued growth in net profits for FY02.

    The outlook for the CV segment in the coming fiscal in encouraging with demand expected to rise by 6%, more favorably towards higher tonnage and multi-axle vehicles. The company's strategy of Hino engine vehicles have received good response from operators and ASOK has plans to add variants to the existing product offerings. It has developed a Hino based CNG engine for buses, which is slated for introduction soon. Given the company's market leadership in the passenger bus segment, this is expected to be one of the key growth drivers in the future. Following Delhi, a number of other states have proposed to introduce CNG-based vehicles, which augurs well for the company. Besides, the company expects STUs to resume vehicle purchases in the current year. ASOK has also been key supplier to Africa and Bangladesh (mostly in CKD) and we expect the contribution to touch almost 14% of sales in the long run.

    But at the same time, Telco has made significant progress in the Southern markets and as a result ASOK's leadership could be affected. Though the company has been increasing its presence in the Northern markets, it is on the lower side. On the higher tonnage segment, Volvo is emerging as one of the strong contenders and their volumes have been growing at a healthy rate. ASOK has ventured into manufacturing of defense vehicles, which has received a number of orders, both from the domestic and international markets. The stock currently trades at Rs 105 implying a P/E multiple of 13.5x FY02 earnings.



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