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Ashok Leyland: Mediocre fiscal - Views on News from Equitymaster

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Ashok Leyland: Mediocre fiscal
May 8, 2008

Performance summary
  • Topline grows by 8% YoY for FY08 despite flat volumes.

  • Operating margins improve by 0.6% over FY07, resulting in a 14% YoY jump in operating profits.

  • Bottomline on the other hand, has grown at a lower rate of 6% YoY, largely due to jump in interest expenses and subdued other income.

  • For the fourth quarter ended March 2008, bottomline has shown a growth of 5% YoY on the back of a 12% YoY growth in topline.

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 22,910 25,620 11.8% 71,682 77,291 7.8%
Expenditure 20,261 22,663 11.9% 64,655 69,251 7.1%
Operating profit (EBDITA) 2,649 2,957 11.6% 7,027 8,040 14.4%
EBDITA margin (%) 11.6% 11.5%   9.8% 10.4%  
Other income 169 116 -31.3% 708 740 4.5%
Interest (net) 19 91 384.8% 53 497 832.9%
Depreciation 481 486 1.0% 1,506 1,774 17.8%
Profit before tax 2,318 2,496 7.7% 6,176 6,509 5.4%
Extraordinary income/(expense) (30) (22)   (131) (84)  
Tax 573 669 16.7% 1,632 1,732 6.1%
Profit after tax/(loss) 1,715 1,806 5.3% 4,413 4,693 6.4%
Net profit margin (%) 7.5% 7.0%   6.2% 6.1%  
No. of shares (m) 1,323.9 1,330.3   1,323.9 1,330.3  
Diluted earnings per share (Rs)*       3.3 3.5  
Price to earnings ratio (x)**         11.5  

What has driven performance in FY08?
  • After six straight years of positive growth rate, domestic demand for M&HCVs showed a decline during FY08 and stood lower by 2% YoY. Ashok Leyland also suffered a similar decline in its M&HCV portfolio as lot of CV owners deferred purchases in wake of the current high interest rate regime. What was heartening from the company’s point of view was the fact that demand for passenger CVs revived, growing by as much as 51%, enabling the company to not only restrict the fall in its overall M&HCV volumes but also gain market share. In the goods segment though, the company lost market share as volumes were down by 11% YoY as against the industry decline of 6% YoY. If one were to consider cumulative sales i.e., all segments and geographies combined, then volumes for the full year remained flat. Here, apart from passenger M&HCVs, sales of LCV and exports also helped prop up volumes. In value terms, growth stood at 8% YoY for the full year, thanks mainly to improved product mix and a series of price hikes that the company undertook during the fiscal.

    Segment wise break up of sales…
      4QFY07 4QFY08 Change (%) FY07 FY08 Change (%)
    M&HCVs Passenger        
    Domestic 3,990 3,869 -3.0% 11,673 17,572 50.5%
    Exports 1,057 1,438 36.0% 3,778 4,688 24.1%
    M&HCVs Goods        
    Domestic 20,324 20,735 2.0% 65,063 57,835 -11.1%
    Exports 677 899 32.8% 2,233 2,389 7.0%
    Total M&HCVs        
    Domestic 24,314 24,604 1.2% 76,736 75,407 -1.7%
    Exports 1,734 2,337 34.8% 6,011 7,077 17.7%
    LCVs        
    Domestic 81 238 193.8% 333 615 84.7%
    Exports 11 130 1081.8% 14 208 1385.7%
    Total        
    Domestic 24,395 24,842 1.8% 77,069 76,022 -1.4%
    Exports 1,745 2,467 41.4% 6,025 7,285 20.9%
    Grand Total 26,140 27,309 4.5% 83,094 83,307 0.3%

  • On the profitability front, despite a steep 28% YoY hike in staff costs, operating margins improved marginally by 0.6% during the fiscal. This was made possible because of control over raw material costs, which declined by 2% (as percentage of sales). Further, the fact that the company sold more high value products also helped boost profitability

    Cost break-up…
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 17,059 18,456 8.2% 53,391 56,018 4.9%
    % sales 74.5% 72.0%   74.5% 72.5%  
    Staff cost 1,163 1,674 43.9% 4,807 6,162 28.2%
    % sales 5.1% 6.5%   6.7% 8.0%  
    Other expenditure 2,038 2,534 24.3% 6,457 7,071 9.5%
    % sales 8.9% 9.9%   9.0% 9.1%  

  • With the company embarking on a significant capex plan, interest costs have jumped more than nine fold during the fiscal. Depreciation outgo has also come in higher by 18% YoY. Thus, these factors combined with a subdued other income restricted the bottomline growth to 6% YoY during FY08.

What to expect?
At the current price of Rs 41, the stock is trading at a multiple of 6.3 times our estimated FY10 cash flow. The company’s results have come in line with our FY08 estimates and as far as the projections for the medium term is concerned, we would have a relook at them post the management conference call.

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