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Ashok Leyland: Higher costs hit profits - Views on News from Equitymaster
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Ashok Leyland: Higher costs hit profits
May 16, 2013

Ashok Leyland announced the fourth quarter results of financial year 2012-2013 (4QFY13). The company reported a 14% YoY fall in revenues, while profits fell by 42% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 14% YoY in 4QFY13 on account of the sluggish conditions in the MHCV market.
  • Operating margins nearly halve to 5.3% in 4QFY13 largely on account of a surge in all cost heads (as percentage of sales).
  • Net profits plunge by 42% YoY led by the poor performance at both the topline and the operating level. Excluding the extraordinary income during the quarter, fall in the bottomline is steeper at 94% YoY.

Financial performance: A snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 43,295 37,285 -13.9% 129,043 124,812 -3.3%
Expenditure 38,596 35,302 -8.5% 116,482 116,047 -0.4%
Operating profit (EBDITA) 4,699 1,983 -57.8% 12,561 8,765 -30.2%
EBDITA margin (%) 10.9% 5.3%   9.7% 7.0%  
Other income  109 115 6.0% 404 624 54.5%
Interest (net)  724 828 14.3% 2,553 3,769 47.7%
Depreciation  956 1,000 4.6% 3,528 3,808 7.9%
Profit before tax 3,128 271 -91.4% 6,884 1,812 -73.7%
Tax  557 114 -79.6% 1,240 370 -70.2%
Extraordinary item 16 1,344   16 2,896  
Profit after tax/(loss) 2,587 1,500 -42.0% 5,660 4,337 -23.4%
Net profit margin (%) 6.0% 4.0%   4.4% 3.5%  
No. of shares (m)        2,660.7  2,660.7  
Diluted earnings per share (Rs)*          0.5  
Price to earnings ratio (x)*          46.7  
(* on trailing twelve months earnings and excluding extraordinary items)

What has driven performance in FY13?
  • Ashok Leyland's revenues fell by 14% YoY during the quarter and by 3% YoY for the full year. This poor performance was on account of the sluggish conditions in the MHCV segment. Not only did volumes fall, but the industry also witnessed heavy discounts all of which took its toll on the topline. Despite this, the company was able to gain market share by 3% in the MHCV space largely attributable to gains across regions and the success of newly introduced models. Exports witnessed a fall on account of losses in key SAARC markets most particularly Sri Lanka where the increase in import duty led to a collapse of the market there for exports.

  • ALL's operating margins shrunk by 2.7% to 7% during the year largely on account of a substantial rise in staff costs and other expenditure (as percentage of sales). For instance, other expenditure surged from 9% of sales in FY12 to 11.3% in FY13 on account of various items such as consultancy fees paid for helping improve the company's working capital position, IT related expenses and maintenance and warranty costs. Further, although prices of vehicles were raised during the year, heavy discounts in the latter half meant that the overall impact was nullified. Thus, with operating margins shrinking, operating profits plunged 30% YoY.

    Cost break-up...
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Raw materials 32,091 28,245 -12.0% 94,618 91,231 -3.6%
    % sales 74.1% 75.8%   73.3% 73.1%  
    Staff cost 2,468 2,821 14.3% 10,204 10,755 5.4%
    % sales 5.7% 7.6%   7.9% 8.6%  
    Other expenditure 4,036 4,235 4.9% 11,660 14,061 20.6%
    % sales 9.3% 11.4%   9.0% 11.3%  
    Total 38,596 35,302   116,482 116,047  

  • Led by the poor performance at the topline and operating level, ALL's net profits fell by 23% YoY during FY13. However, there was extraordinary income of Rs 2.9 bn that the company received during the year. Excluding that, the fall in the bottomline was steeper at 75% YoY. Interest costs also surged during the year by 48% YoY on account of an increase in working capital loans. The company has been working to bring this down.

What to expect?

At the current price of Rs 23, the stock is trading at a multiple of 4.9 times our estimated FY15 cash flow per share. Going forward, in the medium term, the company intends to reduce the discounts on its vehicles and these are expected to be lesser than what they were in FY13. The company expects the CV industry to grow by 3-4% in FY14 and hopes to do slightly better at 4-5%. It must be noted that the first half of the fiscal is expected to remain subdued with growth picking in the second half. The company does not expect its debt to either increase or worsen in FY14 and has outlined a capex of Rs 2.5 bn for the fiscal. Overall, we have a 'Buy' view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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