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  • May 18, 2012 - Ashok Leyland: Higher other expense mars performance

Ashok Leyland: Higher other expense mars performance
May 18, 2012

Ashok Leyland announced its results for the quarter and year ended March 2012 recently. The company reported a 12% YoY increase in revenues, while profits declined by 13% YoY. Here is our analysis of the results.

Performance Summary
  • Net sales grow by 12% YoY during the quarter led by higher volumes as well as price increases.
  • Operating profits decline by 8% YoY as margins contract by 2.3% YoY to 10.9%. The same is due to higher raw material and other expenses (as a percentage of sales).
  • Net profits decline by 13% YoY on account of lower operating profits coupled with higher interest and depreciation charges.
  • Board recommends dividend of Rs 1 per share (dividend yield of about 4%).

Financial performance: A snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 38,484 43,110 12.0% 111,771 128,420 14.9%
Expenditure 33,404 38,411 15.0% 99,634 115,859 16.3%
Operating profit (EBDITA) 5,081 4,699 -7.5% 12,137 12,561 3.5%
EBDITA margin (%) 13.2% 10.9%   10.9% 9.8%  
Other income 157 109 -30.5% 445 404 -9.2%
Finance costs 548 724 32.0% 1,889 2,553 35.1%
Depreciation 772 956 23.8% 2,674 3,528 31.9%
Exceptional items - 16   - 16  
Profit before tax 3,917 3,144 -19.7% 8,018 6,900 -13.9%
Tax 935 557 -40.4% 1,705 1,240 -27.3%
Profit after tax/(loss) 2,982 2,587 -13.2% 6,313 5,660 -10.3%
Net profit margin (%) 7.7% 6.0%   5.6% 4.4%  
No. of shares (m)         2,660.7  
Diluted earnings per share (Rs)*       2.1  
Price to earnings ratio (x)*         11.7  
* On a trailing 12-month basis, adjusted for extraordinary items

What has driven performance in 4QFY12?
  • Ashok Leyland's (ALL) revenues grew by 12% YoY during the quarter. When compared to the preceding quarter i.e.3QFY12, revenues spiked up by 48% QoQ on the back of increased volumes in the light commercial vehicles (LCV) segment. As per the management, ALL benefited from the off take in volumes in the southern region, where ALL garners high market share. Demand for vehicles in the region was subdued during the first half of the financial year on the back of the mining scam.

  • ALL's operating margins contracted by 2.3% YoY to 10.9% on the back of higher input costs as well as higher other expenses. On the other hand, employee costs declined (as a percentage of sales) due to revision in actuarial liability (leave encashment and gratuity) and lower provision for bonus. However, other expenses increased substantially on a year on year basis on account of varied reasons. These include overall increase in production activities, one time related marketing and brand building expenses, higher R&D expenses and higher transportation charges for moving vehicles from the company's Pantnagar plant (located in the northern part of India) to Southern markets. For FY13, the management is targeting operating margins in the range of 10% to 10.5%.

    Cost break-up...
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw materials/ purchases 27,768 32,091 15.6% 81,726 94,618 15.8%
    % sales 72.2% 74.4%   73.1% 73.7%  
    Staff cost 3,018 2,468 -18.2% 9,597 10,204 6.3%
    % sales 7.8% 5.7%   8.6% 7.9%  
    Other expenditure 2,617 3,851 47.1% 8,310 11,037 32.8%
    % sales 6.8% 8.9%   7.4% 8.6%  
    Total expenditure 33,404 38,411 15.0% 99,634 115,859 16.3%

  • A decline in operating profits coupled with lower other income, higher interest and depreciation charges led ALL's profit before tax (PBT) to decline by 20% YoY. However, the company was able to use its MAT credits to lower tax expenses for the quarter.

  • As compared to the preceding quarter, revenues and profits came in higher by 48% QoQ and 287% QoQ respectively. Operating profits expanded by 123% QoQ while margins expanded by 3.7%.

  • For the full year FY12, ALL revenues grew by 15% YoY while profits came in lower by 10% YoY. Operating profits grew by a marginal 3.5% YoY as margins contracted to 9.8% from 10.9% during FY11. While the company did well to maintain its raw material and employee costs, it was largely impacted by higher other expenses (as a percentage of sales).

What to expect?
FY12 was a mixed year for ALL. While it lost market share during the first half of the year due to various issues it faced in the Southern market (where the company has a strong presence), volumes picked up strongly in the second half. The company expects to do well in the next year in terms of improving its marketshare as well as improving its operating performance. The company expects the M&HCV industry to grow by 6%, while the volume growth for the company to be relatively higher. ALL's management is also expecting operating margins to improve due to higher volume sales in the M&HCV segment (a relatively more profitable business). This is due to higher tax benefits on higher rollout from its Pantnagar plant. Further, it would also be able to reap full benefits of the pricing action that it took throughout FY12. However, all of this depends on the share of sales from the LCV segment, since the same garners lower margins. ALL has lined up capex of Rs 8 bn for the full year FY13 towards consolidating its operations at Pantnagar plant in Uttarakhand and also towards research and development activities. All this is in addition to the more than Rs 40 bn that the company plans to invest, along with its JV partner Nissan, towards a green field LCV manufacturing plant in Pillaipakkam (near Chennai).

At the current price of Rs 24.9, the stock is trading at a multiple of 6.7 times our estimated FY14 earning per share and 5 times our estimate FY14 cash flow per share. We will come out with an updated view soon.

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