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Ashok Leyland: Sales, margins shine

May 19, 2011

Ashok Leyland announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported a 30% YoY increase in revenues, while profits grew by 34% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by 30% YoY, led by strong growth in volumes both in the domestic and export markets.
  • Operating margins improve marginally by 0.4% YoY despite higher input costs on account of lower staff costs and other expenditure (as percentage of sales).
  • Strong growth in operating profits coupled with higher other income leads to the 34% YoY growth in net profits.
  • During FY11, revenues and profits rise by 54% and 49% YoY respectively. Despite a 60% YoY increase in operating profits, net profits increase at a slower pace on the back of a lower other income and higher interest costs.
  • Board recommends a dividend of Rs 2 per share (dividend yield of 4%).

Financial performance: A snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 29,390 38,285 30.3% 72,447 111,177 53.5%
Expenditure 25,607 33,187 29.6% 64,819 99,001 52.7%
Operating profit (EBDITA) 3,784 5,099 34.8% 7,628 12,176 59.6%
EBDITA margin (%) 12.9% 13.3%   10.5% 11.0%  
Other income 23 41 78.3% 704 153 -78.2%
Interest (net) 221 451 103.9% 811 1,637 101.7%
Depreciation 588 772 31.4% 2,041 2,674 31.0%
Extraordinary income/(expense) (4) -   (33) -  
Profit before tax 2,994 3,917 30.8% 5,448 8,018 47.2%
Tax 768 935 21.7% 1,211 1,705 40.8%
Profit after tax/(loss) 2,226 2,982 33.9% 4,237 6,313 49.0%
Net profit margin (%) 7.6% 7.8%   5.8% 5.7%  
No. of shares (m)       1,330.3 1,330.3  
Diluted earnings per share (Rs)*         4.7  
Price to earnings ratio (x)*         10.6  
(* on trailing twelve months earnings)

What has driven performance in FY11?
  • Ashok Leyland (ALL) reported a robust revenue growth of 53.5% YoY during the year. The revenue growth was led by 47% YoY increase in volumes and an approximate 7% increase in realisations. While domestic volumes jumped 45% YoY to reach 83,800 vehicles, exports recorded a healthy 72% YoY growth in volumes to reach 10,306 vehicles. This strong performance at the topline level enabled the company to improve its market share by 2.4 percentage points to 26% in the M&HCV segment. The overall capacity utilization was high at around 82% and there was a significant ramp up in production in its Pantnagar facility as well. The company went in for price hikes given that raw material prices had increased by 5% on an average.

  • ALL's operating margins improved marginally by 0.4% during the year despite a rise in raw material costs from 72% in FY10 to 73% this year. This was largely because the company was able to keep its staff costs and other expenditure under control. That said, during the fourth quarter, the expenses which increased the maximum in absolute terms were employee expenses. The sharp 67% YoY increase in employee expenses was on the back of the company paying one-time bonus and ex-gratia costs.

    Cost break-up...
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Raw materials 21,509 27,603 28.3% 52,175 81,212 55.7%
    % sales 73.2% 72.1%   72.0% 73.0%  
    Staff cost 1,807 3,018 67.0% 6,659 9,597 44.1%
    % sales 6.1% 7.9%   9.2% 8.6%  
    Other expenditure 2,290 2,566 12.0% 5,984 8,193 36.9%
    % sales 7.8% 6.7%   8.3% 7.4%  

  • Although the growth in net profits during the year was strong at 49% YoY, it was still lower than the 60% YoY growth in operating profits. This was on the back of a sharp increase in depreciation charges and interest costs. Interest costs were higher for two reasons - no capitalization of interest costs and fresh loans of Rs 4.6 bn taken this year in addition to the loans taken in the last quarter in the previous year to the tune of Rs 5 bn. Depreciation charges were higher on account of the Pantnagar plant coming on stream.

What to expect?
At the current price of Rs 50, the stock is trading at a multiple of 9.4 times our estimated FY13 earning per share and 6.5 times our estimate FY13 cash flow per share. (ResearchPro subscribers, kindly click here. The company's management has stated that it expects the auto industry to grow at a muted pace of 7-8% YoY next year, but it believes that ALL will be able to grow at a slightly faster pace as it would be able to grab some market share. As for the operating margins going forward, the management believes that ALL will be able to clock margins in excess of 10% going forward. This is on account of two reasons - one being higher volume sales and second being the company increasing prices. The company has outlined a capex of Rs 11 bn going forward for which it plans to raise Rs 6 bn through debt. The company's debt equity ratio stood at 0.9 times at the end of the year and the company expects this ratio to be maintained in the coming year as well. The company has performed better than our estimates for the full year and we will have to upgrade our numbers accordingly. Overall, we maintain our view on the stock.

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