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Ashok Leyland: Recovery on the cards? - Views on News from Equitymaster
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Ashok Leyland: Recovery on the cards?
Jun 5, 2014

Ashok Leyland announced the fourth quarter results of financial year 2013-2014 (4QFY14). The company reported a 17.5% YoY fall in revenues but a 142% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales fall by 17.5% YoY in 4QFY14 on account of the continuing sluggish conditions in the MHCV market which result in a substantial drop in volumes.
  • Operating margins, however, improve by 0.7% to 6% in 4QFY14 largely on account of various cost rationalization measures undertaken by the company.
  • Excluding the extraordinary income of Rs 3.8 bn, the company reports a net loss of Rs 127 m on account of higher interest costs.

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 37,285 30,768 -17.5% 124,812 99,434 -20.3%
Expenditure 35,302 28,928 -18.1% 116,047 97,769 -15.8%
Operating profit (EBDITA) 1,983 1,839 -7.2% 8,765 1,666 -81.0%
EBDITA margin (%) 5.3% 6.0%   7.0% 1.7%  
Other income 115 157 36.6% 624 665 6.7%
Interest (net) 828 1,126 36.0% 3,769 4,529 20.2%
Depreciation 1,001 1,034 3.4% 3,808 3,770 -1.0%
Profit before tax 270     (163)     1,812  (5,969)  
Tax 114 (36)   370  (1,206)  
Extraordinary item 1,344 3,761 179.9% 2,896 5,057 74.6%
Profit after tax/(loss)   1,500   3,634 142.3%   4,337 294 -93.2%
Net profit margin (%) 4.0% 11.8%   3.5% 0.3%  
No. of shares (m) 2,660.7 2,660.7   2,660.7 2,660.7  
Diluted earnings per share (Rs)*         (1.8)  

What has driven performance in FY14?
  • Ashok Leyland's revenues fell by 20% YoY during the year. This poor performance was on account of the sluggish conditions in the MHCV segment. Because of the slowdown in the economy, industrial and manufacturing activity got adversely impacted. Hence, freight rates fell and thus demand for CVs dipped. Total industry volumes were down 20% YoY during the year. Besides the fall in volumes, the industry also witnessed heavy discounts all of which took its toll on the performance of CV manufacturers including Ashok Leyland.

    In the fourth quarter too, Ashok Leyland's revenues were down 17.5% YoY. But if one looks at the sequential trend, there was a robust growth in revenues by around 58% YoY. This is an encouraging sign possibly signaling that the CV industry has left the worst behind it. Although weak conditions are likely to persist during the first half of FY15, the management is hopeful of the scenario getting better from the second half of the current fiscal.

  • ALL's operating margins drastically fell by 7% to 1.7% during the year largely on account of the plunge in volumes. This then translated into a massive 81% YoY drop in operating profits. Having said that, the performance in the fourth quarter was very good because operating margins improved by 0.7% to 6%. This was a result of various cost rationalization measures adopted by the company which saw a decline in all costs in absolute terms. As a result, during the fourth quarter, despite the 17.5% YoY fall in revenues, the fall in operating profits was lower at 7% YoY.

    Cost break-up...
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Raw materials 28,245 23,164 -18.0% 91,231 76,026 -16.7%
    % sales 75.8% 75.3%   73.1% 76.5%  
    Staff cost 2,821 2,473 -12.4% 10,755 9,997 -7.1%
    % sales 7.6% 8.0%   8.6% 10.1%  
    Other expenditure 4,235 3,292 -22.3% 14,061 11,746 -16.5%
    % sales 11.4% 10.7%   11.3% 11.8%  
    Total 35,302 28,928   116,047 97,769  

  • Because of the poor performance at the operating level and higher interest costs, Ashok Leyland reported a 93% YoY fall in net profits. Having said that, the company had received extraordinary income of around 6 bn because of the divestment of various non-core assets. This helped the company record some profit for the year. If once excludes this income, the company reported a loss of Rs 4.8 bn at the net level. Interest costs were up by 20% YoY for the year. The company had taken fresh loans in FY13 and the full impact of these was reflected in the interest costs. That said, through the sale of its non-core assets, Ashok Leyland is looking to reduce its working capital requirements and pare down debt.
What to expect?
At the current price of Rs 34, the stock is trading at a multiple of 7.7 times our estimated FY16 cash flow per share. Given that the MHCV industry performed very poorly in FY14, Ashok Leyland bore a brunt of this as well. The first half of FY15 is likely to remain subdued with the possibility of a recovery thereafter. What is encouraging is that the company has managed to significantly ramp up its performance on a sequential basis when it comes to both revenue growth and operating margins.

Throughout the year, Ashok Leyland had been employing various cost rationalization initiatives, which includes sale of non-core assets and these have begun to bear fruit. The cash generated from this will be entirely utilized towards retiring debt. The company also intends to go slow on capex for the next couple of years given that a large part of its existing capacity is underutilized.

The auto industry is cyclical and more so in the case of commercial vehicles as growth is directly linked to that of GDP. Since, it is difficult to predict when a cycle will turn, we nevertheless believe in looking at the average trend over a longer term period. Thus, even if FY14 was bleak for Ashok Leyland, volumes are expected to ramp up once the economy picks up, the benefits of which will flow to the margins as well. Having said that, the stock price of the company has considerably run up in recent times and is almost close to our target price. We will thus need to relook at our estimates for the company. However, we believe that the current price levels do not offer sufficient margin of safety and thus we are of the view that investors should not buy the stock at the current price levels.

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