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Ashok Leyland: Poor volumes hit profits
Jul 18, 2013

Ashok Leyland announced the first quarter results of financial year 2013-2014 (1QFY14). The company reported a 22% YoY fall in revenues and a loss of Rs 1.4 bn at the net level. Here is our analysis of the results.

Performance summary
  • Net sales fall by 22% YoY in 1QFY14 on account of the sluggish conditions in the MHCV market which result in a substantial drop in volumes.
  • Operating margins plunge by 7% to 1% in 1QFY14 largely on account of the considerable fall in volumes.
  • Because of the poor performance at the operating level and higher interest costs, the company reports a net loss of Rs 1.4 bn for the quarter.

Consolidated performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 30,269 23,638 -21.9%
Expenditure 27,862 23,406 -16.0%
Operating profit (EBDITA) 2,407 233 -90.3%
EBDITA margin (%) 8.0% 1.0%  
Other income 129 123 -4.7%
Interest (net) 834 1,007 20.8%
Depreciation 893 952 6.6%
Profit before tax 809 (1,603)  
Tax 140 (251)  
Extraordinary item - (65)  
Profit after tax/(loss) 669 (1,418)  
Net profit margin (%) 2.2% -6.0%  
No. of shares (m) 2,660.7 2,660.7  
Diluted earnings per share (Rs)*   (0.2)  
(* on trailing twelve months earnings and excluding extraordinary items)

What has driven performance in 1QFY14?
  • Ashok Leyland's revenues fell by 22% YoY during the quarter. 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. Although the company also had to resort to discounts, it made attempts to ensure that they were not as steep as some of those offered by the company's competitors. However, in the process, the company lost some market share. Geography wise, the MHCV market in the South, witnessed the most drop in volumes, and because Ashok Leyland has a strong presence in this region, it was impacted by the weakness there. In the bus segment too, volumes dropped in both the STU and private bus segment. Exports also witnessed a fall on account of losses in markets such as Sri Lanka where the increase in import duty led to a collapse of the market there for exports.

  • ALL's operating margins drastically fell by 7% to 1% during the quarter largely on account of the plunge in volumes. Having said that, while in absolute terms, there was a decline in costs due to some cost control measures undertaken by the company, as a percentage of sales costs increased simply because volumes and consequently sales dropped. This then translated into a massive 90% YoY drop in operating profits.

    Cost break-up...
    (Rs m) 1QFY13 1QFY14 Change
    Raw materials 21,887 17,837 -18.5%
    % sales 72.3% 75.5%  
    Staff cost 2,679 2,582 -3.6%
    % sales 8.8% 10.9%  
    Other expenditure 3,297 2,987 -9.4%
    % sales 10.9% 12.6%  
    Total 27,862 23,406  

  • Led by the poor performance at the topline and operating level, Ashok Leyland reported a loss of Rs 1.4 bn at the net level. What also compounded matters was the rise in interest costs by 21% YoY. The company had taken fresh loans in FY13 and the full impact of these was reflected in the interest costs.

What to expect?
At the current price of Rs 17, the stock is trading at a multiple of 3.7 times our estimated FY16 cash flow per share. With the MHCV industry performing very poorly in FY13 and also during the first quarter of this fiscal, the management indicated that this was the sharpest downturn that it has seen. But it expects things to not worsen further.

As far as the long term strategy is concerned, the company intends to keep up its focus on R&D and new product launches. In order to reduce debt, the company has been scaling down capex and this intends to be less than Rs 2 bn in the current fiscal. Whatever capex is undertaken will be more towards R&D and innovation and not on expanding capacities.

In the past, Ashok Leyland was known to make investments in unrelated areas especially with the cash generated during an upcycle. The management intends to scale down investments this fiscal to less than Rs 2.5 bn. It does not intend to utilise its cash flow towards diversification. But it intends to capitalise on the opportunities in the LCV space. And hence is likely to invest in its JV with Nissan (for LCVs) should the need so arise in the future.

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 things look quite bleak for Ashok Leyland at present, over a three year period, we still expect volumes to grow at an average of around 8%, the benefits of which will flow to the margins as well. In view of this, we maintain our 'Buy' view on the stock with a target price of Rs 35 from an FY16 perspective.

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