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Ashok Leyland: The 'domestic' dampener - Views on News from Equitymaster

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Ashok Leyland: The 'domestic' dampener

Jul 21, 2011

Ashok Leyland announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported a 6% YoY increase in revenues, while profits have dropped by 30% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by a mere 6% YoY largely on account of subdued performance of its domestic business.
  • Operating margins shrink only marginally by 0.2% YoY due to higher staff costs and other expenditure (as percentage of sales).
  • Muted sales, lower other income, higher interest costs and depreciation charges all percolate down to the bottomline, which falls by 30% YoY during the quarter.

Financial performance: A snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 23,480 24,955 6.3%
Expenditure 21,132 22,509 6.5%
Operating profit (EBDITA) 2,348 2,446 4.2%
EBDITA margin (%) 10.0% 9.8%  
Other income 53 41 -23.0%
Interest (net) 316 533 68.7%
Depreciation 615 847 37.7%
Profit before tax 1,470 1,107 -24.7%
Tax 244 245 0.3%
Profit after tax/(loss) 1,226    863 -29.7%
Net profit margin (%) 5.2% 3.5%  
No. of shares (m) 1,330.3 1,330.3  
Diluted earnings per share (Rs)*   4.5  
Price to earnings ratio (x)*   11.1  
(* on trailing twelve months earnings)

What has driven performance in 1QFY12?
  • After a very strong FY11, Ashok Leyland (ALL) began FY12 on a muted note as sales during 1QFY12 grew by a mere 6% YoY. While domestic volumes declined by 14% YoY to reach 16,738 vehicles, exports recorded a healthy 31% YoY growth in volumes to reach 2,539 vehicles during the quarter. The drop in domestic volume was primarily in the South, which has been the company's stronghold for long. Since there were practically elections in every Southern state, purchases were delayed leading to drop in domestic volumes and subsequently also a loss of overall market share. Exports, however, came to the company's rescue and grew by a robust 31% YoY thereby cushioning the overall impact on sales.

  • ALL's operating margins shrunk marginally by 0.2% during the quarter largely on account of a rise in both staff costs and other expenditure (as percentage of sales). Staff costs increased from 8.6% of sales in 1QFY11 to 10% in 1QFY12. That said, the company was able to keep its raw material costs under control.

    Cost break-up...
    (Rs m) 1QFY11 1QFY12 Change
    Raw materials 17,346 17,981 3.7%
    % sales 73.9% 72.1%  
    Staff cost 2,025 2,497 23.3%
    % sales 8.6% 10.0%  
    Other expenditure 1,761 2,030 15.3%
    % sales 7.5% 8.1%  

  • Although ALL grew its operating profits by a tepid 4% YoY during the quarter, bottomline declined by 30% YoY. This was on the back of a sharp increase in depreciation charges and interest costs. Interest costs rose by 69% YoY on account of an increase in working capital loans. Depreciation charges were higher on account of the Pantnagar plant coming on stream. Lower other income also contributed to the company's bottomline woes.

What to expect?
At the current price of Rs 49, the stock is trading at a multiple of 8.5 times our estimated FY13 earning per share and 6.1 times our estimate FY13 cash flow per share.

The company's management has stated that it expects the auto industry to grow at a muted pace of 7-8% YoY in FY12, 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 6 bn for FY12 and also intends to raise its long term borrowing target to Rs 6 bn. 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. Overall, we maintain our view on the stock.

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