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Ashok Leyland: Underperformer

Jul 22, 2003

Ashok Leyland, the second largest commercial vehicle (CV) manufacturer in the country, has posted a poor performance for the first quarter ended June 2003. While topline has grown at a slower pace, there has been a contraction in operating margins as well. But for a sharp fall in interest expenses, net profit could have declined during the quarter.

(Rs m) 1QFY03 1QFY04 Change
Net sales 5,577 5,843 4.8%
Other Income 23 18 -21.5%
Expenditure 4,971 5,322 7.1%
Operating Profit (EBDIT) 606 521 -14.1%
Operating Profit Margin (%) 10.9% 8.9%  
Interest 176 86 -51.5%
Depreciation 257 230 -10.6%
Profit before Tax 196 223 14.1%
Extraordinary items (40) (6) -
Tax 58 69 19.7%
Profit after Tax/(Loss) 97 148 51.9%
Net profit margin (%) 1.7% 2.5%  
No. of Shares (m) 119.0 119.0  
Diluted Earnings per share (Rs)* 3.3 5.0  
P/E Ratio (x)   23.1  
(* annualised)      

Total volumes in 1QFY04 have increased by 9% to 8,347 units. Growth in unit sales is on the lower side compared to previous quarters on account of a 10% decline in passenger bus sales. Except for demand from private transport operators, state transport undertakings (STUs) have been postponing fresh orders for passenger buses. This seem to have affected ASOK's volumes sales in 1QFY04. Though M/HCV volumes have risen by 18%, it is lower when compared with Telco, the market leader.

First quarter snapshot…
(Nos) 1QFY03 % of sales 1QFY04 % of sales Change (%)
Bus 2,556 33.3% 2,297 27.5% -10.1%
M/HCVs 4,973 64.7% 5,880 70.4% 18.2%
LCVs 152 2.0% 170 2.0% 11.8%
Total 7,681 100.0% 8,347 100.0% 8.7%
Source: Company website

To put things in perspective, domestic sales of Telco (M/HCVs and LCVs) in 1QFY04 saw a 25% growth as compared to a 18% rise for ASOK. As a result, we expect ASOK's market share to have declined in the first quarter in line with the trend witnessed in FY03. Telco had indicated that it plans to recover its market share in the LCV segment in the medium-term, which it had lost in the late 1990s. As a result of the slower volume growth, ASOK's net sales have increased only by 5% in 1QFY04.

Operating margins have come under pressure during the quarter. Telco has been agressively expanding its presence in the Southern market in the last one year. This could have impacted average realisation for ASOK. With expenditure rising at a faster rate compared to sales, operating profits are on the lower side. A steep fall in interest cost and lower extraordinary adjustment in 1QFY04 has translated into a 51% rise in net profit. However, if one were to remove extraordinary adjustments from the both the quarters, net profit growth stands at 12%.

Geographical mix…
(Nos) 1QFY03 1QFY04 Change (%)
Domestic 7,229 7,859 8.7%
Exports 452 488 8.0%
Total 7,681 8,347 8.7%
Source: Company website

The stock currently trades at Rs 115 implying a P/E multiple of 23.1x annualised 1QFY04 earnings. We had indicated earlier that the company is likely to underperform its key competitor, Telco in FY04 on account of its regional concentration. Though the company has increased its presence in the northern region, market share continues to remain under pressure. In this context, valuations seem to be on the higher side.

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