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Ashok Leyland: Higher expenses take toll - Views on News from Equitymaster

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Ashok Leyland: Higher expenses take toll

Jul 25, 2012

Ashok Leyland announced the first quarter results of financial year 2012-2013 (1QFY13). The company reported a 20% YoY increase in revenues, while profits fell by 22% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by 20% YoY largely led by strong growth in volumes especially the bus segment and from the sales of its LCV 'Dost'.
  • Operating margins fall by 1.7% to 8% in 1QFY13 largely on account of a substantial increase in other expenditure (as percentage of sales).
  • Net profits fall by 22% YoY on account of the poor performance at the operating level, and surge in interest costs.

(Rs m) 1QFY12 1QFY13 Change
Net sales 25,127 30,073 19.7%
Expenditure 22,681 27,666 22.0%
Operating profit (EBDITA) 2,446 2,407 -1.6%
EBDITA margin (%) 9.7% 8.0%  
Other income 74 129 72.9%
Interest (net) 567 834 47.1%
Depreciation 847 893 5.4%
Profit before tax 1,107 809 -26.9%
Tax 245 140 -42.8%
Profit after tax/(loss) 863 669 -22.4%
Net profit margin (%) 3.4% 2.2%  
No. of shares (m) 1,330.3 2,660.7  
Diluted earnings per share (Rs)*   2.1  
Price to earnings ratio (x)*   11.0  
(* on trailing twelve months earnings)

What has driven performance in 1QFY13?
  • ALL's revenues grew by 19.7% YoY during the quarter on the back a 17% YoY growth in volumes. While volumes in the domestic market grew by 4% YoY, exports did better to grow by 14% YoY. The overall improvement in the sales numbers were largely a result of the strong performance of 'Dost' and the gradual improvement in the southern markets.

  • ALL's operating margins shrunk by 1.7% to 8% during the quarter largely on account of a substantial rise in other expenditure (as percentage of sales). There were certain one-time charges that the company incurred, which included among them higher spend on marketing and brand promotion. All of this led to a higher rise in other expenses. Thus, with operating margins shrinking, operating profits fell by 2% YoY.

    Cost break-up...
    (Rs m) 1QFY12 1QFY13 Change
    Raw materials 18,116 21,887 20.8%
    % sales 72.1% 72.8%  
    Staff cost 2,497 2,679 7.3%
    % sales 9.9% 8.9%  
    Other expenditure 2,068 3,101 50.0%
    % sales 8.2% 10.3%  
    Total 22,681 27,666

  • Fall in operating profits coupled with the rise in interest costs led to the 22% YoY drop in net profits. Interest costs rose by 47% YoY on account of an increase in working capital loans.

What to expect?
At the current price of Rs 23, the stock is trading at a multiple of 5 times our estimated FY15 earning per share and 3.7 times our estimated FY15 cash flow per share. Ashok Leyland had earlier outlined a capex of around Rs 40 bn, which included among others, investment with its JV partner Nissan towards a LCV manufacturing plant in Tamil Nadu, as well as towards research and development activities. Having said that, the company had planned a capex of Rs 6 bn for FY13, which will be scaled down to around Rs 4.5 bn and this cutting down of spend will largely occur in Pantnagar. The company's working capital debt stood at around Rs 25 bn in June and it intends to reduce this by around 7.5 bn from here onwards. The MHCV segment has witnessed a slowdown in growth and with LCVs expected to perform better, sales of 'Dost' would ramp up. However, this could put pressure on margins given that MHCVs enjoy a better margin profile. After the declaration of FY12 results, we have factored in estimates for FY15 and based on them, we maintain our positive view on the stock.

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