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Ashok Leyland: Moves into the profit zone

Jul 26, 2002

It has been a sharp reversal in trend for commercial vehicle majors like Ashok Leyland since 3QFY02. The No. 2 in the CV sector has posted a 11% rise in sales for 1QFY03. Similar to Tata Engineering (Telco), Leyland is also back in the black led by a notable improvement in operating margins.

(Rs m)1QFY021QFY03Change
Net sales 5,033 5,577 10.8%
Other Income 11 23 113.1%
Expenditure 4,686 4,971 6.1%
Operating Profit (EBDIT) 347 606 74.9%
Operating Profit Margin (%)6.9%10.9% 
Interest 202 176 -12.8%
Depreciation 249 257 3.2%
Profit before Tax (94) 196 -
Extraordinary items - (40) -
Tax - 58 -
Profit after Tax/(Loss) (94) 97 -
Net profit margin (%)-1.9%1.7% 
No. of Shares (m) 119.0 119.0  
Diluted Earnings per share* (3.2) 3.3  
P/E Ratio (x)  29.6  
(* annualised)   

As per the company's website, there has been a 19% growth in overall volumes for 1QFY03. This was led by increased demand for medium and heavy commercial vehicles (M/HCVs), which rose by 19%. The company has been concentrating on improving its presence in the Northern states where Telco has a strong foothold. The regional nature of the company has been restricting its growth prospects over the years.

First quarter snapshot...
(Nos)1QFY02% of sales1QFY03% of salesChange (%)
Source: Company website

Passenger bus sales have also increased in the same period and could be attributed to resumption of orders from state transport undertaking (STUs) and private fleet operators. It had won orders for supply of CNG buses in the National Capital Region and from the Bangaladesh government in FY02. There also seems to be some action on the LCV segment front. Both, Telco and Ashok Leyland, have witnessed a sharp spurt in demand in 1QFY03 after remaining sluggish for more than two years. Ashok Leyland also benefited from higher exports as well. Export sales more than doubled in 1QFY03 on the back of fresh orders for passenger bus and defense CKDs (completely knocked down units).

Given this backdrop of a 19% growth in volumes, turnover has increased only by 11%, which implies that realisations have come under pressure. The rise in other income is primarily due to incremental interest income from free cash flow (Leyland generated free cash flow of Rs 1,195 m in FY02). Interest costs are also lower for the same reason. The cost restructuring exercise and value engineering efforts have paid off in the form of a sharp increase in operating margins. Average raw material per vehicle is also estimated to have come down in 1QFY03. Extraordinary item pertains to write-off towards VRS scheme.

Geographical mix...
(Nos)1QFY021QFY03Change (%)

The stock currently trades at Rs 97 implying a P/E multiple of 29.6x 1QFY03 annualised earnings. Though valuations might look expensive on annualised 1QFY03 earnings, it is in the process of returning into profitability. Prospects for the company in FY03 remains promising in light of recovery in CV sales and expected rise in demand for passenger-based delivery vehicles from STUs. A slew of measures, which include broadening of the product portfolio and venturing into defense-vehicle manufacturing are expected to insulate the company from cyclicality to a certain extent. The expansion into northern markets will aid further increase in market share in the future. However, any unfavorable developments on the economy front could lower growth in the coming quarters.

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