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Ashok Leyland: Profits surge - Views on News from Equitymaster

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Ashok Leyland: Profits surge

Jul 27, 2010

Ashok Leyland has announced its 1QFY11 results. The company has reported a 156% YoY and 1478% YoY increase in revenues and profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by 156% YoY during the quarter.
  • Operating profits grow by over 12 times as margins expand by 8.1% YoY. Staff and other expenditure drop (as a percentage of sales) during the quarter ending June 2010.
  • Operating margin stands at 10% as compared to 1.9% during the corresponding quarter last year.
  • Notwithstanding higher tax outgo and lesser other income, profits rise by about 15 times on the back of higher operating income and a benign increase in interest and depreciation costs.

(Rs m) 1QFY10 1QFY11 Change
Net sales 9,181 23,480 155.8%
Expenditure 9,003 21,126 134.7%
Operating profit (EBDITA) 178 2,354 1223.4%
EBDITA margin (%) 1.9% 10.0%  
Other income 550 47 -91.4%
Interest (net) 258 316 22.5%
Depreciation 435 615 41.3%
Extraordinary income/(expense) (10) -   -100.0%
Profit before tax 25 1,470 5896.7%
Tax (53) 244  
Profit after tax/(loss) 78 1,226 1478.0%
Net profit margin (%) 0.8% 5.2%  
No. of shares (m) 1,330.3 1,330.3  
Diluted earnings per share (Rs)*   4.1  
Price to earnings ratio (x)*   17.6  
(* on trailing twelve months earnings; adjusted for extraordinary items)

What has driven performance in 1QFY11?
  • During the quarter, Ashok Leyland (ALL) sold 21,402 units as compared to 7,693 units during the corresponding quarter last year. This translates into an increase of 178% YoY. Comparing this to the revenue increase of 156% YoY, it seems that the company has seen lower realisations per unit. However, the reason for the same was lower sales of engines and defense kits. It may be noted that the company had raised prices of its vehicles during the months of April (by 1.5%) and June (by 2.5%) this year. As such, the possibility of seeing a higher revenues increase during the next quarter is there, as the full effect of the 2.5% price hike will be seen in the current quarter.

    The company was able to gain market share in certain markets of the country. However, the most amount of traction it saw was in the southern market, where it has the largest market share in the commercial vehicle segment. This has helped it post strong sales volumes. In addition, the company’s management also stated that it was able to gain market share by a couple of hundred basis points in the northern and western markets.

    Segment wise break up of sales…
      1QFY10 1QFY11 Change (%)
    M&HCVs Passenger      
    Domestic 2,211 4,184 89.2%
    Exports 274 904 229.9%
    M&HCVs Goods      
    Domestic 4,451 15,059 238.3%
    Exports 526 980 86.3%
    Total M&HCVs      
    Domestic 6,662 19,243 188.8%
    Exports 800 1,884 135.5%
    Domestic 128 219 71.1%
    Exports 103 56 -45.6%
    Domestic 6,790 19,462 186.6%
    Exports 903 1,940 114.8%
    Grand Total 7,693 21,402 178.2%
    Data Source: Company's website

  • ALL’s operating profits grew by over 12 times on the back of a strong expansion in margins. Operating margins stood at 10% during the quarter as compared to 1.9% last year. A key reason for such a strong operating performance is higher volumes. In addition, employee costs and other expenses grew at a slower pace as compared to the revenue growth. On the other hand, the company did see some pressure on the raw material front as the share of these expenses increased on a year on year basis (as a percentage of sales). As per the management, the company is facing issues with higher steel and rubber prices (for tyres). It may be noted that this is the highest operating margin the company has seen in a very long time.

    Cost break-up...
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 6,627 17,346 161.8%
    % sales 72.2% 73.9%  
    Staff cost 1,441 2,025 40.5%
    % sales 15.7% 8.6%  
    Other expenditure 935 1,755 87.6%
    % sales 10.2% 7.5%  

  • ALL reported a bottomline increase of 1478% YoY. Apart from a strong performance at the operating level, a lesser increase in interest and depreciation costs has led to a nearly 60 times increase in profits before tax. This was despite a sharp reduction in other income. However, if one looks at the interest costs and depreciation costs separately, the increase is quite high. The reason for the same is ALL’s new plant at Pantnagar coming on stream (leading to lower interest capitalization and higher depreciation charges).

What to expect?
At the current price of Rs 72, the stock is trading at a multiple of 18.2 times our estimated FY12 earning per share and 12.3 times our estimate FY12 cash flow per share (ResearchPro subscribers, kindly click Here.

In its earnings call, the company’s management shared it views on whether the company will be able to sustain such high margins during the current year. The management expects the same to happen but on three key conditions – one being the company being able to achieve its sales volume target, second being response of the new BS-III norm vehicles (which are priced higher by about Rs 40,000). Third would be the ability of the new Pantnagar plant to produce over 17,000 to 19,000 vehicles over the next nine months. It may be noted that the company gets a tax benefit of Rs 35,000 per vehicle for the same.

All said and done, we believe the current valuations factor in the company’s future prospects, and as such, recommend investors to not to enter the stock at current levels.

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