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Ashok Leyland: Continues to struggle - Views on News from Equitymaster
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Ashok Leyland: Continues to struggle
Jul 28, 2009

Performance summary
  • Topline declines by 52% YoY during 1QFY10 mainly led by 58% YoY drop in volumes. The domestic CV industry witnesses a drop of 9% YoY.
  • Operating margins reduce from 6.5% to 1.3% during the first quarter. Higher staff and other expenses (as a percent of sales) were the main culprits.
  • Excluding the extraordinary item (VRS), the bottomline on the back of lower margins and higher interest costs falls by 84% YoY. The interest cost is higher by 140% YoY due to fresh loans taken to fund capital expenditure.


Financial picture
Rs m 1QFY09 1QFY10 Change
Net sales 18,880 9,125 -51.7%
Expenditure 17,661 9,003 -49.0%
Operating profit 1,219 122 -90.0%
Operating margins (%) 6.5% 1.3%  
Other Income 74 606 718.0%
Interest (net) 107 258 141.3%
Depreciation 441 435 -1.4%
Profit before Tax 745 35 -95.3%
Extraordinary item (33) (10)  
Tax 207 (53)  
Profit after Tax/(Loss) 506 78 -84.6%
Net profit margin (%) 2.7% 0.9%  
No. of Shares (m) 1330.3 1330.3  
Diluted Earnings per share (Rs)*   1.11  
Current P/e ratio   30.7  
*12 months trailing earning

What has driven performance in 1QFY10?
  • Ashok Leyland reported a decline of 52% YoY in topline during 1QFY10 led by a total volume decline of 58% YoY. The domestic volumes saw a drop of 60% YoY; exports were down 30% YoY. While tractor trailers saw sluggish growth, some recovery was witnessed in the tipper segment. The engine segment also saw lower volumes and contributed 9% to the total sales. The spare part segment formed 12% of the total turnover. The company has performed below our estimates.

    Segment wise break up of sales…
      1QFY09 1QFY10 Change (%)
    M&HCVs Passenger  
    Domestic 3,999 2,211 -44.7%
    Exports 731 274 -62.5%
    M&HCVs Goods  
    Domestic 12,985 4,427 -65.9%
    Exports 465 526 13.1%
    Total M&HCVs  
    Domestic 16,984 6,638 -60.9%
    Exports 1,196 800 -33.1%
    LCVs  
    Domestic 161 152 -5.6%
    Exports 84 103 22.6%
    Total  
    Domestic 17,145 6,790 -60.4%
    Exports 1,280 903 -29.5%
    Grand Total 18,425 7,693 -58.2%

  • The management has taken price hikes and is launching new models. Further, with economy showing signs of recovery, the demand is expected to pick up. Southern and western region, which are its key regions, are witnessing higher demand. Also, the company expects to see good demand from the export markets, especially Sri Lanka. The management expects strong volume growth in the coming quarters.

  • The operating margins declined from 6.5% during 1QFY09 to 1.3% during 1QFY10. Faster decline in sales as compared to expenses led to the decline in operating profits by 90% YoY. The lower input costs however restricted the fall. Around Rs 1 bn of savings was done on account of lower metal costs from the suppliers. The company saved around Rs 7.2 bn on other expenses due to reduced level of production, change in accounting standard on forex valuation and cost reduction initiatives. The management expects the working capital requirement to reduce to half and thereby have a cash flow of Rs 5 bn. It expects the margins to improve going forward on account of continued focus on cost efficiencies and price hike which it took in July this year.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 14,375 6,627 -53.9%
    % sales 76.1% 72.6%  
    Staff cost 1,626 1,441 -11.4%
    % sales 8.6% 15.8%  
    Other expenditure 1,659 935 -43.6%
    % sales 8.8% 10.2%  

  • Excluding the extraordinary item (VRS), the company’s bottomline declined by 84% YoY. Inspite of higher other income (on account of sale of investments), lower operating margins and higher interest costs led to the huge fall. . The interest cost is higher by 140% YoY due to fresh loans taken to fund capital expenditure. Ashok Leyand incurred capex of Rs 1.2 bn during the quarter and has plans of Rs 7 bn for the full year. It plans to also invest additional Rs 4 to Rs 5 bn in its joint ventures. While the company would raise part of the funds (Rs 4 bn) during the year, remaining would be funded through internal accruals.

What to expect?
At the current price of Rs 34, the stock is trading at 10.9 x times our estimated FY12 cash flow per share. The company has underperformed our estimates. With demand reviving and the company taking steps to reduce costs, scenario will improve going forward. However, at the current price levels, the stock is an expensive bet.

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