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Ashok Leyland: Margin wobble - Views on News from Equitymaster

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Ashok Leyland: Margin wobble
Jul 29, 2008

Performance summary
  • Topline grows by 16% YoY for 1QFY09 despite near flat volumes.
  • Operating margins fall by a significant 450 basis points, resulting in a 33% YoY decline in operating profits.
  • Bottomline slumps 43% YoY as higher depreciation and less than proportionate fall in interest expense aggravates the poor operating performance.


(Rs m) 1QFY08 1QFY09 Change
Net sales 16,211 18,839 16.2%
Expenditure 14,468 17,667 22.1%
Operating profit (EBDITA) 1,743 1,172 -32.8%
EBDITA margin (%) 10.8% 6.2%  
Other income 76 122 61.1%
Interest (net) 128 107 -16.2%
Depreciation 413 441 6.8%
Profit before tax 1,278 745 -41.7%
Extraordinary income/(expense) (35) (22)  
Tax 361 218 -39.7%
Profit after tax/(loss) 882 506 -42.7%
Net profit margin (%) 5.4% 2.7%  
No. of shares (m) 1,324.0 1,330.3  
Diluted earnings per share (Rs)*   3.2  
Price to earnings ratio (x)*   8.6  

What has driven performance in 1QFY09?
  • Although Ashok Leyland’s volumes have grown by a mere 1% on a YoY basis during 1QFY09, topline in value terms has grown an impressive 16% YoY. This has been largely due to a substantial increase in the company’s engine and spare parts businesses. The fact that the company had taken price increases on its commercial vehicles (CVs) in the domestic market also helped matters. Volume growth though has disappointed yet again as higher interest rates and limited availability of finance continues to affect sales. The company has however expressed confidence in the medium to long-term growth prospects and has hence continued with its significant capex plans.

    Volumes
      1QFY08 1QFY09 Change (%)
    M&HCVs Passenger  
    Domestic 4,368 3,999 -8.4%
    Exports 760 731 -3.8%
    M&HCVs Goods  
    Domestic 12,229 12,985 6.2%
    Exports 647 465 -28.1%
    Total M&HCVs  
    Domestic 16,597 16,984 2.3%
    Exports 1,407 1,196 -15.0%
    LCVs  
    Domestic 142 161 13.4%
    Exports 17 84 394.1%
    Total  
    Domestic 16,739 17,145 2.4%
    Exports 1,424 1,280 -10.1%
    Grand Total 18,163 18,425 1.4%

  • On the profitability front, despite the company taking pricing actions, operating margins have come in lower by a significant 4.5%, resulting in a 33% YoY drop in operating profits. The main culprit has been the raw material expenses, which have risen by a strong 23% YoY. Furthermore, mark-to-market losses on the company’s foreign currency exposure (to the tune of Rs 339 m) have also affected its operating margins significantly.

    Cost break up
    (Rs m) 1QFY08 1QFY08 Change
    Raw materials 11,670 14,376 23.2%
    % sales 72.0% 76.3%  
    Staff cost 1,391 1,626 16.9%
    % sales 8.6% 8.6%  
    Other expenses 1,408 1,665 18.3%
    % sales 8.7% 8.8%  

  • Adoption of favorable funding mix has led to the interest expense falling 16% YoY during 1QFY09. Furthermore, rise in depreciation charges has also remained benign at 6% YoY and other income has also grown by an impressive 61% YoY. But even these favorable movements have not pared any pressure caused by fall in operating margins, as the bottomline has declined by 43% YoY during the quarter.

What to expect?
At the current price of Rs 28, the stock is trading at an attractive multiple of 4.1 times our estimated FY11 cash flow per share. However, it should be noted that the decline in company’s operating margins has taken us by surprise, as we had not anticipated such a steep fall. Having said that, it would also be unfair to downgrade the company’s operating margins on the basis of just one bad quarter. As such, we would wait for one more quarter before revisiting our projections on the company.

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