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Ashok Leyland: Still into losses - Views on News from Equitymaster

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Ashok Leyland: Still into losses
Aug 1, 2014

Ashok Leyland announced the first quarter results of financial year 2014-2015 (1QFY15). The company reported a 5% YoY growth in revenues and a net loss of Rs 479 m. Here is our analysis of the results.

Performance summary
  • Net sales grow by 4.8% YoY in 1QFY15 led by growth in tipper volumes and also realisations.
  • Operating margins improve substantially by 3.7% to 4.7% in 1QFY15 largely on account of various cost rationalization measures undertaken by the company and improved realisations.
  • Despite this, the company incurs a net loss of Rs 479 m on account of higher interest costs and depreciation charges.

Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 23,638 24,778 4.8%
Expenditure 23,406 23,617 0.9%
Operating profit (EBITDA) 233 1,161 399.2%
EBITDA margin 1.0% 4.7%  
Other income 123 231 88.6%
Depreciation 952 1,033 8.6%
Interest 1,007 1,063 5.6%
Profit before tax & exceptional items (1,603) (704)  
Exceptional gains/(losses) (65) -  
Profit before tax (1,669) (704)  
Tax (251) (225)  
Effective tax rate 15.0% 31.9%  
Profit after tax (1,418) (479)  
Net profit margin -6.0% -1.9%  
No of shares (m) 34.8 34.8  
Diluted EPS (Rs)*   -111.7  
*trailing twelve month earnings

What has driven performance in 1QFY15?
  • Ashok Leyland's revenues grew by 5% YoY during the quarter. While MHCV volumes remained flat, volumes of LCVs were down by 26% YoY largely on account of a correction in pipeline inventory. In the MHCVs, growth was led by ICV (intermediate CV), tipper and tractor segments. New products such as 'Boss' also did well. Furthermore, better realisations also aided revenue growth.

  • ALL's operating margins improved substantially by 3.7% to 4.7% during the quarter on account of enhanced sales realisations led by better pricing, a tight rein on costs and a better sales mix (i.e. higher volumes of tippers and tractors). This then translated into a massive five fold growth in operating profits.

    Cost break-up
    (Rs m) 1QFY14 1QFY15 Change
    Raw Material Cost 17,836 18,159 1.8%
    % of net sales 72.0% 73.3%  
    Employee Cost 2,582 2,831 9.7%
    % of net sales 10.9% 11.4%  
    Other Expenditure 2,987 2,627 -12.0%
    % of net sales 12.6% 10.6%  
    Total operating expenditure 23,405 23,617 0.9%
    % of net sales 99.0% 95.3%  

  • Despite the strong growth in operating profits, the company reported a loss at the net level to the tune of Rs 479 m. However, this was better than the scenario in the corresponding quarter in the previous year when the company reported a net loss of Rs 1.4 bn. Higher depreciation charges and interest costs were the reasons for the loss this quarter. The company's working capital during the quarter increased as it created excess inventory so that it can capitalise on any spurt in demand going forward.
What to expect?
At the current price of Rs 34, the stock is trading at a multiple of 8.6 times our estimated FY17 cash flow per share. The CV industry has been facing considerable headwinds for around 2 years now and the management is hopeful of a recovery in the second half of FY15. During these tough years, Ashok Leyland has been working on becoming a leaner company and improving its working capital position. The company has also been selling off non-core assets so as to generate cash which will be used to pare down debt. The company also intends to go slow on capex for the next couple of years given that a large part of its existing capacity is underutilized. Having said, assuming that the company's performance considerably ramps up on account of a recovery in the economy which translates into a rise in volumes, valuations do not leave much upside on the table for investors. And hence our view is that investors Sell the stock of Ashok Leyland.

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