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Ashok Leyland: A stellar start - Views on News from Equitymaster
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Ashok Leyland: A stellar start
Sep 14, 2015

Ashok Leyland announced the first quarter results of financial year 2015-2016 (1QFY16). The company reported a 55% YoY growth in revenues and a net profit of Rs 1.6 bn. Here is our analysis of the results.

Performance summary
  • Net sales grow by 55% YoY in 1QFY16 led by ramp up in volumes.
  • On account of the benefit of operating leverage and cost cutting initiatives, the company's operating margins improve by 6% to 10.1% during the quarter.
  • Led by the strong performance at the topline and operating level, the company reports a net profit of Rs 1.6 bn in 1QFY16 as against a net loss of Rs 480 m in 1QFY15 (excluding extraordinary items during both the periods).

Financial performance: A snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 24,778 38,412 55.0%
Expenditure 23,773 34,525 45.2%
Operating profit (EBDITA) 1,005 3,887 286.8%
EBDITA margin (%) 4.1% 10.1%  
Other income 387 271 -30.0%
Interest (net) 1,063 766 -28.0%
Depreciation 1,033 1,043 1.0%
Profit before tax (705) 2,349  
Tax (225) 756  
Profit after tax/(loss) (480) 1,593  
Net profit margin (%) -1.9% 4.1%  
No. of shares (m) 2,660.7 2,845.9  
Diluted earnings per share (Rs)*   1.5  
Price to earnings ratio (x)*   56.5  
(* on trailing twelve months earnings and excluding extraordinary items)

What has driven performance in 1QFY16?
  • Ashok Leyland's revenues surged by 55% YoY during 1QFY16. The MHCV segment had been badly impacted by the economic slowdown in the last couple of years, thereby dragging Ashok Leyland's performance along with it. However, since the early part of FY15, the company began seeing a healthy pick up in volumes. Indeed, policies related to the reversal of mining bans and resumption of some stalled infrastructure projects saw healthy growth in the MHCV space during FY15. And this has continued in 1QFY16 as well. There has been an improvement in freight rates as well as the overall operations of fleet operators as a result of which demand for MHCVs was good this quarter. Ashok Leyland managed to maintain even though the discounts in the industry continued.

  • ALL's operating margins improved by 6% to 10.1% during the quarter on account of benefits of operating leverage, a tight rein on costs and a richer product mix. Thus, operating profits nearly quadrupled during the quarter.

  • Led by the strong performance at the topline and operating profit level, the company reported a net profit of Rs 1.6 bn during 1QFY16 as against a loss of Rs 480 m during 1QFY15.
What to expect?
At the current price of Rs 88, the stock is trading at a multiple of 22.5 times our estimated FY17 cash flow per share. Ashok Leyland's efforts on becoming a leaner company and improving its working capital position have been yielding results. The company has been focusing on reducing debt and in this regard it has been selling off non-core assets and also intends to go slow on capex for the next couple of years. Ashok Leyland has also invested in strengthening its distribution reach over the last several years and this is now beginning to reap benefits especially with the gradual recovery in the economy. Further, new product launches are playing their part as well in bolstering performance.

Having said that, even after factoring a ramp up in the company's performance, 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 not buy the stock of Ashok Leyland at current price levels.

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