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Ashok Leyland: Strong operating performance - Views on News from Equitymaster

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Ashok Leyland: Strong operating performance
Oct 20, 2010

Ashok Leyland has announced its 2QFY11 results. The company has reported a 72% YoY and 89% YoY increase in revenues and profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues rise by 72% YoY during the quarter, more than double during the first half of the year.
  • Operating profits increase by 85% YoY, on the back of a 0.8% YoY expansion in margins. Despite higher raw material and purchase expenses, a lesser increase in employee and other expenses (as compared to the sales growth) leads to this margin expansion.
  • Net profits rise by 89% YoY despite higher interest and tax expenses.
  • During 1HFY11, revenues and profits rise by 103% and 201% YoY respectively. A key reason for the latter is the 3.3% YoY increase in operating margins.


(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 15,773 27,140 72.1% 24,954 50,619 102.9%
Expenditure 14,116 24,077 70.6% 23,119 45,203 95.5%
Operating profit (EBDITA) 1,657 3,063 84.9% 1,834 5,417 195.3%
EBDITA margin (%) 10.5% 11.3%   7.4% 10.7%  
Other income 60 48 -19.2% 610 95 -84.3%
Interest (net) 170 395 132.2% 428 711 66.1%
Depreciation 506 641 26.6% 941 1,255 33.4%
Extraordinary income/(expense) (9) -   (19) -  
Profit before tax 1,032 2,075 101.2% 1,056 3,546 235.7%
Tax 146 405 178.1% 92 649 602.8%
Profit after tax/(loss) 886 1,671 88.5% 964 2,897 200.6%
Net profit margin (%) 5.6% 6.2%   3.9% 5.7%  
No. of shares (m)       1,330.3 1,330.3  
Diluted earnings per share (Rs)*         4.7  
Price to earnings ratio (x)*         16.1  
(* on trailing twelve months earnings; adjusted for extraordinary items)

What has driven performance in 2QFY11?
  • Ashok Leyland (ALL) reported a revenues growth of 72% YoY. This was in line with the volume growth of about 72% YoY during the quarter (about 24,590 units), implying that the average realisations were similar to last year. It may be noted that the company had increased prices of its vehicles by about 4% during the first half of the current year. The first increase was in the month of April (by 1.5%). The second increase was in June (2.5%). As such as compared to the last year, the full effects of these price hikes have been seen in this quarter. It may be noted that during the preceding quarter, i.e. the quarter ended June 2010, ALL had seen a sharp decline in realisations. But the reason for the same was lower sales of engines and defense kits.

    Volume growth during the quarter was seen across segment, barring LCVs. Domestic M&HCVs volumes (both good and passenger cars) rose by 78% YoY, while export volumes of these segments increased by 43% YoY. LCV sales dropped by 38% YoY during the quarter. This segment however, contributed to nearly 1% of total volumes.

  • ALL’s operating profits increased at a faster pace of 85% (as compared to the sales growth) on the back of margin expansion of 0.8% YoY. While raw material/ purchase costs increased at a faster rate (in absolute terms) as compared to the sales, employee and other expenses increased by 26% and 46% respectively, thereby helping the company to expand its margins during the quarter. As per the management, the company is facing issues with higher input costs – especially those of tyres, forgings, amongst others. As per the management, costs are higher by about Rs 40,000 per vehicle.

    Cost break-up...
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Raw materials 11,079 19,969 80.2% 17,706 37,315 110.7%
    % sales 70.2% 73.6%   71.0% 73.7%  
    Staff cost 1,675 2,115 26.3% 3,116 4,140 32.9%
    % sales 10.6% 7.8%   12.5% 8.2%  
    Other expenditure 1,362 1,993 46.3% 2,297 3,748 63.1%
    % sales 8.6% 7.3%   9.2% 7.4%

  • ALL’s profit before tax grew at a faster pace as compared to the growth in operating profits. This was on the back of a not so sharp increase in depreciation charges, notwithstanding the sharp rise in interest costs. However, on account of a higher tax outgo, the company’s profits grew by 89% YoY. The increase in interest and depreciation charges are on account of the company’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 75, the stock is trading at a multiple of 16.2 times our estimated FY12 earning per share and 11.3 times our estimate FY12 cash flow per share (ResearchPro subscribers, kindly click here.

In its earnings call, the company’s management has cautioned about the volumes not being as robust as what the industry has seen in the recent past. This is on account of the BS-III emission norms coming into play. Since vehicles need to comply with the new norms, they would be costing more on account of better engines. However, as per the management, it does not foresee the price as an obstacle, but sees the supply of these vehicles as a hurdle. Further, the company has built up an inventory of about 10,000 vehicles which comply to the BS-II norms, but would be selling at a higher price on account of an approximate 3% increase in prices.

In fact, the company has hiked prices of all its vehicles by about 3% or about Rs 31,000. In addition, it will be taking a similar hike on the vehicles that comply with the BS-III emission norms.

On the whole, the company expects the industry to clock volumes of about 315,000 units (which is higher by about 30% YoY). Targeting a market share of 27%, the company is aiming at domestic volumes of about 85,000 units and exports of about 10,000 units, taking its total volumes target to about 95,000 units.

The company’s performance in the year till date is well above our target. As such we will have to revise our numbers. We will update our numbers soon.

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