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Ashok Leyland: Non core saves the day - Views on News from Equitymaster
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Ashok Leyland: Non core saves the day
Oct 22, 2008

Performance summary
  • Nets sales grow by 7% YoY during 2QFY09 despite 9% fall in volumes.

  • Operating margins fall by 1.2%, resulting in a 6% YoY decline in operating profits.

  • Bottomline falls 16% YoY during the quarter as higher interest expenses and forex related losses aggravate the poor operating performance.

  • Half yearly bottomline slumps 30% YoY despite an 11% YoY growth in topline. Excluding the extraordinary, profits show an impressive 14% YoY growth



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 17,459 18,664 6.9% 33,670 37,503 11.4%
Expenditure 15,820 17,125 8.2% 30,486 34,453 13.0%
Operating profit (EBDITA) 1,639 1,539 -6.1% 3,185 3,050 -4.2%
EBDITA margin (%) 9.4% 8.2% 9.5% 8.1%
Other income 111 285 155.8% 187 407 117.5%
Interest (net) 126 246 94.6% 254 353 38.9%
Depreciation 466 505 8.4% 879 946 7.7%
Profit before tax 1,158 1,073 -7.3% 2,239 2,157 -3.6%
Extraordinary income/(expense) 46 (144) 194 (526)
Tax 374 236 -37.0% 747 453 -39.3%
Profit after tax/(loss) 830 694 -16.4% 1,685 1,178 -30.1%
Net profit margin (%) 4.8% 3.7% 5.0% 3.1%
No. of shares (m) 1,330.3 1,330.3 1,330.3 1,330.3
Diluted earnings per share (Rs)* 3.1
Price to earnings ratio (x)* 6.7
(* on trailing twelve months earnings

What has driven performance in 2QFY09?
  • Although Ashok Leyland’s volumes have fallen by 9% on a YoY basis during 2QFY09, topline in value terms has grown an acceptable 7% YoY. Just as in 1QFY09, a substantial increase in the company’s engine and spare parts businesses helped the company grow its topline. Furthermore, price hikes in 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.

  • On the profitability front, despite the company taking pricing actions, operating margins have come in lower by a significant 1.2%, resulting in a 6% YoY drop in operating profits. Almost all the drop in operating margins could be attributed to a huge 45% jump in other expenses. The increase in the same can be attributed to certain one-time expenses.

    Cost break-up...

    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 13,099 13,952 6.5% 25,139 28,327 12.7%
    % sales 75.0% 74.8% 74.7% 75.5%
    Staff cost 1,619 1,570 -3.0% 3,010 3,197 6.2%
    % sales 9.3% 8.4% 8.9% 8.5%
    Other expenditure 1,102 1,603 45.4% 2,336 2,928 25.4%
    % sales 6.3% 8.6% 6.9% 7.8%

  • At 16%, the fall in company’s bottomline during the quarter has come in significantly higher than the fall in operating profits. This has been mainly due to the near doubling of its interest expenses and losses due to the rupee’s adverse movement against the dollar. Infact, had it not been for stake sale in one of its investments, which propped up the other income, the fall in bottomline would have been even steeper. However, if one excludes the forex related charges, then the bottomline shows a small improvement of 7% YoY during 2QFY09.

What to expect?
At the current price of Rs 21, the stock is trading at an attractive multiple of 3.0 times our estimated FY11 cash flow per share. Although the company’s performance on the topline front is in line with our expectations, we might have to revisit our operating margin assumptions. We will come out with an updated research report shortly.

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