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Ashok Leyland: Itís the buses again! - Views on News from Equitymaster

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Ashok Leyland: Itís the buses again!

Oct 23, 2007

Performance summary
  • Despite a 5% YoY fall in volumes during the quarter, topline jumps a modest 4% YoY, thanks mainly to improved product mix
  • Strict control on costs ensures a robust 160 basis point jump in operating margins for the quarter, leading to 25% growth in operating profits

  • Bottomline suffers a decline of 16% YoY on account of big jump in interest expenses and fall in other income. Tax rates too have increased sizeably.

  • For the half-year ended September 2007, bottomline has shown a growth of 2.4% on the back of a 9% growth in topline, both on a YoY basis.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 16,757 17,459 4.2% 30,996 33,670 8.6%
Expenditure 15,407 15,774 2.4% 28,459 30,243 6.3%
Operating profit (EBDITA) 1,350 1,685 24.8% 2,537 3,428 35.1%
EBDITA margin (%) 8.1% 9.7% 8.2% 10.2%
Other income 337 111 -66.9% 475 187 -60.7%
Interest (net) 4 126 3303.0% 9 254 2758.4%
Depreciation 365 466 27.9% 692 879 27.0%
Profit before tax 1,319 1,204 -8.7% 2,311 2,482 7.4%
Extraordinary income/(expense) (31) (27) (69) (61)
Tax 334 374 11.8% 597 735 23.2%
Profit after tax/(loss) 954 803 -15.8% 1,645 1,685 2.4%
Net profit margin (%) 5.7% 4.6% 5.3% 5.0%
No. of shares (m) 1,310.0 1,330.3 1,310.0 1,330.3
Diluted earnings per share (Rs)* 2.9 2.4 2.5 2.5
Price to earnings ratio (x)** 11.5
(* annualised, ** on trailing twelve months earnings)

What is the companyís business?
Ashok Leyland is the second largest manufacturer of medium and heavy commercial vehicles (M/HCV) in India. It had a 24% market share in the domestic medium and heavy vehicles (M&HCV) segment in FY07 and a marginal presence in the LCV segment (light commercial vehicles). Ashok Leyland is also a key player in the passenger bus segment with almost 49% share in FY07. CVs contributed to 92% of revenues in FY07 while engines and spare parts contributed to the balance. Land Rover Leyland Investment Holdings (LRLIH) owns 52% of Ashok Leyland.

What has driven performance in 2QFY08?
Passenger buses drive volumes to safety: Just like the previous quarter, a steep fall in the sales of commercial vehicles has been cushioned by the jump in sales of passenger vehicles. With this segment remaining a non-performer during the whole of FY07, it has come to the party at the right time as volumes for the quarter were higher by a huge 91% YoY. Hard interest rates on the other hand continued to be party poopers for the domestic commercial vehicles segment, where volumes dipped 24% YoY during the quarter. With exports too falling short, stellar performance of the passenger segment could not prevent fall in overall volumes, which came in at negative 5% YoY during the quarter. For the half year though, there was a marginal improvement in volumes.

Segment wise break up of salesÖ
2QFY07 2QFY08 Change (%) 1HFY07 1HFY08 Change (%)
M&HCVs Passenger
Domestic 2,924 5,572 90.6% 4,298 9,940 131.3%
Exports 846 1,112 31.4% 1,654 1,872 13.2%
M&HCVs Goods
Domestic 15,251 11,642 -23.7% 29,585 23,871 -19.3%
Exports 753 419 -44.4% 1,187 1,066 -10.2%
Total M&HCVs
Domestic 18,175 17,214 -5.3% 33,883 33,811 -0.2%
Exports 1,599 1,531 -4.3% 2,841 2,938 3.4%
Domestic 89 115 29.2% 183 257 40.4%
Exports 0 32 n.a. 2 49 2350.0%
Domestic 18,264 17,329 -5.1% 34,066 34,068 0.0%
Exports 1,599 1,563 -2.3% 2,843 2,987 5.1%
Grand Total 19,863 18,892 -4.9% 36,909 37,055 0.4%

The operating margin kicker: Although volumes growth disappointed during the quarter under consideration, tight control on costs saw the company add a significant 160 basis points to previous quarterís operating margins, thus enabling the operating profits to jump 25% YoY. While staff costs increased by 35% YoY, savings on the raw materials and other expenses front helped the company perk up its margins.

cost break up
(Rs m) 2QFY07 2QFY08 Change
Raw materials 12,661 12,708 0.4%
% sales 75.6% 72.8%
Staff cost 1,203 1,619 34.5%
% sales 7.2% 9.3%
Other expenditure 1,542 1,447 -6.2%
% sales 9.2% 8.3%

The other income for the company has come down during the quarter and interest expense on the other hand, has gone up significantly. While the former could be attributed to a one-time stake sale in the previous quarter, the latter is a result of the companyís increased deployment of funds towards stepped up capex requirements. Depreciation outgo has also improved significantly and these factors have combined to pull down the bottomline of the company by 16% YoY during the quarter.

Over the last few quarters: As can be seen from the table below, topline growth during the current quarter has come in at a much lower rate than what was being witnessed in the previous quarters. Operating margins however have remained healthy, which is a positive. Net profit margins on the other hand have drifted lower as compared to recent quarters, due mainly to higher interest and higher depreciation and tax outgo.

over the last few quarters
2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Sales growth (YoY) 34.0% 48.0% 32.1% 13.9% 4.2%
OPM 8.1% 10.4% 11.6% 10.8% 9.7%
NPM 5.7% 5.9% 7.5% 5.4% 4.6%

What to expect?
At the current price of Rs 38, the stock is trading at a price to cash flow multiple of 6 times our estimated FY10 cash flow. While we would revisit our numbers soon, we do not foresee a significant change in the medium term prospects of the company. In the long-term though, some positive factors like the recent JV with Nissan, are likely to be value accretive to shareholders.

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