Ashok Leyland, the country's second largest player in the commercial vehicles (CVs) segment, has posted an impressive second quarter performance. While turnover has increased by 14%, there has been considerable rise in operating margins of the company in 2QFY03.
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One of the key reasons for the commendable rise in turnover is the upturn in CV sales in 1HFY03. Domestic trunk route freight rates increased by as high as 10% in 1QFY03 followed by a marginal 4% increase in 2QFY03. Lucrative freight rates are one of the key growth determinants of CV sales. Given the sharp spurt in cement output and increased food grain production in FY02, road sector has benefited in a large way. For Ashok Leyland, while domestic CV sales (in volume terms) has risen by 22%, exports have declined in 1HFY03. Demand for multi-axle vehicles that are above 16 tonnes has increased significantly due to economies of scale coupled with road network in key trunk routes also improving. That said, growth in domestic CV sales is on the lower side when compared with Telco (the market leader).
Source: Company website
On the other hand, passenger vehicle sales have been sluggish in 1HFY03 in absence of fresh orders from State Transport Undertakings (STUs) that account for a bulk of demand. Much of the domestic passenger vehicle sales is believed to have come from increased demand from private transport operators. The company's concerted effort to boost exports have yielded positive results in the passenger bus segment. Volumes are higher by 15% in 1HFY03. The company had won orders from both Bangladesh and Egypt from such vehicles in SKD (semi-knocked down) form recently. This has led to a 7% rise in volume sales for Ashok Leyland in the first half of the current fiscal year.
When compared on a monthly basis both in 1HFY03 and with respect to the corresponding period previous year, April and September 2002 saw one of the highest rise in volume sales. Moving away from bus and CVs, 1HFY03 also saw a sharp spurt in LCV demand. Though lower base in 1HFY02 was one of the reasons, our interaction with some CV majors indicated that due to higher consumer durable demand, LCV demand has also increased in the same period.
Operating margins have increased on the back of lower raw material costs, benefits from increased asset sweating and lower employee related expenses. We expect FY03 margins to touch 13% levels in FY03. Interest costs have fallen in line with expectation as Ashok Leyland was estimated to repay debts worth Rs 1.8 bn in FY02 (around 20% of total debt). In FY03, we expect the company to retire debts to the tune of Rs 1.4 bn. Growth in net profits would have been higher but for higher tax outgo and extraordinary items in 2QFY03. Overall, the performance of Ashok Leyland is a commendable one.
The stock is currently tradeing at Rs 85 implying a P/E multiple of 12.1x annualised 2QFY03 earnings. As mentioned above, freight rates have remained stagnant in the last three months in light of several round of increase in input costs (diesel prices account for 50% of operating expenses for truck operators). Given this backdrop and slower economic growth expectations (3.1% GDP growth as per CMIE), we remain cautious for the rest of the year. While the rise in industrial output is a positive, it remains to be seen whether it is enough to sustain volume growth for the next year and a half. Based on peer value comparison, the stock seems to be fairly valued at the current juncture. Any upward revision in prices would be primarily if CV sales sustain at the current levels and increase in STU orders.
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