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Ashok Leyland: Margins throw a spanner

Oct 26, 2004

Performance Summary
Ashok Leyland, one of India’s leading producers of CV, has faced the heat on the expenses front during 2QFY05. As a consequence, while the topline has grown at a steady rate of 11% YoY, the bottomline has witnessed a fall of 20% YoY in the quarter under consideration. For the half yearly period, the corresponding figures stood at 23% and 10% growth respectively.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 8,239 9,148 11.0% 14,082 17,360 23.3%
Expenditure 7,186 8,399 16.9% 12,508 15,861 26.8%
Operating profit (EBDITA) 1,053 748 -28.9% 1,574 1,498 -4.8%
EBDITA margin (%) 12.8% 8.2%   11.2% 8.6%  
Other income 93 119 27.6% 111 149 33.8%
Interest (net) 95 (9) -109.6% 181 21 -88.6%
Depreciation 251 258 3.0% 481 498 3.7%
Profit before tax 801 619 -22.8% 1,024 1,128 10.2%
Extraordinary item (18) (24)   (23) (47)  
Tax 248 164 -33.9% 318 331 4.2%
Profit after tax/(loss) 535 431 -19.5% 683 750 9.9%
Net profit margin (%) 6.5% 4.7%   4.8% 4.3%  
No. of shares (m) 118.9 1,189.3   118.9 1,189.3  
Diluted earnings per share (Rs)* 1.8 1.4   1.1 1.3  
Price to earnings ratio (x)   12.5     14.4  
(* annualised)            

Company background
Ashok Leyland (ASOK) is the second largest manufacturer of medium and heavy commercial vehicles (M/HCV) in India. It has a 28% market share in the domestic CV segment and a marginal presence of 1% in LCV's (light commercial vehicles). Apart from CVs, ASOK is also a key player in the passenger bus segment with almost 50%-55% share. CVs and passenger vehicles contributed to 91% of revenues in FY04 while engines, sale of CKD units, castings and spare parts contributed the balance. Land Rover Leyland Investment Holdings (LRLIH) owns 51% of ASOK.

What has driven performance in 2QFY05?
Sales: Total volumes were higher by 4% as compared to the same quarter last year. This growth was largely led by M/HCVs which managed to grow 6% YoY. The growth during the first half period was even more enthusing as overall volumes were higher by 16% YoY. This is the fourth consecutive year of positive growth for the CV industry, a rarity indeed for a cyclical industry like heavy vehicles.

What has led to the robust growth is the fact that over the past few years, the position of railways as the main carrier of goods has come under threat from roadways owing to the latter’s greater flexibility and improvement in the country’s road infrastructure. This coupled with easy availability of financing has led to higher demand for CVs. With improvement in economic activity, we expect the demand to grow at a fair clip of 7%-8% over the medium to long-term. However, with its larger dependence on one market (southern), we expect the company to grow at a slightly lower rate than the industry.

Segmental break up…
Segment 2QFY04 2QFY05 % change 1HFY04 1HFY05 % change
MDV Passenger 3,299 3,333 1.0% 5,605 5,636 0.6%
MDV Goods 8,561 9,078 6.0% 14,433 17,831 23.5%
LCV Goods 158 70 -55.7% 327 150 -54.1%
Total 12,018 12,481 3.9% 20,365 23,617 16.0%

Operating profits: Operating margins have fallen by a significant 460 basis points during the quarter and this has largely led to the decline in bottomline. Prices of key inputs such as steel and rubber have increased at a fair clip over the past few months and this has put pressure on the company’s raw material expenses (up 16%). Besides, other expenses (up 28%) are also significantly higher vis-à-vis the same quarter last year.

Cost break-up…
(Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
Raw materials 5,509 6,372 15.7% 9,339 12077 29.3%
% sales 66.9% 69.7%   66.3% 69.6%  
Staff cost 774 873 12.8% 1,556 1748 12.3%
% sales 9.4% 9.5%   11.1% 10.1%  
Other expenses 902 1,154 27.9% 1,612 2037 26.3%
% sales 10.9% 12.6%   11.5% 11.7%  

Net profits: Had it not been for the huge decline in interest expenses, the fall in bottomline of the company would have been even more severe. It should be noted that the company has retired debts to the tune of Rs 4.3 bn in the past three years and this move seems to be paying rich dividends as evident from the savings on the interest front. Tax provisioning has also been lower by a significant 33% as compared to the corresponding previous year quarter.

What to expect?
At Rs 18, the company trades at a P/E of 14 times its annualised 1HFY05 earnings. Growth from a near to medium term perspective seems to have been already factored into the stock. For the long term however, the smaller size of the company’s balance sheet and its inability to make significant inroads into the other regions of the country, does increase the risk profile of the stock.


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