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Ashok Leyland: Topline surprise

Oct 28, 2003

Ashok Leyland, the country's second largest commercial vehicle major, has posted a sharp 30% growth in sales for the second quarter ended September 2003. This was led by a significant rise in CV sales and savings on account of lower interest and depreciation charges. At the operating profit level, growth in profits for 1HFY04 is, however, lower at 14% YoY.

(Rs m)2QFY032QFY03Change1HFY031HFY04Change
Sales 6,353 8,239 29.7% 11,930 14,082 18.0%
Other Income 50 93 88.3% 72 111 53.8%
Expenditure 5,577 7,186 28.8% 10,548 12,508 18.6%
Operating Profit (EBDIT) 775 1,053 35.8% 1,382 1,574 13.9%
Operating Profit Margin (%)12.2%12.8% 11.6%11.2% 
Interest 164 95 -42.0% 340 181 -46.9%
Depreciation 284 251 -11.8% 541 481 -11.2%
Profit before Tax 377 801 112.5% 573 1,024 78.8%
Extraordinary items (46) (18)-62.0% (87) (23)-73.0%
Tax 122 248 103.5% 180 318 76.6%
Profit after Tax/(Loss) 208 535 156.6% 306 683 123.2%
Net profit margin (%)3.3%6.5% 2.6%4.8% 
No. of Shares (m) 118.9 118.9   119.0 119.0  
Earnings per share (Rs)* 7.0 18.0   5.1 11.5  
P/E (x)     19.8  
(*annualised)      

Total volumes for 2QFY04 has increased 47% to 12,002 units mainly on account of a 62% growth in M/HCV sales. The CV sector, after growing by 30% in FY03, was initially expected to register a 7% rise in volumes in FY04. However, demand continues to remain strong and consequently there is a need to revise this number upwards. We now expect the sector to grow at around 10% in FY04. Ashok Leyland, being the second largest player, has taken full advantage of the rise in demand. Expansion of distribution network in the northern markets (25% of unit sales in FY03) has also enabled the company to clock strong growth in volumes.

Compared to 1QFY04, bus segment also has registered higher growth in sales in 2QFY04 (20% YoY as compared to 8% YoY in 1QFY04). This is a positive sign considering the fact that orders from state transport undertakings have been hard to come by in the last two years. Given the strong performance of the company in 1HFY04, there is a need to revise our sales estimates for FY04.

On the operating margins front, there is not much surprise, as it is in line with our FY04E expectations. But the company has been able to accelerate the debt reduction exercise, which is apparent from the 47% fall in interest cost in 1HFY04. Increased cash flow from operations and unlocking of cash from working capital has enabled the company to retire its high cost debt (average cost of 13% in FY03). Aided by lower depreciation charges and higher other income, net profit has increased by more than 150% in 2QFY04.

The stock currently trades at Rs 227 implying a P/E multiple of 19.8x annualised 1HFY04 earnings. Apart from robustness in domestic demand, the company is believed to have a large export order to the Middle East. The supply is expected to commence in 2HFY04. This should benefit the company. However, Telco is strengthening its foothold in the Southern market, which has traditionally been the key market for Ashok Leyland. With new players like Eicher and Bajaj Tempo entering the CV market, competition is slated to increase. While the company's performance is commendable, valuations seem to be on the higher side for a highly economy reliant sector.

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