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Ashok Leyland: Not driven by topline - Views on News from Equitymaster
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Ashok Leyland: Not driven by topline
Oct 30, 2009

Performance summary
  • Topline suffers a 16% fall during the quarter on the back of a similar fall in volumes
  • Lower costs help expand the operating margins by 280 basis points and grow operating profits by 15% YoY
  • At 32% YoY, growth in bottomline during the quarter exceeds operating profit growth as tax outgo falls by 35% YoY
  • Half yearly bottomline falls 18% YoY on the back of a 34% fall in topline


(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 18,705 15,777 -15.7% 37,585 24,901 -33.7%
Expenditure 17,262 14,116 -18.2% 34,923 23,119 -33.8%
Operating profit (EBDITA) 1,443 1,660 15.1% 2,662 1,782 -33.1%
EBDITA margin (%) 7.7% 10.5%   7.1% 7.2%  
Other income 238 56 -76.6% 312 662 112.1%
Interest (net) 246 170 -30.8% 353 428 21.4%
Depreciation 505 506 0.1% 946 941 -0.6%
Profit before tax 930 1,040 11.9% 1,675 1,075 -35.8%
Extraordinary income/(expense) (33) (9) -73.6% (66) (19) -71.0%
Tax 224 146 -35.2% 431 92 -78.6%
Profit after tax/(loss) 672 886 31.8% 1,178 964 -18.2%
Net profit margin (%) 3.6% 5.6%   3.1% 3.9%  
No. of shares (m) 1,330.3 1,330.3   1,330.3 1,330.3  
Diluted earnings per share (Rs)*         1.3  
Price to earnings ratio (x)*         36.3  
(* on trailing twelve months earnings)

What has driven performance in 2QFY10?
  • The near 16% drop in topline during the quarter has come about on account of a similar drop in overall volumes, 17% to be precise. While the volumes look lower on a YoY basis, the management has stated that in the past few months, volumes have really picked up. Infact, on a QoQ basis, the company’s volumes have virtually doubled. Besides, with the company having received orders for supplying a large number of buses under the Urban Renewal Scheme, the 33% decline that it suffered in the passenger segment during the current quarter will also start looking a lot better. All in all, exciting times lie ahead for the company as far as the volumes are concerned.

    Segment wise break up of sales…
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 13,952 11,079 -20.6% 28,327 17,706 -37.5%
    % sales 74.6% 70.2%   75.4% 71.1%  
    Staff cost 1,571 1,675 6.7% 3,197 3,116 -2.5%
    % sales 8.4% 10.6%   8.5% 12.5%  
    Other expenditure 1,740 1,362 -21.7% 3,399 2,297 -32.4%
    % sales 9.3% 8.6%   9.0% 9.2%  

  • On the costs front, like other companies in the sector, Ashok Leyland has also managed to bring about a robust improvement in operating margins. Thanks to lower commodity prices as opposed to same quarter last year when they ruled at historic highs and also price increases taken by the company, operating margins have come in higher by 2.8%. It has also helped the company grow its operating profits by 15% YoY despite a similar fall in topline. Going forward though, there could be some pressure on margins as prices of certain key raw materials have started inching upwards.

    Cost break-up…
      2QFY09 2QFY10 Change (%) 1HFY09 1HFY10 Change (%)
    M&HCVs Passenger            
    Domestic 5,406 3,647 -32.5% 9,405 5,858 -37.7%
    Exports 1,312 545 -58.5% 2,043 819 -59.9%
    M&HCVs Goods            
    Domestic 9,658 8,763 -9.3% 22,643 13,190 -41.7%
    Exports 603 1,088 80.4% 1,068 1,614 51.1%
    Total M&HCVs            
    Domestic 15,064 12,410 -17.6% 32,048 19,048 -40.6%
    Exports 1,915 1,633 -14.7% 3,111 2,433 -21.8%
    LCVs            
    Domestic 117 192 64.1% 278 344 23.7%
    Exports 111 62 -44.1% 195 165 -15.4%
    Total            
    Domestic 15,181 12,602 -17.0% 32,326 19,392 -40.0%
    Exports 2,026 1,695 -16.3% 3,306 2,598 -21.4%
    Grand Total 17,207 14,297 -16.9% 35,632 21,990 -38.3%

  • The company’s bottomline growth has come in at 32% YoY for the quarter. This is higher than the growth in operating profits mainly on account of lower tax charges. While the exact reason for the same could not be known, the company’s effective tax rate has come down to 14% from 24% that prevailed a year ago. The 31% drop in interest charges is also heartening and could be attributed to reduced working capital requirement.

What to expect?
At the current price of Rs 46, the stock trades at a cash flow multiple 8.5x its expected FY12 cash flow per share. While profit for the first half are still down 18% YoY, we expect the same to improve considerably over the next half, both backed by improvement in volumes as well as profitability. Also, in FY11, the industry is expected to grow no less than 25% and Ashok Leyland, by virtue of being the second largest player may also benefit from the same. On the valuations front though, any medium term upside seems to be well reflected in the current price. We will update our research report on the company shortly.

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