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Ashok Leyland: Exports bolster growth - Views on News from Equitymaster
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Ashok Leyland: Exports bolster growth
Nov 7, 2011

Ashok Leyland announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported a 14% YoY increase in revenues, while profits have dropped by 8% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by 14% YoY largely led by strong growth of its exports business.
  • Operating margins shrink by 0.5% YoY due to higher staff costs and other expenditure (as percentage of sales).
  • Decline in operating margins, higher interest costs and depreciation charges all percolate down to the bottomline, which falls by 8% YoY during the quarter.

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 27,140 30,946 14.0% 50,619 55,901 10.4%
Expenditure 24,091 27,634 14.7% 45,217 50,143 10.9%
Operating profit (EBDITA) 3,048 3,312 8.6% 5,402 5,758 6.6%
EBDITA margin (%) 11.2% 10.7%   10.7% 10.3%  
Other income 62 103 65.6% 110 144 31.7%
Interest (net) 395 627 58.8% 711 1,160 63.2%
Depreciation 641 859 34.1% 1,255 1,706 35.9%
Profit before tax 2,075 1,929 -7.1% 3,546 3,036 -14.4%
Tax 405 388 -4.2% 649 633 -2.5%
Profit after tax/(loss) 1,671 1,541 -7.8% 2,897 2,403 -17.0%
Net profit margin (%) 6.2% 5.0%   5.7% 4.3%  
No. of shares (m)       1,330.3 2,660.7  
Diluted earnings per share (Rs)*         2.2  
Price to earnings ratio (x)*         12.7  
(* on trailing twelve months earnings)

What has driven performance in 2QFY12?
  • After a tepid performance in 1QFY12, the second quarter was relatively better as Ashok Leyland's (ALL) sales during this quarter grew by a mere 14% YoY. While domestic volumes declined by 8% YoY to 20,429 vehicles, exports recorded a healthy 37% YoY growth in volumes to reach 3,230 vehicles during the quarter. For the half year period, total revenues grew by 10% YoY largely led by growth in exports as domestic sales dipped. The drop in domestic volume was primarily in the South, which has been the company's stronghold for long. Since there were practically elections in every Southern state, purchases were delayed leading to drop in domestic volumes and subsequently also a loss of overall market share during the half year period.

  • ALL's operating margins shrunk marginally by 0.5% during the quarter largely on account of a rise in both staff costs and other expenditure (as percentage of sales). Staff costs increased from 7.8% of sales in 2QFY11 to 8.1% in 2QFY12. That said, despite firm commodity prices, the company was able to keep its raw material costs under control.

    Cost break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw materials 19,969 22,757 14.0% 37,315 40,738 9.2%
    % sales 73.6% 73.5%   73.7% 72.9%  
    Staff cost 2,115 2,515 18.9% 4,140 5,013 21.1%
    % sales 7.8% 8.1%   8.2% 9.0%  
    Other expenditure 2,007 2,362 17.7% 3,762 4,392 16.7%
    % sales 7.4% 7.6%   7.4% 7.9%  
    Total 24,091 27,634   45,217 50,143  

  • Although ALL grew its operating profits by a tepid 9% YoY during the quarter, bottomline declined by 8% YoY despite higher other income. This was on the back of a sharp increase in depreciation charges and interest costs. Interest costs rose by 59% YoY on account of an increase in working capital loans. Depreciation charges were higher on account of the Pantnagar plant coming on stream.

What to expect?
At the current price of Rs 28, the stock is trading at a multiple of 7.4 times our estimated FY14 earning per share and 5.6 times our estimate FY14 cash flow per share.

The company's management expects the auto industry to grow at a muted pace of 7-8% YoY in FY12. As for the operating margins going forward, the management believes that ALL will be able to clock margins in excess of 10% going forward. This is on account of two reasons - one being higher volume sales and second being the company increasing prices. The company has outlined a capex of Rs 6 bn for FY12 and also intends to raise its long term borrowing target to Rs 6 bn. The company's debt equity ratio stood at 0.9 times at the end of FY11 and the company expects this ratio to be maintained in the coming year as well. Overall, we maintain our positive view on the stock.

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