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Ashok Leyland: The battering continues - Views on News from Equitymaster

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Ashok Leyland: The battering continues

Nov 16, 2013

Ashok Leyland announced the second quarter results of financial year 2013-2014 (2QFY14). The company reported a 23% YoY fall in revenues and a loss of Rs 251 m at the net level. Here is our analysis of the results.

Performance summary
  • Net sales fall by 23% YoY in 2QFY14 on account of the continuing sluggish conditions in the MHCV market which result in a substantial drop in volumes.
  • Operating margins plunge by 7.9% to 2.2% in 2QFY14 largely on account of the considerable fall in volumes.
  • Because of the poor performance at the operating level and higher interest costs, the company reports a net loss of Rs 251 m for the quarter.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 33,195 25,496 -23.2% 63,464 49,134 -22.6%
Expenditure 29,854 24,934 -16.5% 57,716 48,339 -16.2%
Operating profit (EBDITA) 3,341 563 -83.2% 5,748 795 -86.2%
EBDITA margin (%) 10.1% 2.2%   9.1% 1.6%  
Other income 239 231 -3.1% 367 354 -3.7%
Interest (net) 1,036 1,244 20.0% 1,870 2,251 20.4%
Depreciation 984 901 -8.5% 1,877 1,853 -1.3%
Profit before tax 1,559 (1,351)   2,368 (2,955)  
Tax 133 (663)   273 (914)  
Extraordinary item - 438   - 372  
Profit after tax/(loss) 1,426 (251)   2,095 (1,668)  
Net profit margin (%) 4.3% -1.0%   3.3% -3.4%  
No. of shares (m) 2,660.7 2,660.7   2,660.7 2,660.7  
Diluted earnings per share (Rs)*          (0.5)  
(* on trailing twelve months earnings and excluding extraordinary items)

What has driven performance in 2QFY14?
  • Ashok Leyland's revenues fell by 23% YoY during the quarter. This poor performance was on account of the continuing sluggish conditions in the MHCV segment. Total industry volumes were down 25% YoY. Not only did volumes fall, but the industry also witnessed heavy discounts, all of which took its toll on the company's topline. Having said that, the company had lost around 3% market share in 1QFY14, which it managed to regain this quarter.

  • ALL's operating margins drastically fell by 7.9% to 2.2% during the quarter largely on account of the plunge in volumes. Having said that, while in absolute terms, there was a decline in costs due to some cost control measures undertaken by the company. As a percentage of sales, costs increased simply because volumes and consequently sales dropped. This then translated into a massive 83% YoY drop in operating profits.

    Cost break-up…
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw materials 23,993 19,457 -18.9% 45,880 37,294 -18.7%
    % sales 72.3% 76.3%   72.3% 75.9%  
    Staff cost 2,638 2,546 -3.5% 5,317 5,128 -3.6%
    % sales 7.9% 10.0%   8.4% 10.4%  
    Other expenditure 3,223 2,931 -9.1% 6,519 5,917 -9.2%
    % sales 9.7% 11.5%   10.3% 12.0%  
    Total 29,854 24,934   57,716 48,339  

  • Led by the poor performance at the topline and operating level, Ashok Leyland reported a loss of Rs 251 m at the net level. What also compounded matters was the rise in interest costs by 20% YoY. The company had taken fresh loans in FY13 and the full impact of these was reflected in the interest costs.
What to expect?

At the current price of Rs 15, the stock is trading at a multiple of 3.4 times our estimated FY16 cash flow per share. With the MHCV industry performing very poorly during the first half of this fiscal, the management indicated that this was the sharpest downturn that it has seen and that conditions remain tight. It expects FY14 to remain subdued with the possibility of a recovery thereafter. While Ashok Leyland's performance on a YoY basis has been poor, the company has managed to do much better on a sequential basis.

The company is employing various cost rationalization initiatives, which includes sale of non-core assets and the cash generated from this will be entirely utilized towards retiring debt.

The auto industry is cyclical and more so in the case of commercial vehicles as growth is directly linked to that of GDP. Since, it is difficult to predict when a cycle will turn, we nevertheless believe in looking at the average trend over a longer term period. Thus, even if things look quite bleak for Ashok Leyland at present, over a three year period, we still expect volumes to grow at an average of around 8%, the benefits of which will flow to the margins as well. In view of this, we maintain our ‘Buy' view on the stock. However, please note that the stock's rating on the Equitymaster Risk Matrix (ERM) is much lower than those featuring in the list of top buys.

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