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Ashok Leyland: Volumes, profits surge - Views on News from Equitymaster

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Ashok Leyland: Volumes, profits surge

Nov 17, 2014

Ashok Leyland announced the second quarter results of financial year 2014-2015 (2QFY15). The company reported a 26% YoY growth in revenues and a net profit of Rs 1.2 bn. Here is our analysis of the results.

Performance summary
  • Net sales grow by 26% YoY in 2QFY15 led by ramp up in volumes and exports.
  • Operating margins improve substantially by 5.1% to 7.3% in 2QFY15 largely on account of the benefit of operating leverage.
  • Led by the strong performance at the topline and operating level, the company reports a net profit of Rs 117 m (excluding the extraordinary income of Rs 1 bn).

Standalone financial snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 25,496 32,177 26.2% 49,134 56,955 15.9%
Expenditure 24,934 29,833 19.6% 48,339 53,450 10.6%
Operating profit (EBDITA) 563 2,344 316.5% 795 3,505 340.7%
EBDITA margin (%) 2.2% 7.3%   1.6% 6.2%  
Other income 231 257 11.2% 354 488 38.0%
Interest (net) 1,244 1,007 -19.0% 2,251 2,071 -8.0%
Depreciation 901 1,031 14.4% 1,853 2,064 11.4%
Profit before tax (1,351) 563   (2,955) (142)  
Tax (663) 445   (914) 220  
Extraordinary item 438 1,090 149.0% 372 1,090 192.6%
Profit after tax/(loss) (251) 1,207   (1,668) 727  
Net profit margin (%) -1.0% 3.8%   -3.4% 1.3%  
No. of shares (m) 2,660.7 2,660.7   2,660.7 2,660.7  
Diluted earnings per share (Rs)*         (1.2)  
(* on trailing twelve months earnings and excluding extraordinary items)

What has driven performance in 2QFY15?
  • Ashok Leyland's revenues grew by 26% YoY during the quarter. The MHCV segment, in the last two years, has been badly impacted by the economic slowdown, thereby dragging Ashok Leyland's performance along with it. However, this quarter was a strong one for the company led by a ramp up in volumes most notably exports. Further, because of policies related to the reversal of mining bans and resumption of some stalled infrastructure projects, the MHCV space witnessed better growth this quarter. The other factor that helped Ashok Leyland was that the southern Indian market (where the company has a significant presence) grew at a faster pace than the overall industry.

  • ALL's operating margins improved substantially by 5.1% to 7.3% during the quarter on account of benefits of operating leverage, a tight rein on costs and a better sales mix (i.e. higher volumes of tippers and tractors). This then translated into a massive four fold growth in operating profits.

  • Led by the strong performance at the topline and operating profit level, the company reported a net profit of Rs 117 m (excluding extraordinary income of Rs 1 bn) during the quarter as against a loss of 251 m during 2QFY14. The extraordinary income during the quarter was with respect to the profit on sale of a land parcel in Chennai.
What to expect?
At the current price of Rs 55, the stock is trading at a multiple of 14.2 times our estimated FY17 cash flow per share. Ashok Leyland's efforts on becoming a leaner company and improving its working capital position have been yielding results. The company has been focusing on reducing debt and in this regard it has been selling off non-core assets and also intends to go slow on capex for the next couple of years. Having said, assuming that the company's performance considerably ramps up on account of a recovery in the economy which translates into a rise in volumes, valuations do not leave much upside on the table for investors. And hence our view is that investors Sell the stock of Ashok Leyland.

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