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Ashok Leyland: Performs better than industry
Nov 28, 2012

Ashok Leyland announced the second quarter results of financial year 2012-2013 (2QFY13). The company reported a 6% YoY increase in revenues, while profits fell by 8% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by a 6% YoY in 2QFY13 which is decent compared to the sluggish conditions in the MHCV market.
  • Operating margins fall by 0.5% to 10% in 2QFY13 largely on account of an increase in other expenditure (as percentage of sales).
  • Net profits fall by 8% YoY on account of the poor performance at the operating level, and surge in interest costs.

Financial performance: A snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 31,148 32,960 5.8% 56,275 63,034 12.0%
Expenditure 27,837 29,620 6.4% 50,517 57,286 13.4%
Operating profit (EBDITA) 3,312 3,341 0.9% 5,758 5,748 -0.2%
EBDITA margin (%) 10.6% 10.1%   10.2% 9.1%  
Other income 135 239 77.3% 209 367 75.7%
Interest (net) 658 1,036 57.4% 1,225 1,870 52.7%
Depreciation 859 984 14.5% 1,706 1,877 10.0%
Profit before tax 1,929 1,559 -19.2% 3,036 2,368 -22.0%
Tax 388 140 -63.9% 633 273 -56.8%
Profit after tax/(loss) 1,541 1,419 -7.9% 2,403 2,095 -12.8%
Net profit margin (%) 4.9% 4.3%   4.3% 3.3%  
No. of shares (m)       2,660.7 2,660.7  
Diluted earnings per share (Rs)*         2.0  
Price to earnings ratio (x)*         13.9  
*On trailing 12 months earnings

What has driven performance in 2QFY13?
  • Ashok Leyland's revenues grew by 6% YoY during the quarter and 12% YoY for the first half of the fiscal. This growth was decent when compared to the sluggish conditions in the MHCV segment. The company managed to gain market share across segments and did particularly well in the intermediate vehicles range where its market share improved from 16% to 25%. 'Dost' continued to do well and has been clocking a run rate of 3,000 vehicles per month which the management is looking to scale up. Further, while the industry volumes are expected to decline by around 5-10% for FY13, the management expects the company's volume numbers to be a tad higher than what they were in FY12.

  • ALL's operating margins shrunk by 0.5% to 10.1% during the quarter largely on account of a substantial rise in other expenditure (as percentage of sales). This was on account of higher expenses incurred for 'Dost' and also because of consultancy fees paid to a consultancy firm which has been employed for giving inputs for improving working capital position. All of this led to a higher rise in other expenses. Thus, with operating margins shrinking, operating profits grew by only 1% YoY.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw materials 22,924 23,993 4.7% 41,040 45,880 11.8%
    % sales 73.6% 72.8%   72.9% 72.8%  
    Staff cost 2,515 2,638 4.9% 5,013 5,317 6.1%
    % sales 8.1% 8.0%   8.9% 8.4%  
    Other expenditure 2,397 2,988 24.7% 4,465 6,090 36.4%
    % sales 7.7% 9.1%   7.9% 9.7%  
    Total 27,837 29,620   50,517 57,286  

  • Tepid growth in operating profits coupled with the rise in interest costs led to the 8% YoY drop in net profits. This is despite the healthy growth in other income and lower tax expenses. Interest costs rose by 57% YoY on account of an increase in working capital loans. The company has been looking to reduce loans on the working capital side. While it stands at around Rs 17 bn at present, the management is looking to bring this down to Rs 10 bn by the end of the fiscal.

What to expect?
At the current price of Rs 28, the stock is trading at a multiple of 6.2 times our estimated FY15 earnings per share and 4.6 times our estimated FY15 cash flow per share. Ashok Leyland has planned a capex of around Rs 6.5 bn for FY13, which will largely occur in Pantnagar and also for optimizing capacities. The company's working capital debt stood at around Rs 17 bn at the end of the quarter and it intends to reduce this to around Rs 10 bn by the end of the fiscal. Although, the MHCV segment has witnessed a slowdown in growth, Ashok Leyland expects to do better for the full year. Overall, we maintain our 'Buy' view on the stock.

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