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Ashok Leyland: Below par

Dec 5, 2001

One of the key reasons behind the rally in auto stocks is the sharp rise in passenger car volumes and revival in commercial vehicles demand towards the later half of 1HFY02. While Telco reported a rise in heavy and medium commercial vehicle demand (M/HCV), Ashok Leyland's (ALL) CV sales continues to remain sluggish. ALL's production and sales for the first half of the current year has fallen by 12.5% and 3.1% to 13,395 units and 12,833 units respectively. If one were to look at the monthly trend in sales of the current year, after a brief rise in the first two months i.e. April-May 2001, demand has witnessed a slowdown. ALL reported a 4% rise in sales to 6,247 units in 1QFY02. However, weakness in industrial production leading to a slowdown in the economy has had a significant impact on CV demand in 2QFY02. Sales plummeted by 9% to 6,586 units in 2QFY02.

Exports also fell by 17.2% to 878 units for the first half of the current fiscal year. But the rise in exports in 2QFY02 could be attributed to the shipping of CKD units, for which ALL had received new orders in the current year. Though the company reported a 24% rise in net profits in 2QFY02, it was led by a sharp rise in other income. Excluding the other income component, net profit actually fell by around 12% in 2QFY02.

Margins fell in 1HFY02 and the reasons for this are multi-fold. Demand in the Southern region, where ALL has a big presence, was lacklustre on account of a less than average monsoon. It had also lost market share in the CV segment in the current year and competitive pressure along with a weak demand scenario could have lead to a downward pressure on prices. Besides, the workmen stopped work for the month of September 2001 in its Hosur unit. As a result, operating expenditure escalated by 5.7%, primarily led by a 10% rise in raw material related expenses.

The slowdown effect...
(% change) 1QFY02 2QFY02 1HFY02
Production -11.8% -13.2% -12.5%
Sales 4.0% -9.0% -3.1%
Exports -54.5% 9.0% -17.2%

ALL currently trades at Rs 83 implying a P/E multiple of 13.3x annualised 2QFY02 earnings. Though CV demand has increased in recent months, much of it has come from Northern India where ALL does not have a significant presence. It also remains to be seen whether higher agricultural output translates into a higher CV demand in 2HFY02.

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