Ashok Leyland Ltd’s March quarter results were expected
to be impressive, as its monthly vehicle output reports had indicated a 138% jump in volumes. But what impressed was its net profit growth of 317%, to Rs223 crore, over the year-ago period, even as sales rose by 139%. Ashok Leyland’s operating profit margin rose to 13% compared with 10.5%. Despite higher raw material costs during the quarter, margins improved. Higher volume growth, a better product mix due to higher sales of multi-axle vehicles and tractor trailers, and cost reduction were key reasons for margin expansion. This was visible even in employee costs, which fell as a percentage of sales despite the higher output. The firm’s management perceives the demand uptrend in commercial vehicles as sustainable. K. Sridharan, chief financial officer, explained: “The company is strong in the heavy duty segment, particularly in multi-axle vehicles, where volume growth has been around 50-60% last fiscal.”
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Still, its estimate for volume growth in 2011 is conservative, at 15% compared with over 30% in FY2010.
The company has also steadily gained market share, from 21-22% in the first quarter of 2010 to 28-29% in the fourth quarter. One concern is that it is not yet a strong player in the eastern market. Besides, the southern market, traditionally its stronghold, has grown by only 15% in volume terms in 2010. The rest of India (mainly north and west) grew by 40% during the year.
Ashok Leyland was also unable to deliver its committed number of buses during the March quarter, due to supply constraints largely because of the strike at Bosch India. Around 1,200 buses under the Jawaharlal Nehru National Urban Renewal Mission scheme are yet to be delivered of the 5,098 ordered. Besides, it has orders on hand from state transport undertakings for another 2,000 buses.
Graphic: Yogesh Kumar/Mint
The firm is investing to increase its capacity, with Rs1,200 crore proposed for expansion plans over the next two years; mainly to increase output of engines and new generation cabs. Besides, it plans to invest Rs800 crore in joint ventures. Analysts believe that its Uttarakhand plant is expected to deliver 22,000-25,000 vehicles in fiscal 2011, in its first full year of operation.
Concerns are similar to that of its peers, whether its margins will come under pressure. Steel, nickel, aluminium and rubber are all expected to see price increases, which will put some pressure on operating margins. But analysts are hopeful that net profit margin (NPM) could hold out, as excise and income-tax benefits accrue from a higher share of production from Uttarakhand. On a quarter-on-quarter basis, NPM has improved from around 7.8% to 10.2%. Earnings per share jumped from Rs1.40 to Rs3.20 in fiscal 2010. At Rs55, the stock seems fairly valued, it trades at a discount of around 14 times its estimated earnings of Rs4.30 for fiscal 2011.
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