Why Ashok Leyland’s results failed the Street
Strangely, Ashok Leyland Ltd’s strong double-digit growth in revenue and profit in the September quarter failed to cheer investors. The stock closed lower by 2.3% at Rs119.30 as the results missed forecasts pencilled in by analysts. Perhaps expectations rule high on the Street given that the second-largest truck maker recorded a 23% year-on-year growth in sales during the three months, with a steady growth in market share over the last few quarters.
Here are some things that might have caused the deviation on all parameters from Bloomberg’s 16-analysts’ average estimate:
Firstly, net revenue of Rs6,046 crore was certainly a big 30.8% jump when compared to a year back. But it was below forecasts. According to Mitul Shah, an analyst with Quant Capital, the revenue miss could partly be due to lower tax benefits under the new goods and services tax (GST) at the company’s Pantnagar facility. After all, this unit accounts for a third of its total revenue.
Secondly, the 14% growth in operating profit to Rs611.4 crore was also below Bloomberg’s average estimate of Rs680.2 crore. Higher commodity prices led to a surge in raw material cost as a percentage of sales by 340 basis points year-on-year and about 180 basis points on a sequential basis. Even stable employee costs and lower other expenses were not sufficient to offset this.
That apart, average realization per vehicle sold, albeit 7% higher than the year-ago period, was short of forecasts.
Thirdly, higher costs and lower realizations (against forecast) translated into a miss on margins too. Operating margin at 10.1% was 100 basis points lower than the average estimate and 150 basis points lower year-on-year. Some analysts say that an adverse product mix and higher discounts in addition to higher costs could have taken the sheen off the margins. The management underscored that sales to push BS-III vehicle inventory to neighbouring countries were less profitable.
Lastly, the net profit of Rs363 crore (adjusted for forex variations) was a decent 17% higher year-on-year, but again, slightly below what the Street expected.
In other words, Ashok Leyland’s sturdy sales growth with market share inching into the 30%-plus league, from its earlier 24-25%, had raised expectations on the Street. The stock too has been an outperformer when compared to benchmark indices and peers. Currently, at Rs119, the stock price discounts the average earnings estimate for fiscal year 2019 by a reasonable 20 times.
The management forecast on sales is good for the coming quarters. Moreover, the company has displayed good control over working capital that is now on a par or better than industry. These factors should pan out favourably in the coming quarters as the shadows of GST and BS-III wane, provided Ashok Leyland’s march in gaining market share continues and it is able to offset the rise in commodity prices.
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