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Interest, depreciation drag down Ashok Leyland’s net

Interest, depreciation drag down Ashok Leyland’s net
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First Published: Tue, Jul 19 2011. 11 19 PM IST
Updated: Tue, Jul 19 2011. 11 19 PM IST
An 18% jump in average realizations (or the money made from each sale) from a year ago helped boost Ashok Leyland Ltd’s June quarter performance, compensating for a 10% dip in sales volumes during the quarter. The upshot was a 6% growth in revenue compared with the same period last year. That didn’t enthuse investors and the stock took a beating, closing about 4% lower.
Interest costs are clearly a concern; they rose nearly 70% from the year-ago period, mainly on account of higher working capital requirements. This is perhaps due to higher inventory of finished goods. Further, a change in accounting policy led to amortization of leased property, which was so far accounted for under the head “other expenditure”. So, while other expenditure was reduced, the same was charged under depreciation, which increased by 38%.
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Staff cost as a percentage of sales also increased. Higher interest and depreciation together hit net profit, which fell 30% from a year ago.
The Street is also worried about flattish realizations when compared with the preceding quarter and a 36% drop in volumes. The firm reiterated a drop in sales in the southern market, which has been its stronghold in the truck segment. A report by Angel Broking Ltd says, “During 1QFY2012 (quarter ended June), the company lost 500 basis points of market share in the medium and heavy commercial vehicle segment and its share currently stands at 22.2%.” One basis point is one-hundredth of a percentage point.
The question is: does this confirm the predicted slowdown in the trucks segment or does it reflect trying times for the firm in terms of competition? The fact that its competitor Tata Motors Ltd registered 8% growth in volumes in medium and heavy vehicles from a year ago suggests the latter is also a strong factor.
Lower volumes also imply poor operating leverage. This is reflected in the steep drop of 390 basis points in operating profit margins from the preceding quarter.
The management expressed that rising fuel costs and interest rates, along with higher cost of ownership, softened demand in the June quarter. Relief came by way of a 30% jump in exports.
Ashok Leyland’s shares trade at Rs50.70 apiece on BSE. At its current market price, the stock is valued reasonably at around 10 times fiscal 2013 earnings. However, moderation in sales and the strain on its profitability is likely to tell on the stock.
Graphic by Yogesh Kumar/Mint
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First Published: Tue, Jul 19 2011. 11 19 PM IST