Things are getting incrementally better for Ashok Leyland Ltd. Although its sales volumes fell by about 12% on a year-on-year basis in September, they were still 14% higher compared with the previous month. Now, as the industry enters the second half of the current fiscal year, Ashok Leyland seems poised to grow by around 50% on a year-on-year basis given the resurgence in economic activity on one hand and the benefit of a very low base on the other.
Apart from the recovery in industrial activity, the firm is also making attempts to facilitate low-cost finance for truck operators, which should help improve volumes. Dealer reports validate this optimism. A few large dealers in the southern markets state that while demand is not robust, it has been picking up considerably in the past few months. What will also aid volumes in the coming months is that inventory lying with dealers has been brought down considerably over the last few months.
Meanwhile, the government order for 5,200 buses from the state transport undertakings under the JNNURM scheme will also begin to reflect on the company’s sales in the second half of this fiscal year. With modern buses being added to their fleet by tour operators, the bus segment is likely to account for around 25% of the company’s heavy commercial vehicles sales (in volume) during FY10 compared with 20% in FY09.
Ashok Leyland has also indicated that its unit in Uttarakhand will go onstream by March 2010, adding a capacity of 50,000 units to its existing 100,000 units per annum. This will bring down the capacity utilization from current levels.
Brighter days ahead: Workers assemble engines on a production line at Ashok Leyland’s factory in Hosur, Tamil Nadu. Rogan Macdonald / Bloomberg
But the profits made out of Uttarakhand are entitled to income tax and excise duty exemptions, which will negate the impact of the drop in utilization to a large extent. The company will also gain from lower steel prices, nearly 25-30% lower compared with the average for the previous fiscal year.
All this augurs for an improvement in operating profit margins (or earnings before interest, tax, depreciation and amortization, expressed as a proportion of sales) which had fallen to an abysmal 1.3% during the first quarter of the current fiscal. While analysts expect strong earnings growth between FY10 and FY12, given an earnings projection of Rs3 per share for FY11, at Rs41 the stock seems more than fairly?priced.
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