Ashok Leyland’s fund-raising plans irk investors

Strong volumes, a favourable product mix and economies of scale should have led to a disproportionate improvement in margins


Analysts expect Ashok Leyland to see steady sales in the current fiscal year, helped by replacement demand, a recovery in mining activity and implementation of new pollution norms.
Analysts expect Ashok Leyland to see steady sales in the current fiscal year, helped by replacement demand, a recovery in mining activity and implementation of new pollution norms.

Ashok Leyland Ltd’s shares slumped 4.38% on Wednesday after the company surprised the Street with a huge impairment to its investments and announced plans to raise funds by issuing fresh equity. Against an expectation of Rs.425 crore, Ashok Leyland reported a net profit of Rs.77 crore. But even after adjusting for the write-down, the estimated net profit at Rs.360-380 crore is lower than Street estimates.

Sales revenues surged 32%, while average realizations per vehicle improved 3% on a better product mix. The share of higher-priced medium and heavy commercial vehicles in total sales increased from 77% a year ago to 80% last quarter.

But the company was not able to fully capture the gains in margins. Gross margins expanded at a slower-than-expected pace of 1.8 percentage points. Ebitda margins increased 2.5 percentage points from a year ago to 12.6%. The Bloomberg consensus brokers’ estimate had pegged Ebitda margins at 12.8-12.9%. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of profitability.

Strong volumes, a favourable product mix and economies of scale should have led to a disproportionate improvement in margins. But these benefits were countered by a sharp rise in other expenses and slower expansion in gross margins. Nevertheless, a slight miss in margins couldn’t have led to the sell-off in the stock.

What piqued investors is the combination of a huge investment write-down and the unexpected fund-raising plan, through both equity and debt. The company also plans to rationalize its investments during the rest of the fiscal year, which opens the possibility of more write-downs in the coming quarters.

Though just an enabling resolution as of now, the fund-raising plan also did not go down well with investors as the requirement is not seen as immediate. “More clarity is expected on this announcement, as current operations do not warrant a fund raise,” ICICI Securities Ltd said in a note. According to PhillipCapital (India) Pvt. Ltd, the proposal can dilute equity base by 4.7% and emerge as a near-term overhang for the stock.

More clarity will emerge in the conference call scheduled on Thursday.

Analysts expect Ashok Leyland to see steady sales in the current fiscal year, helped by replacement demand, a recovery in mining activity and implementation of new pollution norms.

While the optimism is captured in the stock—up 40% in the last one year—events outside the core performance overshadowed the company’s good show in the March quarter.

The writer does not own shares in the above-mentioned companies.

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