BackWhy Ashok Leyland’s sharp jump in profit failed to impress
An abnormally high jump in profit for the December quarter failed to impress investors as shares fell 4.2% after the results were announced
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Ashok Leyland Ltd reported an abnormally high jump in profit for the December quarter, although investors were not impressed. In the year-ago December quarter, it reported an operating loss amounting to 5% of revenue. Last quarter, operating profit rose to 7.1% of revenue on the back of a 72% jump in net revenue.
But analysts had estimated an ever higher profit margin of 7.4%, more or less in line with the margins the company had reported for the September quarter. Besides, Ashok Leyland trades at steep valuations of 10 times enterprise value to Ebitda, based on estimates for 2016-17. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a key measure of profitability.
It’s not surprising that investors were disappointed; the company’s shares fell by 4.2% after the results were announced.
The jump in revenue was a result of a 38% increase in volume and a 25% jump in net price realizations. Volume growth was driven by the truck segment (up 70%), which is also the reason why average price realizations rose sharply year-on-year. Sales of light commercial vehicles fell by 8%.
The better operating leverage as well a higher contribution from the high-margin truck segment led to the over 12 percentage point increase in margins. Besides, the company’s interest expenses fell by 15% year-on-year, reflecting an improvement in working capital as well as the effect of the sale of non-core assets.
Despite all this, net profit was 18% below analysts’ estimates, or should we say analysts’ estimates were off-target by 18%. They may need to rethink on estimates, which may put pressure on valuations, even though the company’s growth story remains promising.
The writer doesn’t own shares in the above-mentioned companies.
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