Ashok Leyland: Is the worst behind it?
The street has recognized Ashok Leyland's efforts to improve operating performance and cash flows, but the equity dilution has been a dampener
The 5.2% drop in Ashok Leyland Ltd’s stock in the last two trading sessions reflects concerns of a 6% equity dilution through a qualified institutional placement (QIP). This may hit the estimated growth in earnings per share in the near term. Besides, the promoter’s stake in the company will come down from the present 41.5% to about 35%.
However, the company’s initiatives to improve its operating performance and balance-sheet health indicate that the worst is behind for the second largest truck company in the country.
High borrowing and interest costs have been the primary concern for Ashok Leyland. But the good news is the firm is done with major capex. Barring an expenditure of about ₹ 200 crore per annum into new product development, there’s no major capex forecast.
On the contrary, the forecast is that its debt-to-equity ratio will come down from 1.4 in March 2014 to about 1 in March 2015.
About ₹ 700 crore raised through the recent QIP would barely alleviate the company’s massive debt. But it’s a milestone on the road to debt reduction, as is the company’s stake sale in non-core assets. These initiatives have taken the stock up by almost 60% in the last three months.
On the operations front, Leyland’s March-quarter results have been exceptional. Operating margin at 6% beat the street consensus of 2.2% because of cost-cutting exercises across the board. A report from Religare Capital Markets highlights the reduction in inventory levels of both raw material and finished goods. “Working capital has reduced to the lowest in the recent past, down from 40 to eight days of sales." This may translate into better profitability in the forthcoming quarters.
Leyland has also raised product prices in the last few months, and their benefits will accrue in the next few quarters as realization gets better. Sales are expected to improve too after a couple of quarters. Reflecting the sighting of these green shoots in the trucks business, a report from Emkay Global Financial Services Ltd says, “While there’s overcapacity in the system and the fleet operator profitability remains far from a comfortable level, we anticipate things might have bottomed out and can only get better." The need, of course, is for a turnaround in industrial activity.
The street has recognized Ashok Leyland’s efforts to improve operating performance and cash flows. But the equity dilution has been a dampener. The stock has a valuation of about nine times its enterprise value. Note that while the promoter stake may be diluted, it had steadily inched up to 41.5% in March 2014 from about 38.6% in the first quarter of fiscal 2014, indicating promoter confidence in the company’s prospects.
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