Ashok Leyland Ltd’s reported net profit of Rs.74 crore beats the consensus Street estimate by a wide margin, but doesn’t mask the weakness in its earnings. The boost to net profit came from the sale of investments worth Rs.156.25 crore. But for this one-time income, the company would have reported a net loss.
The results aren’t surprising. The commercial vehicle industry is undergoing pangs of a slowdown. Unlike many of its rivals, Ashok Leyland is a pure-play truck and bus seller and is more exposed to economic vagaries.
In the December quarter, it sold 22,666 vehicles, down 2% from a year ago. This fall was stemmed by increasing sales of its light pickup Dost. Excluding that model, the firm’s medium and heavy commercial vehicle volumes slipped by 29% from a year ago.
But Dost is also a lightweight when it comes to contributing to revenues. A higher proportion of the pickup in Ashok Leyland’s sales mix meant that realizations fell 16.6% from a year ago. Thus, the company’s total income reduced by 18% from a year ago. The only silver lining for the firm was in the form of lower raw material costs, the result of a global economic slowdown. Raw material costs declined by one-fifth from a year ago. However, that was not enough to plug a 51% fall in earnings before interest, taxes, depreciation and amortization, the worst such decline since December 2010.
Sure, Ashok Leyland made some market share gains, but one point of concern was flat sales in the southern region, its main market. It was also one of the reasons why investment bank Jefferies downgraded the company a couple of days ago, causing the stock to lose some 7%.
That only added to its underperformance compared with the BSE Auto index and Tata Motors Ltd since the start of 2012. A rate cut by the Reserve Bank of India—as widely expected to happen when it reviews monetary policy next week—may help it recoup some of these losses.
But a real turnaround will only happen when the economy revives, in turn, boosting industrial activity, truck rentals and hence, sales of commercial vehicles.