Ashok Leyland Ltd’s healthy performance for the September quarter (Q2) may not impress investors, given that it did not meet analysts’ estimates by a substantial margin. The resignation of Vinod K. Dasari, chief executive and managing director, also came as a surprise.

Dasari, credited with turning around the company, will quit in March 2019.

During a call with analysts, chairman Dheeraj G. Hinduja said all organizations go through such changes and Ashok Leyland was no exception. Even so, the management change does add to the uncertainty in the near term.

Ashok Leyland Q2 results show the elevated impact of competitive pressures. Tracking robust volumes, price hikes and the management’s focus on profitable growth, analysts were expecting the company’s margins and profits to cross 11% and 500 crore, respectively, for the quarter.

But the earnings expansion is relatively subdued. Competitive pressures and rampant discounting resulted in realizations lagging expectations. Besides, costs and margins expanded by a mere 50 basis points (compared to the expectation of 100 basis points-plus) to 10.6%. Net profit at 460 crore is at least 10% lower than Street estimates.

“The miss is primarily tracking lower-than-expected average selling price and Ebitda margin profile amid increase in raw material costs," ICICI Direct said in a results review note. Ebitda stands for earnings before interest, tax, depreciation and amortization.

On the face of it, however, the performance does look healthy. Revenue, operating profit and net profit grew 25-37%. But the Street was expecting faster earnings growth.

The earnings miss comes amid the slowdown in sales. Tight liquidity conditions and the resultant squeeze on finance companies means that sales have hit the slow lane. Sales during October increased 17%, compared to 32% growth, so far, in this fiscal year.

According to the management, close to half of the commercial vehicle industry sales came from the construction sector, driven by infrastructure spending. So sales may only be delayed.

Even so, much depends on liquidity conditions. The fear is the ongoing tight liquidity conditions can continue to impact sales. A consequent slowdown in industry volumes can accentuate discounting, weighing on profitability, warns an analyst. The concerns can make investors wary in the near term.

That said, compared to an 18% fall in the Nifty Auto index, the Ashok Leyland stock has done relatively better, gaining 6.9% over the past one year. Strong volume growth and healthy earnings helped the stock. But much depends on the liquidity conditions and management transition in the near term, and how the company captures the benefits from the transition to the new emission norms.

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