Ashok Leyland’s margins improve, but will they sustain?

Ashok Leyland’s margins improve, but will they sustain?

The March quarter is traditionally the best for the automobile industry, and especially commercial vehicles, as fleet operators buy new vehicles to get depreciation benefits. Ashok Leyland Ltd built on that advantage and posted financial numbers that surpassed Street expectations.

Net profit rose by one-third for the three months ended March from a year earlier. More importantly, operationally the firm performed better than the previous couple of quarters. Obviously, scale helped. Fourth quarter sales were almost one-third of the entire year’s volumes.

On top of that, Ashok Leyland was able to improve realizations as well. While volumes grew 15% in the March quarter, net sales improved by 30% as price hikes took effect. Note that the company has also been steadily scaling up production at its Pantnagar factory, where it gets excise and income-tax incentives.

Thus, it was able to compensate for the rise in input prices and a two-thirds rise in employee costs. Raw material costs as a percentage of net sales rose 2.78 percentage points from a year ago. Yet, operating profit improved by one-third and operating margins rose 44 basis points. One basis point is one-hundredth of a percentage point.

For a company that has been struggling to improve operational leverage, these numbers couldn’t have come at a better time. No wonder, investors bumped up the share price by 4% on Thursday, minutes after the firm announced its results.

But a larger question remains for the stock, which has been languishing this calendar year. Has the cyclical commercial vehicle industry reached a tipping point after two years of near 30% growth?

Sales grew at just 8.2%, about one-third of its pace in the last fiscal. It’s almost a given that growth will decelerate with rising interest rates and an imminent diesel price hike. With freight rates declining a bit over the past four months—evidenced by the Transport Corporation of India’s Indian Road Freight Index and perhaps explained by a slowing economy—it’s a double whammy for fleet operators.

Still, bountiful agricultural yields and an expected pickup in industrial activity in the latter part of the year are expected to keep commercial vehicle sales chugging along at near double-digit growth rates. The Ashok Leyland management indicated that they will do better and guided for 15% growth this fiscal. They will need to deliver on that promise for the stock to climb back to its highs of last November.

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