Ashok Leyland ends FY17 well, transition to GST and BS-IV key
Pressure to sell vehicles with old emission standards at March-end notwithstanding, Ashok Leyland Ltd exited the fiscal year 2017 (FY17) on a good note. Revenues net of excise duty grew 11% in the March quarter, better than Bloomberg consensus analysts’ estimate of 9.8%. Net profit at Rs476 crore is notably higher than Street estimates of Rs425 crore.
Rise in input costs and the industry’s rush to sell BS-III vehicles in the last few days of March by offering discounts meant that analysts were expecting the firm’s profitability to take a major hit.
Operating profit or earnings before interest, tax, depreciation and amortization dropped 4% and profitability eased by about a percentage point. But the pace of the drop is not as acute as feared. In fact, realizations were better than a year ago, thanks to a better product mix. That is why profit margins remained in double digits.
With this, Ashok Leyland reported double-digit margins for the second consecutive year. The full year profit of Rs1,223 crore is also significantly better than the previous year. The firm claims to have increased market share by about one percentage point to 33.8% in medium and heavy commercial vehicles (MHCVs). Against a flat market, the company expanded its volumes by 4%.
The financial performance should please investors. But as the government implements the goods and services tax (GST) and the commercial vehicle industry transitions to BS-IV emission compliant vehicles, investors would do well to prepare for a rough patch.
The ban on sale of BS-III compliant vehicles from April has hit Ashok Leyland. As the company recalled the inventory for retrofitting (to comply with new norms) and rerouted some to export markets, sales in April slumped 30%.
Ashok Leyland has introduced new BS-IV engines. But they are relatively expensive. Also, there are concerns of the strong sales push in March-end pre-empting future sales. The transition to GST may weigh on market growth and sales in the near term. Channel checks by HDFC Securities Institutional Research indicate that dealers want to avoid keeping high inventory ahead of GST implementation due to lack of clarity on transition rates.
The second issue is competition. According to reports, Daimler India Commercial Vehicles Pvt. Ltd, which sells the Bharat Benz brand of trucks, priced its BS-IV vehicles lower than established firms like Ashok Leyland. As Bharat Benz tries to expand its sales in a subdued market, existing firms can be hard- pressed to protect their market shares. This is raising concerns about sustainability of profitability.
“Given better features and technology for Bharat Benz trucks, we believe this could accelerate market share gains for Bharat Benz and impact incumbents. The domestic MHCV segment contributes around 71% of revenues for Ashok Leyland and any slowdown/market share loss will not be offset by defence, exports and aftermarket,” Nomura said in a report last month.
Ashok Leyland is aware of the situation. In the results statement, the management said it wants to pursue profitable growth by focusing on cost optimization. It has to be seen how successfully the company can pursue this in current market conditions.