Truck and bus company Ashok Leyland Ltd’s performance in the September quarter portrayed mixed fortunes. Although revenue grew amid challenges of an economic slowdown, net profit growth did not measure up to the Street’s expectations.

Workers attach lights to the cab of a vehicle on an Ashok Leyland production line in Hosur. Photo: Bloomberg.

Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd, said in his results review note, “Average realization per vehicle was higher than our expectation on account of higher sales to the defence sector (revenue of 1 billion versus 200 million) and price hikes taken in previous quarters."

In fact, Ashok Leyland is confident of clocking strong sales in the ensuing months, given that it raised product prices by 1% in November, notwithstanding the forecast of a slowdown in truck sales.

However, what matters to the investor is profitability. That’s where the auto maker failed to impress. The increase in raw material costs and other expenditure, which included a one-time advertising cost, tempered the expansion in operating profit to only 8.1% at 331.2 crore. Of course, a comparison with the June quarter paints a pretty picture though—operating profit was higher by around 41%. This was because of the relatively weak June quarter, when the elections in the southern region and the iron ore mining ban in Karnataka hit sales.

Higher September sales, in comparison with June, gave the benefit of higher operating leverage, as fixed costs were distributed on a larger sales volume.

Operating profit margin was affected in a similar way. It fell about 58 basis points (bps) year-on-year (y-o-y), but improved 128 bps sequentially. One basis point is one-hundredth of a percentage point.

However, what made a bigger dent to Ashok Leyland’s profits in the last few quarters is soaring interest costs. In the September quarter, interest outgo rose 59% over the year-ago period, and by 18% over the June quarter, too.

Loan funds, as on September, increased by around 770 crore to 3,300 crore, of which analysts reckon that 600 crore is only on account of working capital. This obviously pulled down the net profit to 154.1 crore, which was around 8% lower on a y-o-y basis although it grew by 79% on a lower base in the June quarter.

This is, perhaps, why the buoyancy in the commercial vehicle sector in the last few quarters has not reflected in the firm’s share price, which has lost ground from a year-ago. Analysts say this would eat into profits at least in the near term, though the management reportedly stated its intent to cut down working capital debt by around 450 crore.

That apart, with the country’s central bank increasing interest rates for the 13th time since March 2010, loan rates for truck purchases are northward-bound. With most truck purchases made on credit, any slowdown in economic activity could pull down purchases. Ashok Leyland’s y-o-y 9% growth in sales during October was mainly driven by tippers due to demand from the construction sector and not so much from trucks and tractor-trailers. Although the firm’s management is confident of hitting the one lakh-volume milestone for fiscal 2012, analysts’ estimates hover around 95,000 units. Its ability to meet its targets, rein in input costs and prune its debt burden holds the key to improved profits, and investor fortunes.

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