BackWith low earnings growth, Ashok Leyland stock fairly valued
With low earnings growth, Ashok Leyland stock fairly valued
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The country’s second largest truck maker Ashok Leyland Ltd posted a lacklustre performance for the June quarter. Net revenue at ₹ 30,073 crore was in line with Bloomberg consensus estimates and 19.8% higher than a year ago. This was driven by a 43% growth in sales volumes—the only sweet spot in the results, although it included the newly launched light commercial vehicle (LCV) Dost.
Most striking was the 210 basis points (bps) jump in other expenses as a percentage of sales, which the management stated was on account of marketing and advertising costs incurred on brand building for the new product.
Operating profit at around ₹ 240 crore was flat against the year-ago period. But it was 50% below the March quarter, which is normally a better one. Operating margin fell by 170 bps from a year ago.
But what has been eating into profitability is the rising debt. This is reflected in the 56.3% jump in interest costs to ₹ 83.4 crore. Further, analysts view that with close to ₹ 1,000 crore needed this year for capex, investment in JVs and working capital, there could be further borrowings. Hence, there may not be any near-term respite on this front.
Higher expenses and interest costs pulled down net profit for the quarter. At ₹ 66.9 crore, it was 22% lower than a year ago and 30% below Bloomberg’s estimates. Little wonder then that the stock closed 2.1% lower at ₹ 23.30 and has always underperformed market leader Tata Motors Ltd and key indices.
Meanwhile, the unfavourable macroeconomic environment with falling cargo movement and lower truck rentals does not bode well for the sector, including Ashok Leyland. The silver lining is that the growth rate could be buoyed by its LCV, despite the late entry. Low growth in sales volumes along with higher costs will only translate into low earnings growth in the medium term. According to Surjit Arora, analyst at Prabhudas Lilladher Pvt. Ltd, “The company will post a compounded earnings growth of around 8-9% over the next two years; hence the one-year forward price-earnings multiple of eight implies fair valuation, at its current price."
Also See | Intra-day & quarterly performance (PDF)
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