Ashok Leyland trims costs to pull up performance
Ashok Leyland Ltd’s June quarter earnings were slightly better than expected. Revenue was marginally higher than Bloomberg’s forecast, while net loss narrowed.
The commercial vehicle maker reported a 4.8% operating margin—about 80 basis points (bps) wider than analysts’ estimates. One basis point is one-hundredth of a percentage point. Though the firm posted a drop in sales volume, price hikes improved realization to aid revenue growth. Segments like the intermediate commercial vehicle (CV) range and the tippers and tractors segment fared well to post a net revenue of Rs.2,477.8 crore, 4.8% higher than the year-ago period.
Operating margin, however, improved as a result of reining in costs. Raw material cost as a percentage of sales fell by 250 bps while other expenses, too, were 230 bps lower. Ashok Leyland’s operating profit at Rs.97.3 crore was significantly better than Bloomberg’s consensus estimates.
Rising interest cost has been Ashok Leyland’s major problem for several quarters. A Rs.106.3 crore finance charge was marginally lower than in the March quarter. Following the recent qualified institutional placement (QIP) of about 1.85 million shares, which brought in about Rs.600 crore, Ashok Leyland’s interest cost is likely to come down in the forthcoming quarters, which can lift profit. The firm posted a net loss of Rs.48 crore, which was lower than the loss of Rs.141 crore a year ago and better than Bloomberg’s consensus estimates.
Ashok Leyland’s performance is likely to improve in the near term. Lower commodity prices, falling discounts and cost cutting initiatives, along with higher sales volume as the industrial sectors pick up, will boost operating performance. Freight movement data show improvement in the last few months and indicate the ability of the transport operators to raise rentals. Dealer channels also indicate higher footfalls for truck purchases and lower defaults on old CV loans—both positive indicators of a demand revival.
The only concern is that while Ashok Leyland’s interest cost will come down, would higher revenue generate enough profit to service the equity dilution? An IDBI Capital Research report suggests improvement in balance sheet profile over the next two years. Debt-to-equity is likely to reduce to 0.4 by 2015-16 from about one in 2013-14.
However, near-term fears of earnings dilution, given that the stock trades at a price-to-earnings ratio of nearly 18 times estimated 2015-16 earnings per share, will cap further upsides. Robust improvement in volumes is the key to a higher stock price.