Ashok Leyland shines amid gloom with margin beat and  market  gains

  • Ashok Leyland’s market growth by 400 basis points to 34.1% commendable in tough times
  • Ebitda margin beat at 9.4% versus estimates of 8.8% was due to cost efficiencies

In spite of turbulent times, Hinduja Group flagship firm and truck maker Ashok Leyland Ltd revved up operating performance in the June quarter.

To begin with, it stumped the Street with a beat in profitability. Ebitda (earnings before interest, tax, depreciation and amortization) margin of 9.4% shot past Bloomberg’s average estimate of 8.8% by 23 brokerage firms. In fact, some had even pencilled it at 7.5%. Of course, it is still lower by 100 basis points than the Ebitda margin of the year-ago period. A basis point is one-hundredth of a percentage point.

In its media release, the company attributes margin expansion to cost efficiencies. So far, Ashok Leyland is the first automaker to beat margin estimates during the quarter.

To be sure, the company reined in costs. Other expenses were contained and raw material costs fell dramatically on a sequential basis, although they were a tad higher year-on- year. Meanwhile, analysts reckon that perhaps preference for margins over sales push led to the profit beat.

The second largest truck manufacturer had resorted to a production shutdown during the quarter. However, the 6% year-on-year decline in total sales volume was a better show compared to the 17% decline in the commercial vehicle (CV) industry. What’s more impressive is that the company registered a 400 basis points increase in market share to 34.1%—commendable given the steep drop in CV registrations during June.

Data from the Federation of Automobile Dealers Association shows that CVs are the worst-hit by the industry slowdown. In June, while overall vehicle registrations dipped 5.4% year-on-year, CV sales fell by a huge 19.3%, the highest drop among auto segments. Perhaps a slew of new product launches across several segments along with increased market penetration helped expand its share of the CV pie.

As if sensing some positives in the results that were declared after market hours, Ashok Leyland shares closed about 2% higher on the National Stock Exchange.

This is not to say that the mood may improve on the Street. Truck rentals are plummeting, recent data on core sector growth shows a dramatic fall, and movement of goods both from agricultural sources and industry is weak.

Besides, much depends on July sales numbers that will be released in the next two days.

A report by broking firm Sharekhan Ltd forecasting July sales says that Ashok Leyland’s medium and heavy CV sales would fall by 22%, accounting for the nine-day production cut taken during the month and weak demand.

The only silver lining is that the positives of market share growth and margin beat amid the gloom in the industry may trigger some upward movement in the stock on Thursday. After all, since sales growth reversed in November, shares of Ashok Leyland have fallen sharply by 39%, far worse than the 22.3% and 7.4% drop in the Nifty Auto and Nifty Midcap 50 indices, respectively.

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