Bumpy ride ahead

The effects of a slowing economy are visible on auto major Ashok Leyland’s June 2012 quarter numbers. A rising stockpile of inventory, increasing costs and higher interests outgo have led to a disappointing set of numbers by the company.

Ashok Leyland posted a net profit of Rs 66.94 crore, which was almost 30 per cent lower than analysts’ expectations. Though the company managed to maintain its sales target, poor product mix and rising cost resulted in a drop in operating margins.

Higher contribution of low-priced Dost, a newly launched light commercial vehicle (LCV), though helped the company achieve its revenue target but impacted margins. Operating profit margins were lower by 180 basis points (100 basis points make a percentage point) at eight per cent as the share of LCV to sales has increased and that of trucks has come down. Volumes of its LCV Dost, increased by 48 per cent to 7,247 units during the June 2012 quarter.

 

Higher expense on account of employee costs, electricity (power tariffs were increased in Tamil Nadu by 26 per cent) and higher discounts and selling expenditure (included in other expenses) resulted in a drop in operating profit margins. These expenses are unlikely to reduce anytime soon. Thus, it will be difficult for the company to achieve its guidance of a 10 per cent operating profit margin.

PROFITABILITY WOES
In Rs crore	FY12	Q1’FY13
Net sales	12,642.1	2,941.0
% change y-o-y	14.3	18.4
Operating profit	1,256.1	240.7
% change y-o-y	3.5	-1.6
Adj. net profit	564.7	66.9
% change y-o-y	-10.6	-22.4
Source: CapitaLine Plus

To add to the company’s troubles is a build-up of inventory, which has increased from 9,276 vehicles in end-March 2012 to 12,000 vehicles by June end. This also resulted in higher working capital being blocked as is reflected in the interest cost, which has increased 47 per cent year-on-year to Rs 83.37 crore.

A saving grace was a 73 per cent surge in other income to Rs 12.87 crore while tax outgo also fell 40 per cent to Rs 10 crore (effective tax rate fell from 15.16 per cent to 12.36 per cent). These helped restrict the fall in net profit to Rs 66.94 crore as compared to Rs 86.25 crore in the June 2011 quarter.

With the economy showing no signs of picking up and a less-than-normal monsoon expected, which has a direct impact on sales of CVs, it does not bode well for the company in the near future. The stock, which is down by a little over five per cent in two sessions post-results at Rs 22.55, discounts its past four quarter profits by 11 times and to some extent reflects investor worries. However, the company’s plan to raise about Rs 1,650 crore (through QIP or debentures) for funding its FY13 capex, could weigh on the stock.