Ashok Leyland: Lower realisations offset volume gains

Street will keep an eye on volume growth and market share

Ashok Leyland’s stock dropped nearly six per cent on Thursday, as its September quarter numbers were below estimates. The company’s average per unit realisations were seven per cent, below analysts’ estimates, due to lower proportion of higher margin defence sales, exports and spares. Top line grew 54 per cent year-on-year (y-o-y), riding on 47 per cent y-o-y growth in vehicle sales volume.

Volume growth has been strong, a large part of it also due to the base effect, with commercial vehicle (CV) sales year ago falling 10 per cent. The demand drivers, as of now, are largely replacement in nature, given the net freight rates have increased due to decline in diesel costs, resulting in higher cash flow for fleet operators.

While Ashok Leyland, which has been gaining market share, expects the sector to grow at 20 per cent y-o-y in FY16, the management did not give any forecast, while stating the company would pursue meaningful market share gains keeping in mind profitability and cash flows. The Street will be watching the company’s volumes, as it has been steadily gaining medium and heavy commercial vehicles (CV) market share, which has moved from 25.7 per cent in FY14 to 28.2 per cent in FY15, increasing to 30 per cent currently. Further, how the other segments such as exports move (13-15 per cent of revenue, target of 33 per cent over three-five years) will decide the top line performance.

On the operational front, good top line show, coupled with a sharp fall in raw material costs, which as a percentage of sales came down by 320 basis points year-on-year, pushed operating profit margins to 12 per cent. This was 475 basis points (bps) higher over the year-ago period and 191 bps more than the June quarter. If volumes continue to stay high, expect margins to stay high, too. Higher employee and other expenses though pegged back margin gains.

Reported net profit was 138 per cent higher over the year ago quarter, impacted by a couple of exceptional items in the quarter. The first was an Rs 157-crore write-off given the fall in value of investments in the construction equipment joint venture with John Deere. The other exception was income from part sale of its stake in IndusInd Bank, which fetched it Rs 152 crore. Lastly, higher tax rate also impacted the net profits.

While the company has done well on the volumes front so far, the Street will keep a close eye on the discounts, new truck purchases and promotional and staff costs.