Ashok Leyland: Demand to pick up in the second half

Volume, product mix related gains in the September quarter

The first net profit in six quarters and performance beat across parametres saw the Ashok Leyland stock touch its 52-week high on the bourses.  The company reported a net profit of Rs 120 crore in the September quarter as against a loss of  Rs 25 crore in the year ago quarter. On the back of a 9% gain in volumes, the company's revenues were up 26% to Rs 3,217 crore.

Volume gains were led by medium and heavy commercial vehicles sales of which were up 14% year on year.  One of the reasons the company outperformed the sector has been higher sales in the southern part of the country. This also helped it to increase market share by 1.7% to 27.1%.

Currently higher sales of tractor trailers is driving the volumes in the higher tonnage segment but the company indicated that mining related sales (tippers) should see revival when industrial activity picks up. Further while replacement demand is currently driving volumes, the the company is hoping fresh orders will pick up pace.

The company's Ebidta margins which came in at 7.28% saw a huge jump as compared to 2.21% in the year ago quarter. Margin gains came on the back of higher operating leverage as well as better product mix. While volumes were up 9%, the company sold higher number of defence kits which fetch better margins. The company has managed to bring down debt from peak levels of Rs 6,200 crore last year to about Rs 4,300 crore at end of the September quarter. The current debt to equity levels post the recent QIP is pegged at 1.09 times.

The management indicated that volumes should pick up in the second half. Some of the key indicators which aid demand are favourable such as freight rates. The cost of transporting goods has increased in the April to August period and is a positive. Combined with a lower cost of operations given falling fuel costs makes it attractive for fleet owners to replace/order fresh vehicles. The critical thing to watch out for however is industrial activity both on restarting stalled projects of the launch of greenfield ones.

The worrying factor for the company and the sector continues to be discounts which are currently average about Rs 1.75 lakh per truck. The company has indicated that it hikes prices on select models by a% and is offsetting discounts to an extent. Higher demand is expected to bring in a rationalisation of the discounts which continue to rule at high levels for last few quarters.