Ashok Leyland: High on operational leverage

The company saw one of its best quarters, as high volume growth offset the impact of rising raw material costs.

The pick-up in economic activity is strikingly evident in the case of Ashok Leyland. The company saw volumes double in the June quarter over the previous year to 21,402 units. Despite the raw material cost rising to 73 per cent of sales, and higher staff costs, the company managed to maintain earnings before interest, tax, depreciation and amortisation at 10 per cent. This is seen as the best June quarter performance by the company since FY04.

The management has guided that it would be selling around 90,000 units in the current financial year. This will be a 34 per cent year-on-year growth, much above the industry estimate of 20 per cent. Volumes are seem to be driven by strong industrial growth. Moreover, past trends indicate that the growth in higher tonnage vehicles has been higher than that in the lower tonnage.

The company was predominantly seen as a major player in the southern India, with a 46 per cent market share there. But, now it plans to expand its presence in the northern and western regions and would look to eat into the share of Tata Motors in the east. It intends to maintain a 27-28 per cent market share. Strong monsoon could also be an advantage.

However, there could be some impediments as well. Rising interest rates could stifle the market for new vehicles, as more than 90 per cent of the medium to large commercial vehicles are financed. Higher diesel costs could also be a dampener. Then, Bharat-IV emission norms that kick in from September will also raise prices. Analysts reckon truck sales might be higher in the first half of the year, as there could be pre-buying before the emission norms kick in. The share of the first half could be 50:50, as against the industry norm of 35:65.

This pick-up in markets can bring some respite for exports, which are expected to rise more than 30 per cent this year, say analysts. The company’s recent strategic stake in the UK-based Optare Plc can also provide some support.