Ashok Leyland: No recovery yet

The truck and bus maker's margins have been badly dented despite lower raw material costs.

With volumes down 58 per cent, truck and bus maker Ashok Leyland (ALL) was expected to report weak top line numbers for the June 2009 quarter. Sales slumped 52 per cent year-on-year to Rs 900 crore and despite some respite from lower raw material costs — down 120 basis points as a share of sales — the operating profit margin (OPM) was severely dented, coming in at just 1.3 per cent. Higher spends on overheads and personnel left the earnings before interest tax, depreciation and amortisation (Ebitda) lower by 92 per cent at just over Rs 12 crore, way below the Street’s estimates. Had it not been for Rs 61 crore of other income and a reversal of deferred taxes, ALL would have actually reported a loss loss for the quarter at nearly Rs 40 crore.

The management had recently indicated that OPM for the current year could expand by about 350 basis points, ending up somewhere close to 11 per cent. While business should be far more brisk in the second half of the year, it’s unlikely, say analysts, that margins will improve to that extent and will probably be closer to 9 per cent. ALL has already bagged orders for 5,000 buses under the JNNURM scheme, which is encouraging. Besides, with the economy recovering from the downturn, truck sales should also pick up though the southern market, where the company has a good presence, is taking time to recover. In the June quarter, ALL lost some ground yielding market share of around 750 basis points to Tata Motors and it’s possible the company may lose some more share though volumes should pick up in 2010-11. In the current year, ALL is expected to turn in revenues of around Rs 6,200 crore, an increase of around 4 per cent over 2008-09.

Operating profit, however, is expected to stay flat as a result of which the net profit too could come in just marginally higher than the last year’s level of Rs 202 crore. It is surprising that the stock trades at such a high multiple of 29 times estimated 2009-10 earnings and 18 times estimated 2010-11 earnings.