Ashok Leyland: Out of the trough

The company has done well to gain market share and should cash in on the recovering economy.

The revival in the domestic commercial vehicles (CV) market has helped truck and bus maker Ashok Leyland (AL) take a couple of price increases in the last few months. Indeed, with volumes increasing by 87 per cent sequentially during the September 2009 quarter compared with the June 2009 quarter, the worst is clearly over for the Chennai-based firm.

The management believes volumes could probably grow by about 15 per cent whereas earlier it was talking of only single-digit growth. AL was also able to pick up 5-10 per cent of the market share and the company surprised the street with a slightly higher-than-expected top line performance — net sales were down just 15.5 per cent year-on-year during the quarter at Rs 1,578 crore.

However, the operating profit margin (OPM) came in a tad below estimates at 10.5 per cent, up 220 basis points year-on-year. An increase of about 8 per cent in the operating profit to Rs 166 crore.

Also somewhat disappointing was the net profit of Rs 89.5 crore, up 36.6 per cent, though that had more to do with a higher-than-expected tax rate and lower-than-expected other income.

With the economy recovering the outlook, CVs is now much better than it was three months ago, and AL should be able to cash in on the improving environment. The company already has orders for around 5000 buses under the JNNURM scheme and an additional 3,500 units from state transport undertakings.

In 2010-11, AL is expected to turn in revenues of around Rs 8,300 crore and should the company be able to control costs and manage inventories, profits could increase to as much as Rs 400 crore. Of course, much would depend on how the company ends the current year and net profit estimates range anywhere between Rs 275 crore and Rs 350 crore.

The AL stock currently trades at Rs 49, which implies a price-earnings multiple of 14 times for 2010-11 estimated earnings, if profits come in at the higher end of the range.That, analysts believe, is expensive.