Higher margins propel Ashok Leyland showing

Operations score better than expected; volume recovery key to better prospects

A higher margin due to a fall in costs helped Ashok Leyland, the country's second largest commercial vehicle (CV) maker, post better than expected results for the March quarter. The six per cent operating profit margin was almost double that estimated by analysts. The company was able to lower input costs, as well as employee and other expenses. Improving product mix, cost control and lower advertising expenses all helped.

Though volumes continue to disappoint and revenues were down, the superior product mix helped improve realisations. The company sold 25 per cent fewer units compared with a year before and revenue fell 17 per cent to Rs 3,077 crore due to this. However, realisations were up 10 per cent. Yaresh Kothari, analyst at Angel Broking, attributes this to a superior product mix, a higher share of exports and higher share of medium and heavy CVs in the volume. The company has sold less of its light CV, the Dost, compared to a year before. The share of the low margin Dost has come down to 28 per cent, from 32 per cent in the March quarter last year and 42 per cent in the December quarter.

Despite a 36 per cent surge in interest costs, the company managed to limit losses to Rs 13 crore on an adjusted basis, better than analyst estimates of Rs 80-Rs 155 crore. It reported an exceptional gain of Rs 376 crore in the March quarter on sale of assets, compared to a one-time gain of Rs 134 crore in the year ago-quarter. The exceptional gains were on account of a sale of shares in IndusInd Bank and profit from immovable properties.

The reported profit was Rs 363 crore, compared to Rs 150 crore in the March 2013 quarter. The company has also been able to bring down debt to Rs 4,300 crore, against analysts' expectation of Rs 4,800 crore. The debt at the end of the December quarter was Rs 5,300 crore.

While Leyland has taken the right steps in terms of reducing debt and cutting costs, its fortunes are linked to revival of the medium and heavy CV market. Most analysts believe this is likely in the second half of the current financial year and the company is well positioned to tap the prospective volume growth.