Ashok Leyland: Strong volumes boost performance

Operating leverage, better working capital management improve cash flow of the commercial vehicle maker

Driven by a strong 33 per cent year-on-year growth in volume and improvement in realisations, Ashok Leyland’s revenues grew 46 per cent to Rs 4,505 crore in the quarter ending March.

Realisations were up 10 per cent as the proportion of medium and heavy commercial vehicles (M&HCV) improved. Price increases helped, with the operating profit margin up 430 basis points (bps) over a year earlier, to 10.1 per cent, slightly lower than some estimates.

The company said the higher margin was due to improved operating leverage. Profit growth and margins would have been better but for higher employee costs and other expenses. Margin performance and muted average selling prices (on a sequential basis) due to lower share of defence orders saw the stock close lower by about three per cent in trade on Wednesday.

The company is looking at a margin improvement of 100 bps. At the net level, a one-off charge of Rs 8 crore and higher taxes restricted profits. Net profit at Rs 238 crore, was better than consensus estimates of Rs 201 crore due to a 22 per cent fall in interest costs to Rs 88 crore and more than doubling of other income to Rs 37 crore. Taxes were Rs 58 crore versus a negative Rs 3.6 crore in the year-ago period. Better working capital management and cost cutting meant a Rs 2,000-crore cash flow for the year. This should further the earlier initiative to cut debt.

For FY15, the M&HCV volumes grew 28 per cent while the industry grew at 16 per cent, helping Leyland gain market share. The company says volume growth in FY16 could be 10-15 per cent on a conservative estimate. While mining activity is yet to pick up, the recent volume uptick has largely been driven by higher cement freight and oil movement. The management has said higher construction or project activity and in mining will be key for higher growth of the sector.

The other area of growth is revenue from export, currently at 12 per cent. The target in the medium term is to triple it. Further, the company is looking to expand its presence in the defence space, from which revenues are currently pegged at $100 million a year.

Due to poor response to its Stile multi-purpose vehicle, the company has said it is exiting the segment.

About half the analysts tracking the stock have a 'buy' call, with a one-year target price of Rs 74, not much upside from the current Rs 70. While there is little clarity on the outlook, if the improvement in volumes since September last year gathers pace, Ashok Leyland could with its range and reach be a major beneficiary. Buy the stock on dips.