Ashok Leyland seems in top gear with market share, margin gains

Net sales at Rs 6,618 crore were up 11% over the year-ago quarter

Ashok Leyland ended FY17 on a strong note, delivering better than estimated financials for the quarter ended March. The strong results saw the stock gain 4.6 per cent in trade on Thursday.

Boosted by higher volumes and realisations, net sales at Rs 6,618 crore were up 11 per cent over the year-ago quarter and better than the consensus estimate of Rs 6,515 crore.

A major part of the volume gain came from the medium and heavy commercial vehicle (M&HCV) segment, which grew by nearly 10 per cent. Light CVs, lagging, were up two per cent. The higher M&HCV volumes were largely due to the pre-buying of BS-III emisison standard vehicles in March, with the company selling about 15,000 units, highest for a month in a little over two years.

The company also outdid analyst expectations on the operating front, reporting a profit of Rs 727 crore. Operating profit margin at 11 per cent for the quarter were better than the 10.3 per cent pegged by analysts. Gopal Mahadevan, chief financial officer, said it was the ninth straight quarter of double-digit margin performance. In pursuing growth, he said, the focus would continue on operating costs and margins.

Net profit was Rs 476 crore, as against a loss of Rs 141 crore in the year-ago period. Vinod K Dasari, managing director, said this was due to reduction in the tax provision. The company had a tax saving of Rs 325 crore due to the merger of loss-making Hinduja Foundries. In addition, the quarter had a number of exceptional items such as sale of investments/impairment to the tune of Rs 350 crore. Profit prior to the exceptional items and taxes was Rs 611 crore, down 6.2 per cent over a year before. Though Leyland reported a 30 per cent year-on-year fall in volumes in April, it gained 570 basis points market share as the overall CV market sales were down 55 per cent. For FY17, the company gained about 115 basis points market share to 33.8 per cent. Dasari attributed this to products launched last year.

Though outperforming the market, maintaining the volume momentum for the June quarter will be tough, given the strong pre-buying of BS-III vehicles in March on the back of heavy discounting to clear the stock, and the higher prices of BS-IV vehicles from April. The company said it had 10,664 units of BS-III vehicles, of which around 2,000 would be exported. “We will not have any impact due to the switch to BS-IV, since the engines can be sold in replacement markets,” according to Dasari.

Demand has also been hampered by the uncertainty regarding the coming goods and services tax (GST) rates and its implementation. Given the GST rate of 28 per cent, compared to the current effective rate of 30 per cent, it is expected to benefit companies such as Leyland. Passing on of the benefits to end-users could lead to improvement in volumes. Dasari, who also heads the Society of Indian Automobile Manufacturers, expects the CV industry to grow 10-15 per cent in FY18. He said he was confident Leyland would surpass the industry growth.

It is focusing on more of export and is looking at the possibility of setting up two assembly units in Africa over the next couple of years. The aim is to take the export share of volumes from the current eight per cent to at least 30 per cent. The military is the other key sector where the company is looking to improve its business multifold, from the current Rs 500 crore a year. To reduce cyclicality and bring down the share of M&HCV in the overall mix to half, the company is looking at a higher proportion (50 per cent) of revenue from defence, spares, exports, LCVs and power solutions. It also plans to invest around Rs 500 crore in 2017-18 towards product development, in information technology and on de-bottlenecking at two of its facilities. All these seem good signs for now on the long-term prospects, though there could be a blip in the June quarter.