The Ashok Leyland stock continues to trade at a fairly high multiple of 25 times estimated 2009-10 earnings and 15.5 times 2010-11 earnings. The Street is pencilling in a recovery in the commercial vehicles (CV) cycle but almost all of that appears to be in the price.
It’s true the CV industry is bottoming out after a 30 per cent drop in volumes in 2008-09, but the truck and bus maker take a little longer to gain from it. That’s because of the fairly muted demand in a couple of its key markets in the southern part of the country.
Between April and August, ALL’s domestic volumes were down 46 per cent over the comparable period of the previous year. Nevertheless, with the economy looking up, industry watchers expect CV volumes to grow at a compounded 13 per cent between 2009 and 2011 driven by a pick-up in manufacturing activity and affordable interest rates.
Already, inventories have been cleared, discounts have almost disappeared and component makers are doing more business. Schemes such as JNNURM, which will provide states financial assistance to buy buses for their urban transport systems, will also create demand.
ALL had lost around 200 basis points of market share to Tata Motors last year, the good news is that it has already won orders for 5000 buses under the JNNURM scheme, and should pick up some more since there is time till the end of 2009.
ALL’s earnings will also be under pressure because of high outflows on account of interest. While the net profit this year could come in at close to Rs 290 crore, a growth of over 50 per cent over that in 2008-09, it should be remembered that the net profit in 2007-08 was Rs 448 crore.
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The management has indicated that the operating profit margin (OPM) for the current year could expand by about 350 basis points ending up somewhere close to 11 per cent. However, analysts believe it would probably be closer to 9-10 per cent.
In the June 2009 quarter, ALL’s 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 OPM was severely dented coming in at just 1.3 per cent. In the current year, ALL is expected to turn in revenues of around Rs 6,300 crore, 6 per cent higher than the Rs 5,959 crore reported in 2008-09.