Fall in sales is hurting the firm’s profit.
Ashok Leyland ( ALL) may have produced more trucks and buses in January than it did in December — volumes were up 6 per cent — but that’s little consolation. With the outlook for the economy worsening, it's now clear that ALL will sell lower volumes in 2008-09, compared with the previous year. What's more, the company could well report a fall in sales in 2009-10 also, going by the trend of the past few months. In the nine months to September 2008, ALL produced slightly more than half the vehicles that the 84,006 units it made in 2007-08.
This loss of sales momentum could put the company in a spot because it is creating fresh capacity in Uttarakhand. This is a major concern, besides the firm’s high financial leverage for rating agency Fitch. It believes ALL’s increased capacity of 150,000 units would be significantly under-utilised because of the slowdown. What’s worse, much of the expansion has been funded by borrowings.
Morgan Stanley reckons the firm’s total debt could cross Rs 2,100 crore in the current year and stay at those levels next year. As a result, ALL’s interest bill is expected to rise from around Rs 115 crore now to around Rs 130 crore next year. Moreover, even though capital expenditure has been scaled back to around Rs 2,000 crore, depreciation charges will increase.
In the December 2008 quarter, ALL’s net sales declined 44 per cent to Rs 1,001 crore, though a fall in the cost of raw materials helped arrest the fall in the operating profit margin (adjusted) to 6.8 per cent. Net profits, however, crashed 84 per cent y-o-y to Rs 18.86 crore. ALL’s top line for 2009-10 could stay flat at levels of around Rs 6,000 crore estimated for the current year. However, operating margins could improve because of falling input costs.