Ashok Leyland: On a roll

Shipments to Iraq will boost exports at Ashok Leyland

Ashok Leyland clocked sales of Rs 1,118 crore in the quarter ended March 31, 2004, which amounts to a third of the company's sales in the whole of FY2004.

The high quantum of sales last quarter relative to the rest of the year meant that operating margin was also much better than the other quarters.

Operating margin in the March quarter stood at 13.7 per cent, over 300 basis points higher than the margin of 10.6 per cent in the first nine months of the year.

What's more, last quarter's margin represented a 100 basis points jump over the year-ago levels, which is important considering that profitability was actually lower in the first nine months of the fiscal on a year-on-year basis.

For the whole year, sales grew 26.6 per cent on the back of a 33.5 per cent increase in volumes. But margins were impacted because of a 200 basis points increase in raw material cost, thanks to higher commodity prices. Profit before taxes and exceptionals still rose 66 per cent as interest cost was cut by 64.5 per cent last year.

Last year's earnings per share of Rs 16.28 translates into a PE of 12.7 times, which is much more reasonable than the discounting of 19 times the Ashok Leyland stock used to enjoy earlier in the year.

A similar price correction has taken place in competitor, Tata Motor's stock as well, but it still trades at 17 times FY04 earnings. Some analysts now prefer Ashok Leyland for an exposure to the CV sector, partly because of this big valuation differential.

The company has started off the year well with a 58 per cent jump in volumes in the two-month period till May. But this is partly because of the low base last year owing to the truckers' strike.

Shipments to Iraq, which commenced earlier this year, are expected to result in a quantum jump in exports this year. According to estimates, this could result in exports going up to 12 per cent of total sales compared with 8 per cent in FY04.

The company is still facing problems with some of its suppliers (about 20 per cent of them) unable to cope with the much higher requirements.

Meanwhile, the company is sourcing some parts from China, but if demand continues to grow at a fast pace, suppliers' capacity constraints could cap growth.

But analysts have now scaled down growth estimates for CVs, fearing the cycle may turn against them. Besides, freight rates fell last month both on a month-on-month and a year-on-year basis, and if the trend continues it could lead to lower demand.

But some other factors such as the ban on old trucks and the huge spending on road infrastructure continue to keep hopes of CV players alive. Ashok Leyland has set a growth target of around 20 per cent for FY05, which if it meets, would result in higher valuation.

Overseas borrowing

Overseas borrowing for Indian corporates is increasingly becoming difficult. Globally, rates have started firming up and a rise in Fed rates looks imminent any time now.

This has affected Indian borrowers as well who are facing a tight pricing spread including a high withholding tax, increasing Libor, a slowdown in the appetite of investors and finally a rising premium in the forward dollars in the domestic market.

Merchant bankers say that they're seeing a 15-20 basis points (bps) rise in spreads while syndicating external commercial borrowing.

Among others, ICICI Bank had raised its bonds overseas at 105 bps over Libor, but is currently trading at 150 bps over Libor. Similarly, National Thermal Power Corporation, which had issued bonds at around 207 bps over Libor is at present ruling at a spread over Libor of 230-240 bps.

This hardening of spreads is not limited to Indian bonds alone. Hutchinson (a Hongkong based corporate) raised bonds in the Eurobond market at 200 bps over US treasury bonds and the issue is now trading at a 240 bps spread.

However, new players in the secondary overseas bond markets such as the Chinese and Taiwanese banks are picking up Indian paper at lucrative prices, helping to hold down yields. Further, while issues routed through the bond market are slowly declining, the loan market is still active with corporate borrowers.

Currently GAIL India and Bharat Petroleum Corporation Ltd are in the fray. These two corporates are getting indicative quotes at a spread of 80-90 basis points over Libor. These companies are enjoying fine rates because of the assurance that their sovereign rating tag will continue.

Of course, investors are going by not only the sovereign status but also their outlook on the business. For instance, because of the bearish sentiment on the power sector in India, Rural Electrification Corporation is fighting hard for a quote in the overseas loan market. On the other hand, Reliance Energy could get funds at a spread of 125 over Libor.

Therefore, while the overseas bonds market may be in a slowdown mode, the loan market offers new participants a window of opportunity, but only for quality paper.

With contributions from Mobis Philipose and Amriteshwar Mathur