 "Ashok Leyland's margins crash to 1% in first quarter")
The impact of negative industrial output has started showing up during the earnings season. Ashok Leyland, India's second largest commercial vehicle manufacturer, reported a net loss of Rs 141 crore in the first quarter (Q1) of FY14, as profitability collapsed and costs increased. While the company is trying to cut costs and rationalise production, the downturn in the commercial vehicles segment is unlikely to turn anytime soon, due to capacities built up over the years. Dhananjay Sinha of Emkay Global believes over-capacity has resulted in a rush of vehicles in the second-hand market and, as a result, any pick-up in sales would be difficult till industrial activity improves.
While it's a known fact that slowing industrial output has been hurting freight movement and sales of heavy and commercial vehicles, the net loss of Rs 140 crore in Q1 is nearly double of what the market was expecting. The company's reported contraction in volumes across segments and across geographies.
During the quarter, volumes fell 21 per cent, year-on-year (y-o-y), and 37 per cent sequentially to 21,721 units. Medium and heavy commercial vehicles fell 25 per cent, y-o-y, and 40 per cent, sequentially, to 12,967 units. Sales of light commercial vehicle brand, Dost, and exports, too, declined during the quarter. Ashok Leyland's net revenues declined by 21 per cent annually and 37 per cent sequentially to Rs 2,370 crore.
While the percentage of raw material to overall sales has declined by 30 bps sequentially to 75.5 per cent, it is up y-o-y to 300 bps annually, says Mitul Shah of Karvy. Other expenses to sales are also up as are staff costs.
Coupled with the operational issues, the company has also seen a sharp increase in debt, of which a large portion is foreign debt. According to its annual report, Ashok Leyland's debt has increased by Rs 1,100 crore as it invested Rs 800 crore in group companies and Rs 650 crore in capex. Higher interest costs have also hurt in the first quarter as a result.
While it's a known fact that slowing industrial output has been hurting freight movement and sales of heavy and commercial vehicles, the net loss of Rs 140 crore in Q1 is nearly double of what the market was expecting. The company's reported contraction in volumes across segments and across geographies.
During the quarter, volumes fell 21 per cent, year-on-year (y-o-y), and 37 per cent sequentially to 21,721 units. Medium and heavy commercial vehicles fell 25 per cent, y-o-y, and 40 per cent, sequentially, to 12,967 units. Sales of light commercial vehicle brand, Dost, and exports, too, declined during the quarter. Ashok Leyland's net revenues declined by 21 per cent annually and 37 per cent sequentially to Rs 2,370 crore.
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While the market had factored in a drop in revenues, the collapse in profitability was least expected. The company's operating margins have crashed to one per cent in the first quarter, a decline of 700 basis points (bps), y-o-y, and 430 bps sequentially. The Street was expecting margins to decline to four per cent levels. Higher costs (staff and other operating expenses) have eaten into profitability during the quarter.
While the percentage of raw material to overall sales has declined by 30 bps sequentially to 75.5 per cent, it is up y-o-y to 300 bps annually, says Mitul Shah of Karvy. Other expenses to sales are also up as are staff costs.
Coupled with the operational issues, the company has also seen a sharp increase in debt, of which a large portion is foreign debt. According to its annual report, Ashok Leyland's debt has increased by Rs 1,100 crore as it invested Rs 800 crore in group companies and Rs 650 crore in capex. Higher interest costs have also hurt in the first quarter as a result.