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The Ashok Leyland scrip extended its losses for the second day, shedding 6.5% on the back of weak September quarter results and sluggish outlook for the medium and heavy commercial vehicle segment (M&HCV).
While demand is slowing, higher discounts by commercial vehicle makers is making matter worse. Year to date industry sales of M&HCVs is down 26% and discounts have increased in the current quarter as compared to the September quarter. Discounts in the segment are pegged at Rs 1.6 lakh per unit to Rs 2.2 lakh, at 5-10% of selling price. Discounts for Ashok Leyland have gone up from Rs 1.67 lakh in the September quarter to about Rs 1.75 lakh in the current quarter. Companies are being forced to offer higher discounts to improve demand and retain market share. The company has resorted to price hikes to cushion the impact of the discounts.
Another area of concern for the company has been the high debt on its books at Rs 5,500 crore (debt to equity ratio at 1.1), which despite sale of investments has not come down on a sequential basis due to high interest costs.
The company is looking at ways to bring down its costs and has a target of generating cash to the tune of Rs 700 to Rs 1,000 crore to reduce debt. This is likely to be achieved by selling non-core assets such as land and investments as well as reducing working capital requirements.
Most analysts have a sell on the scrip given that there has not been any improvement in volumes nor is there any clarity on economic turnaround. Despite the lack of any immediate triggers, the stock has run up 40% over the last two months. Edelweiss analysts believe that the stock at 5.3 times its FY15 EV/Ebidta is expensive. Analysts have pegged a target in the Rs 11-Rs 15 range which from the current levels has a downside of 10-34%.
Lower volumes, revenues
Ashok Leyland's overall volumes (M&HCV and LCV Dost) for the quarter were down 22.5% to 23,000 units. While M&HCV volumes fell by 25%, light commercial vehicles fell 17% as compared to the year ago period. Given the sharp fall in volumes as well as lower realizations, revenues were down 23% year on year. While overall volumes remain muted, Edelweiss analysts believe that the company's move of launching the new Boss, next generation cab and neptune engine should provide some volume respite. Realisations were down by a percent year on year to Rs 11.02 lakh. However, on a sequential basis the company managed to improve realizations by 1.4% due to higher proportion of defence orders and exports which benefitted from a weaker rupee.
Losses continue
Margins at the operating level were at 2.2% (compared to 10.1% in September quarter last year) due to lower volumes and capacity utilization as well as higher discounts. Margins were better on a sequential basis than the 1% achieved in the June quarter this year due to lower staff costs and other expenses. The company reported a net loss of Rs 25 crore as against expectation of Rs 110 crore. A tax write back and profit from sale of its investments in US-based Defiance Testing and Engineering Services for Rs 47 crore reduced the extent of losses. Adjusted for this, losses were pegged at Rs 69 crore.
