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After gaining 2.2 per cent after Monday's announcement of October volumes, which fell 15 per cent to 6,803 units, the Ashok Leyland scrip fell to Rs 16.8 on Thursday. For most of Friday, too, the scrip was in the red, following the weak September quarter results (announced on Thursday after market hours) but it closed with 1.2 per cent gains at Rs 17 on the BSE on Friday.
For the September quarter, net sales fell 23 per cent over a year to Rs 2,550 crore, while it reported a loss before tax from ordinary activities of Rs 135 crore versus profit of Rs 156 crore in the year-ago period. Friday's share price gains can be partly attributed to the selloff seen in previous sessions, as well as the news that the company was planning to offer a Voluntary Retirement Scheme (VRS) to employees, to cut costs.
Going ahead, given the weak performance and sluggish outlook for the medium and heavy commercial vehicle segment (M&HCV), most analysts remain bearish on the stock.
While demand is slowing, higher discounting by CV manufacturers is making matters worse. Year-to-date industry sales of M&HCVs is down 26 per cent. Although companies have raised prices, the discounts on vehicle sales have also risen in the quarter as compared to the September 2012 one. These discounts range between Rs 1.6 lakh to Rs 2.2 lakh per unit, said the company. This is five to 10 per cent of the average selling price, say analysts. Companies are being forced to offer higher discounts to improve demand and retain market share, a trend likely to sustain in the near term, given the weak economic environment. Another area of concern has been the high debt, 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. The interest expense increased sharply by 23.6 per cent sequentially (20 per cent year-on-year) to Rs 124 crore following an increase in the debt levels (up by Rs 1,400cr in September quarter as compared to March 2013 levels) on account of higher working capital requirements.
The company is looking at ways to bring down its costs and has a target of generating cash of Rs 700-1,000 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.
In this backdrop, most analysts have a ‘sell’ recommendation on the scrip, as there has not been any improvement in volumes or clarity on an economic turnaround. Despite the lack of any triggers, the stock has seen gains of 40 per cent over two months. Edelweiss analysts believe the stock, at 5.3 times its FY15 Enterprise Value/Ebitda ratio, is expensive. Analysts have pegged a target in the Rs 11-15 range, which from the current levels has a downside of 12-35 per cent.
Lower volumes, revenues
Leyland's overall volumes (M&HCV and LCV Dost) for the September quarter were down 22.5 per cent over a year, to 23,000 units. While M&HCV volumes fell 25 per cent, light commercial vehicles fell 17 per cent as compared to the year-ago period. The sharp fall in volumes, as well as lower realisations, has meant revenues were down 23 per cent year-on-year. While overall volumes remain muted, Edelweiss analysts believe the company's move in launching the new Boss, the next generation cab and Neptune engine should provide some volume respite. Realisations were down by one per cent year-on-year to Rs 11.02 lakh. However, on a sequential basis, the company managed to improve realisations by 1.4 per cent, due to a higher proportion of defence orders and exports, which benefited from a weaker rupee.
Losses continue
Margins at the operating level were a mere 2.2 per cent (compared to 10.1 per cent in the September quarter last year), due to lower volumes and capacity utilisation, as well as higher discounts. Margins were better on a sequential basis than the one per cent achieved in the June quarter, due to lower staff costs and other expenses.
The company, however, reported a net loss of Rs 25 crore as against expectation of Rs 110 crore.
A tax writeback and profit from sale of its investments in US-based Defiance Testing and Engineering Services for Rs 47 crore helped reduce the extent of losses. Adjusted for this, the loss was Rs 69 crore.
