Truck and bus maker Ashok Leyland’s (AL) September 2008 quarter numbers have been in line with the Street’s expectations. What’s worrying analysts though is that sales of commercial vehicles could come off over the next couple of years given that the economy is slowing down.
Besides, with interest rates still high and credit harder to come by, the company will have to pay more for the debt that it needs to raise to fund its capital expenditure over the next two years. AL plans to spend around Rs 2,500 crore on various initiatives between now and FY10. Thus, the company’s profits are expected to come off by about 20 per cent in the current year from Rs 479 crore in FY08.
Volumes for the September quarter were weak — down 9.3 per cent — with the fall being sharper in the home market. However, the company had taken a price hike and that together with a better performance from the business such as engines, defence supplies and spare parts, resulted in revenues increasing by about 7 per cent.
While the management has announced a further 2 per cent increase in prices for both buses and trucks, from October, volumes could remain sluggish for the rest of the year. SIAM data shows that volumes for medium and heavy commercial vehicles (M&HCVs) have dropped by 1.6 per cent between April and September and a steeper 9.5 per cent between July and September. Within the M&HCV space, Ashok Leyland has upped the product mix in favour of passenger vehicles which should continue to help it earn better realisations.
However, the benefits might be felt only in the long run. In the September quarter, the better realisations haven’t been sufficient to take care of higher input costs — the operating margin came off by 110 basis points to 8.3 per cent. The cost of raw materials was up 260 basis points as a share of sales. That together with a foreign exchange loss of Rs 14.35 crore — the result of the company restating its foreign currency assets and liabilities — drove down the net profits for the quarter by 16 per cent to Rs 67 crore.
