The outlook for commercial vehicles is improving, though a full recovery seems to be some distance away
If Ashok Leyland Limited's (ALL) despatches during the June 2009 quarter — down by about 58 per cent — appeared somewhat weak it was because the management took steps to clear inventories with dealers, reportedly around 3,000 vehicles at the start of the quarter, bringing them down to nearly zero. That done, the company is hoping to grow volumes for trucks in single digits this year, while it has a much higher target of 15-20 per cent for buses.
The improved outlook resulted in the stock moving up by 8 per cent on Thursday. Indeed, ALL should not have a problem achieving the targeted volumes for buses having snapped up orders for 4,800 of the 9,500 buses ordered so far under JNNURM, which envisages the modernisation of urban transport.
However, industry watchers are circumspect about how many trucks the Hinduja-owned firm can sell this year and believe ALL’s volumes would remain flat compared with 2008-09 or even fall somewhat. ALL actually lost market share last year with its key market in the South seeing very weak demand. Revenues this year are expected to be around Rs 6,200 crore over the Rs 5,981 crore posted last year.
Flat revenues notwithstanding, there should be a sharp jump in the operating profit margin (opm) this year with an increase of about 250-300 basis points.
The expansion would be driven by the sharp fall in the prices of several key inputs such as steel, copper, lead and rubber. Also, prices of vehicles were increased by about 2 per cent recently. Last year, the company posted an opm of 7.8 per cent, down 240 basis points, as a result of which operating profits fell by 40 per cent.
The management has also been trying to improve its working capital management and should be able to free up close to Rs 500 crore during the year. What will continue to hurt the bottom line though is the outgo on interest, estimated at close to Rs 100 crore.
That’s despite the fact that ALL has pruned its capital expenditure by about Rs 1,000 crore to Rs 2,000 crore to be spent over the next three years. Last year, it spent close to Rs 1,000 crore, most of which went towards setting up the Uttarakhand plant.
