Ashok Leyland: On a roll

Ashok Leyland managed a better Q3 with 22% top line spurt

Ashok Leyland's numbers for Q3 FY06 surprised the street mainly because the 22 per cent y-o-y top line growth comprised a value increase of around 20 per cent, on a volume growth of just 1.6 per cent y-o-y.

Higher sales to defence and a better product mix, which included more HCV carriers and buses helped along with price hikes in November last year.

Operating profit was up just under 14 per cent at Rs 116 crore though margin fell by 67 basis points to 9.7 per cent thanks to a forex loss of Rs 7.9 crore compared with a gain of Rs 18 crore in Q3 FY05.

Adjusting for this, the margins were higher by 190 basis point at 10.3 per cent. The improvement at net level was marginal at 1.6 per cent at Rs 54.5 crore, thanks to a rise in interest costs and depreciation.

Ashok Leyland has sold good volumes in the current fiscal. In the nine months to December, it posted a volume growth of 13 per cent y-o-y compared with an industry growth of 9 per cent.

It has managed to gain market share by stepping up production and to a small extent because the market leader faced some production-related constraints.

In January, domestic sales at 5,618 vehicles, were strong at 20.6 per cent y-o-y growth, while cumulative sales for April-January jumped up to 17 per cent y-o-y. At the current price of Rs 37, the stock trades at 11 times estimated FY07 and is reasonably valued, given the growth prospects.

Canara Bank

Canara Bank posted robust numbers for Q3 FY06, and it is no surprise that investor interest is returning to the stock. The stock has gained about 9.7 per cent to Rs 263 on Friday.

The bank witnessed 26.6 per cent rise in its net interest income during the December 2005 quarter. An 11.2 per cent decline in other income is also positive, as the bank's dependence on trading profits is reducing.

Credit growth is better than the industry average at 31.8 per cent in Q3 FY06, with a slightly higher growth in retail assets. But deposit growth was lower at 11.6 per cent. Net interest margin, at 3.3 per cent, fell marginally over December 2004.

With an incremental credit-deposit ratio rising by 133 per cent compared with the industry average of about 100, its capital adequacy ratio fell by 84 per cent y-o-y to 12.05 per cent.

The credit-deposit ratio rose by over 400 basis points q-o-q to 67.51 per cent. Asset quality also improved with net NPAs falling to 1.2 per cent in December 2005 compared with 2.93 per cent a year ago.

A reduction in employee costs and lower provisions improved the bank's net profit growth. Canara Bank will have to increase its deposit growth rate, especially of low cost deposits to continue the growth momentum. The stock trades at about 1.3 times FY07 adjusted book value.

Sterlite: Metal bonus

The Sterlite Industries' stock fell about 2 per cent to Rs 1,436 on Friday, despite the board declaring a bonus in the ratio of 1:1. Nevertheless, prior to this announcement, the stock had gained 7.5 per cent over the past week.

The bonus reflects the strong improvement in the performance of the company's core copper business in the first nine months of Q3 FY06, helped by improved TC/RC (treatment and refining) rates. In addition, its aluminium and other business have also performed better.

Meanwhile, Sterlite has reported a 100.2 per cent y-o-y growth in its consolidated operating profit to Rs 875.2 crore in the December 2005 quarter.

In its copper division, copper cathode production was up 58 per cent y-o-y to 75,000 tonne in Q3 FY06.

Also, average TC/RC have improved to 25 cents per pound as compared to 10-11 cents a pound in Q3 FY05. Higher TC/RC rates are largely owing to improved concentrate availability.

In addition, the company's zinc production at 69,000 tonne in Q3 was up 26 per cent y-o-y.

Improved zinc production was due to its expanded capacity coming on stream in April, 2005, say analysts. As a result, Sterlite's consolidated operating profit margin expanded 273 basis points y-o-y to 24.92 per cent in the last quarter.

Apart from the bonus, the company plans to split the face value of its stock from Rs 5 to Rs 2 and this expected to significantly improve liquidity.

Going forward, TC/RC rates are expected to remain strong and that should help its key copper business, to continue doing well. The stock gets a discounting of about 13.7 times estimated FY 06 earnings.

With contribution from Shobhana Subramanian and Amriteshwar Mathur