Ashok Leyland: Sales drive

The truck maker has managed to push sales and bring down inventories in the March 2008 quarter thereby improving its operating profit margins .

Lower expenses on raw materials and interest have helped truck and bus maker Ashok Leyland post strong earnings numbers of Rs 190 crore for the March 2008 quarter, a rise of 11.5 per cent over the previous year. Revenues for the quarter at Rs 2,562 crore were up just under 12 per cent, driven by better realisations per vehicle "�up 7 .2 per cent "�and also an increase in volumes.

The smaller raw materials bill resulted partly from inventories being lower in the quarter compared with a build up in inventory in the nine months to December 2007. The management claims it was able to sell far more than it produced and also to collect outstanding dues. Thus, the operating profit margin increased by 60 basis points to 11.9 per cent.

During the year FY08, the Chennai-headquartered Leyland yielded some market share in the truck segment losing 150 basis points to finish at around 35 per cent. However, strong volumes, up 50 per cent, in the bus segment pushed up the company's market share in that space to 45.5 per cent.

The commercial vehicle sector is going through difficult times: sales of medium and heavy commercial vehicles fell in FY08 though light commercial vehicles grew marginally. The sector could bounce back in the current year given the low base of FY08 and industry watcher say the growth could be in the region of 7-8 per cent.

However, the Leyland management is confident of growing sales in double digits on the back of several new product launches. The management says operations of fleet operators continue to remain viable though high oil prices and interest rates are a worry.

The Rs 7,599 crore Leyland is adding capacity to make another 100,000 vehicles, more than doubling the capacity of 84,000 vehicles. The company will spend Rs 1200 crore on capital expenditure across several projects during the current year which means interest costs will go up.

Leyland has three joint ventures with Nissan for making vehicles, power train and developing technology, which will no doubt help it get a stronger presence in the light commercial vehicle space. A manufacturing plant for 1,00,000 units is being contemplated and that would strengthen AL's product portfolio and give it access to technology.

Moreover, it's possible that AL will get access to Nissan's distribution in overseas markets. On the face of it the partnership appears to be just what AL needed but how well the truck and bus maker takes advantage of the alliance remains to be seen. The stock lost nearly 4 per cent in Friday's trading session. At Rs 39, the stock trades at 11 times estimated FY09 earnings and is expected to perform in line with the broad market.