Ashok Leyland: Slowing down

The rising cost of truck finance and the surging raw material costs are a matter of concern.

Ashok Leyland's operating profit margins in the March 2007 quarter were adversely affected by the rising raw material costs. The operating profit grew 21.2 per cent y-o-y in Q4 FY07 as compared with 32.1 per cent growth in net sales in the corresponding quarter. Its operating profit margin declined 100 basis points y-o-y to 11.6 per cent during the last quarter.

The pressure on margins was because the adjusted raw material costs as a percentage of net sales rose 50 basis points y-o-y to 74.5 per cent in Q4 FY07. The company had hiked vehicle prices in January 2007 in response to higher input costs, but that could not prevent pressure on margins.

The company's sales of medium and heavy commercial vehicles (accounting for about 90 per cent of the company's revenues) grew 30 per cent y-o-y to 21,001 units in the last quarter.

As a result, the company's market share in the M&HCV segment rose by 80 basis points to 28 per cent at the end of FY07.

Though the sales of the higher margin buses went up 26.3 per cent y-o-y to 5092 units in the last quarter, it fell marginally on a y-o-y basis as a proportion of the total sales, accentuating the margin pressure.

The company's sales growth during FY07 was 34.8 per cent y-o-y to 83,094 vehicles. However, the rising input costs led to its margin declining 50 basis points y-o-y to 9.8 per cent.

Going forward, Ashok Leyland's new plant in Uttarakhand, having an annual capacity of 25,000 units, is expected to be operational by end FY08. This should improve sales in the north, which currently contributes around 25 per cent of the total revenues.

The company also plans to scale up the capacity at its recently acquired company Avia in the Czech Republic, from 2,000 units to 5,000 units a year.

The investors are increasingly concerned about the rising cost of truck finance, coupled with the surging raw material costs. The stock of Ashok Leyland trades at 12.5 times estimated FY08 earnings and the upside seems limited.

Gujarat Gas: Solid on growth

A strong volume growth at Gujarat Gas resulted in better performance during the March 2007 quarter. The company saw its consolidated revenues from operations rise 43.9 per cent y-o-y, while its operating profits gained 34.7 per cent.

However, the strong volume growth did not have a positive impact on the margins. Despite a price hike during the quarter, the operating profit margin dipped 56 basis points to 18.2 per cent. However, there was an improvement compared with the 15.4 per cent margin in CY06.

The total gas volumes increased 32.7 per cent y-o-y to 341 million cubic metres during the March 2007 quarter. The average realisations improved 11 per cent to Rs 9.75 per scm. The net profit grew 42.6 per cent.

But if the one-time income of Rs 8 crore as the minimum guarantee obligation from one customer is taken into consideration, the net profit growth was lower at 22 per cent, said analysts.

The company attributes the higher sales volumes to growth in the retail segment and higher bulk sales, thanks to higher availability of gas.

An additional 0.7 million standard cubic metres per day (scmd) gas was contracted with the Panna, Mukta and Tapti fields in December 2006. This enabled Gujarat Gas to touch daily sales of almost 3.8 million scmd per day.

The new gas supply from Panna, Mukta and Tapti fields will start in the September 2007 quarter, say analysts. The parent company British Gas has a stake there. Sourcing gas from other suppliers will also be a key to the company's future growth.

The Gujarat Gas stock has appreciated 13 per cent after its results and trades at 17 times estimated CY07 earnings and 15 times CY08 earnings, and appears expensive.

Shoppers' Stop: Sales on a high

Like-to-like sales at Shoppers' Stop improved 18 per cent y-o-y in the last quarter, but the rising operating and administrative expenses coupled with a higher proportion of lower margin non-apparel sales imposed pressure on the company's margins.

The operating profit margin declined 30 basis points y-o-y to 7.1 per cent in the last quarter. The consolidated operating profit grew 25.4 per cent y-o-y in Q4 FY07, while sales grew 31.3 per cent.

The company's sales per sq ft grew 16 per cent y-o-y in Q4, with share of the higher margin private label to total sales rising 220 basis points y-o-y.

The operating and administrative expenses as a percentage of net sales rose 650 basis points y-o-y to 22 per cent in the last quarter and this was related largely to the launch of new outlets across the country.

The company's store area was 1.17 million sq ft at the end of FY07, as compared with 1.15 million sq ft at the end of Q3 FY07. Pantaloon Retail's operating profit margin fell 145 basis points y-o-y to 7 per cent in the last quarter.

Its FY07 operating margin expanded 50 basis points to 8.2 per cent. Going forward, the company is planning to ramp up its total store area to nearly 1.7 million square feet by the end of FY08. The stock trades at 43 times estimated FY08 earnings, given the euphoria for retail stocks.