Ashok Leyland: Volume growth to remain strong

Top line growth, lower raw material and finance costs boost profits in June quarter

Aided by robust volume growth and lower input costs, Ashok Leyland had a strong June quarter, beating estimates. On the back of a 45 per cent jump in volumes to 18,600 units and improving product mix, revenues rose 55 per cent to Rs 3,841 crore. Sales volumes, 80 per cent of which are trucks, have grown at double the sector’s growth rates, taking the firm’s market share to 30 per cent. Analysts had pegged the turnover at Rs 3,711 crore. Given the strong performance, the stock was up 1.55 per cent on a day when the broader markets fell 1.27 per cent.

 

While the company has recorded a growth of 41 per cent year-on-year (y-o-y) for the April-June period (46 per cent for trucks and buses), analysts peg the FY16 growth number at 22-24 per cent. The improving fortunes could get a leg-up on the back of road projects kicking off and a bit of mining activity. While full-blown growth is a couple of quarters away, analysts say fleet operators’ profitability has risen on the back of falling diesel prices and slight pick-up in freight rates has increased, boosting truck volumes for manufacturers.

On strong volume growth, falling raw material prices added to the company’s performance. Operating profit at Rs 388 crore was higher than Rs 321 crore estimated by analysts and 287 per cent more than the year-ago number. Raw material cost as a percentage of sales was down 400 basis points to 69.4 per cent, boosting operating profitability.

These lower costs and other control measures helped improve the margins. At 10.1 per cent, this was 600 basis points higher than in the year-ago quarter. It managed to sustain profitability at the March quarter levels, despite lower volumes on a sequential basis. Revenues on a sequential basis was down 14 per cent. Operating profit and margins would have been higher but for the 63 per cent rise in other expenses.

Better top line growth and operational performance aided the bottom line. Lower finance costs (down 28 per cent year-on-year) given the reduction in debt helped the company report a net profit of Rs 159 crore, compared with a loss of Rs 48 crore in the year-ago quarter. Higher cash flow from operations has been used to retire debt. Profits would have been higher, but for a fall in other income and higher taxes.