Smooth road ahead for Ashok Leyland; strong growth to drive earnings faster

Ashok Leyland


The steps taken by Ashok Leyland (ALL) over the past few years, along with an improving industrial climate, are helping the company gain ground in its business and improve its financials. The quarter ended December 2017 (Q3) is evidence of that.
And the company’s management and analysts say the situation will be better.
Stellar third quarter
To begin with, aided by technological advancements and regulatory changes, ALL's net profit jumped almost three-fold to Rs 4.49 billion in Q3 from Rs 1.61 billion in the same period a year earlier, overtaking analysts’ estimates of Rs 4 billion.
Despite an increase in raw material costs, which surged 58 per cent to Rs 54.06 billion from Rs 34.02 billion a year earlier, and high discounts on vehicles continuing, ALL improved its operating profit margin by 100 basis points, both year-on-year and sequentially, to 11.1 per cent in the third quarter.
An improved mix of products (vehicle sales), increasing demand, and hike in prices led to better profitability. Higher export volumes (up 46 per cent) and domestic sales (up 41 per cent) of medium and heavy commercial vehicles (M&HCV) have helped ALL.
Vinod K Dasari, managing director, Ashok Leyland, said the growth demonstrated the company’s technological leadership.
“What we focus on is net sales realisation. Prices have increased and discounts have also gone up. Net-net prices are higher than before, realisation is also better compared to the previous quarter,” he added.Chief Financial Officer Gopal Mahadevan added: “ALL's growth in revenues and the focus on cost efficiencies have helped profitability.”
Adding new tech, geographies
Intelligent Exhaust Gas Recirculation (iEGR) has helped the company in growing volumes and the expanded network reach customers better. ALL claims iEGR technology is more suited for India than Selective Catalytic Reduction (SCR) and provides 10 per cent better mileage as compared to BS III engines.
ALL also says it is no longer a player just in south India, where its market share is around 50 per cent. ALL has 2,800 points of presence, be it in terms of sales, service, or spares compared to 300 five years ago.
In other regions, ALL's market share is 25-30 per cent. So, for every three trucks sold in India, about 1.25 come from the Ashok Leyland stable. Beyond the Indian shores, ALL has also been expanding globally. It opened an office in the Ivory Coast in the third quarter.
“The thrust on introducing products, expanding networks, connecting with customers, and delivering superior solutions should help us pursue profitable growth. Our working capital position continues to be very healthy and our focus on cost would continue,” said Mahadevan.
ALL is focusing on segments such as light commercial vehicles, and the defence and its spares business, which should help it de-risk from cyclicality in domestic M&HCVs.
Demand drivers
The key factors driving volumes for the industry and ALL include rules related to the rated load of goods that trucks can carry. In the northern states, especially Rajasthan, UP, and others, regulations are coming in and fleet operators will need to invest in new vehicles. The goods and services tax (GST) has also had a positive effect since the productivity of vehicles is going up.
There is a lot of activity in infrastructure, which is driving this demand and ALL is seeing rising sales of high-tonnage vehicles. Over the past four to five years, there has been a demand shift from mid-20-25 tonners to 31-41 tonners and now the industry is talking about 49 tonners.
It makes a lot of sense for operators to move to high-tonnage vehicles, which earn higher margins for truckmakers and whose cost of operations is low, according to Mahadevan.
While ALL is optimistic about the March quarter, which, it believes, will be reasonably good, it also cautions that the fourth quarter of last year saw high sales because of the shift from BS III to BS IV on judicial orders and the resultant discounts given to dispose of vehicles. But the demand is expected to be healthy in Q4 and the year ahead.
Apart from buses (which may see a decline of 13 per cent), the Society of Indian Automobile Manufacturers too expects all other commercial vehicles to grow by around 16 per cent in 2018. The growth will be driven by infrastructure development, construction work and opening mining activities.
Dasari says the outlook for 2018 looks good. Analysts expect the company's revenue and earnings to grow at 15-18 per cent annually over the next two-three years.


E: estimates; standalone financials; * adjusted for one-offs | Source: Emkay Global