Ashok Leyland impresses with better margins amid axle-load imbroglio

Ashok Leyland impresses with better margins amid axle-load imbroglio

Graphic: Mint

Graphic: Mint

Driven by robust sales growth, Ashok Leyland Ltd’s June quarter performance was a gratifying one on the whole. However, concerns remain amid the profitability beat. On the one hand, raw material price increases and pressure on realizations continue to create a challenging milieu. On the other hand, the Street is jittery about the implications of the 25% increase in axle load that may impact future commercial vehicle (CV) sales.

From the results perspective, the 47% sales growth with huge demand pull for medium and heavy CVs had set the expectations high for the quarter. Beating Bloomberg’s consensus estimate of 9.7%, its 10.4% Ebitda (earnings before interest, tax, depreciation and amortization) margin vaulted by 320 basis points from the year-ago period. A basis point is one-hundredth of a percentage point.

True, Ashok Leyland’s sustained double-digit Ebitda margin for 13 out of the last 14 quarters is commendable, when compared to listed peers. However, pressures are visible in the June quarter performance. The average blended realization was slightly lower year-on-year and flat when compared to the preceding quarter. In its media release, the management highlighted that tight control on working capital in a market which operated on heavy discounting and credit push helped push profitability.

According to Bharat Gianani, an analyst at Emkay Global Financial Services Ltd, the drop in year-on-year blended realization could be due to higher discounts offered on truck sales. The slight drop in the quarter-on-quarter realization may be attributable to a lower medium and heavy CV mix in sales.

Meanwhile, the raw material cost increase as a percentage of sales mirrors higher input costs. However, here’s where strong operating leverage aided by the 47% year-on-year revenue growth gave a leg-up to the company’s performance. The result: doubling of Ebitda when compared to the year-ago period to ₹647.5 crore.

Be that as it may, investors must not ignore the potholes that may drag Ashok Leyland along with other CV manufacturers off the fast track. Raw material and interest cost pressures along with higher diesel price may soften demand. In spite of the strong sales growth, the prevalence of discounts and the credit push required indicate the need to support sales. Further, note that the high year-on-year sales growth during the quarter was on a relatively low base of the year-ago period.

This is not all. The uncertainty around the increase in axle load would weigh on sentiment towards CV stocks. Although there is a clarification that this would be applicable with prospective effect, implementation of the regulation, is crucial. Besides, there is ambiguity on the treatment for existing vehicles, if at all. In any case, some CV makers feel the new load parameters would require different aggregates (inputs) that may increase the cost of trucks too.

It remains to be seen whether the positive factors such as a good monsoon, recovery in industrial activity and infrastructure spending will sustain demand against these odds.

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