Ashok Leyland Ltd’s shares were trading about 5% lower in morning trade on Monday on NSE. The reason is simple. The company’s results for the three months ended December (Q3FY22) have disappointed, especially on the margin front. Earnings before interest, tax, depreciation and amortization (Ebitda) fell by 12% year-on-year to ₹224 crore. This was a dampener as it came below analysts’ expectations. For instance, Q3 Ebitda was 46% lower than Jefferies India Pvt. Ltd’s estimates on lower-than-expected gross margin.
Ebitda margin contracted by 123 basis points (bps) y-o-y to 4% due to rising commodity costs and supply chain inefficiencies. One basis point is one-hundredth of a point. However, margin performance was better, sequentially. “Gross margin contracted 120bp QoQ but operating leverage benefit drove 100bp QoQ expansion in Ebitda margin to 4.0%,” said Jefferies analysts in their first cut note.
The company expects commodity prices to decrease further and the semiconductor shortage issue to ease, which will aid margins in the coming days.
Ashok Leyland points out, growth in MHCV (medium and heavy commercial vehicle) domestic truck and bus volumes in Q3 almost doubled vis-à-vis total industry volume growth of 20%. Inevitably, the company’s MHCV market share increased sequentially from 22.5% in Q2 to 26.1% in Q3.
Even so, Ashok Leyland posted a loss of nearly Rs15 crore before tax and exceptional items in Q3FY22 versus a profit of Rs28 crore in Q3FY21. Decline in other income weighed on profitability. Plus, higher depreciation and finance costs added to the woes. Revenues, however, increased by 15% y-o-y to Rs5535 crore on the back of 2% increase in volumes and 13% increase in net realization per vehicle.
Sequentially though, net realization is flat. As is the case with other automakers, growth in Ashok Leyland’s export volumes by 8% y-o-y helped it partly cushion the impact of subdued domestic demand. In Q3, Ashok Leyland completed the sale of electric vehicle (EV) business to Switch Mobility Automotive Ltd which is a step-down subsidiary of the company. The profit from this transaction along with provision for onerous contracts led to an exceptional gain in Q3, leading to a reported net profit of Rs6 crore in Q3FY22 versus a loss of Rs19 crore in Q3FY21.
Ashok Leyland’s EV subsidiary, Switch UK, continues to grow. Further, the company recently launched trucks in the compressed natural gas (CNG) segment – the Ecomet STAR. “It plans to launch CNG vehicles in 4QFY22, which will plug gaps in the fast-growing CNG ICV segment” said analysts at Motilal Oswal Financial Services in a report. ICV is intermediate commercial vehicle.
Meanwhile, demand recovery is on course with the economy opening up. With increased capital outlay in the recently announced budget, the MHCV segment is expected to benefit with growth in capital-intensive sectors such as construction & mining.
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