Ashok Leyland’s stock tumbles as operating performance hits the abyss

owned commercial vehicle maker Ashok Leyland Ltd’s pathetic June quarter earnings led investors to hammer its stock. No sooner were the results released on the bourse than the stock plunged by 9.5% to Rs.15.8 —a four-year low. Ashok Leyland posted a loss of Rs.141.8 crore, more than double the Bloomberg consensus forecast of a Rs.61.5 crore loss. In the year-ago period, the company had a net profit of Rs.67 crore. Poor performance precipitated the gloom which had already set in after the company announced a production cutback at its European subsidiary, Avia, last week and promoters pledged about 35% of their holding.

Market expectations were poor given the 21% contraction in sales volume posted in the June quarter when compared with the year-ago period. Net revenue fell 21.4% to Rs.2,363.8 crore. Poor operating volume and leverage, therefore, led to costs spiralling as a percentage of sales. Raw material costs jumped by 270 basis points to 75.5% of sales even as other expenses and staff costs rose. Operating margin plunged to a precarious 1% against 8.2% posted a year ago and consensus estimates of 3.9%. The firm posted a meagre operating profit of Rs.23.3 crore, about 90% lower than a year back.

The weak operating performance mirrors the huge slump in infrastructure and industrial activity. Falling truck rentals offer few incentives for logistics and transport operators to buy new trucks. Reports state that rising discounts did little to better the situation. Until March 2013, light commercial vehicles were shoring up volumes, but the situation in this segment, too, has turned grim in the last few months. The only bright spot in the last few months was that the company won an order for supply of about 2,700 buses from Tamil Nadu.

Meanwhile, rising working capital needs led to a 20% rise in interest costs to about Rs.100 crore. Hence, the firm’s losses deepened to Rs.141.8 crore which includes a tax inflow of Rs.25 crore and an one-time gain of Rs.6.5 crore during this quarter. The management, in its media release, talked of efforts to cut operational expenses and debt, but there was little of that in the June quarter.

For Ashok Leyland and its peers, the ride ahead for several quarters will be a rough one. What might have improved sentiment is an interest rate cut. But that, too, appears far-fetched given the fall of the rupee and sticky inflation. Monday’s move by the central bank to curb borrowing by banks by hiking rates will further impede the process of core-sector recovery. Given such multiple challenges looming, the stock is unlikely to rebound in the near term.