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Raghuvir Srinivasan

The resurgence in the commercial vehicles industry has reflected in the performance of Ashok Leyland.

ASHOK Leyland's(ALL) performance in 2002-03 clearly reflects the resurgence in the commercial vehicles industry. While the top-line revved up 17 per cent to Rs 3,074 crore, the post-tax earnings accelerated 30 per cent to Rs 120 crore despite a wobbly performance in the final quarter.

The company appears to have faced some operating pressures in the fourth quarter that depressed its bottomline by 5 per cent compared to the last quarter of 2001-02. Rising input costs coupled with an increase in employee compensation exerted pressure on margins even as the company could not push up product prices due to the competitive market. A sharp fall in interest costs (29 per cent) helped boost earnings at the gross level.

The highlight of the past year was the commencement of its migration from the Iveco engine platform to the tried and tested Hino. So far ALL had been using Hino engines for its passenger carriers only. But now it is the platform of choice across all categories. Hino combines the virtues of fuel efficiency and controlled emission without sacrificing on power. This is just about everything that fleet operator would look for in his truck. The engine has already been fitted on the most popular of ALL's models and has received favourable response in the market.

The company will also be launching light commercial vehicles on the Hino platform in the next few months. The production capacity for the engine has been enhanced to 50,000 units for this purpose.

ALL has also strengthened its balance-sheet by prepaying debt of Rs 155 crore reducing its total debt in the process to Rs 490 crore.

The company has also, as is now routinely expected of it, managed its working capital admirably well that is reflected in the lower interest costs. There has also been a big draw-down in the inventory of finished vehicles as reflected by the fact that production is up by 6 per cent only while sales rose 25 per cent in volume terms.

The higher sales were spurred by demand from the road projects that pushed up sales of not just vehicles used in construction but also goods carriers. This trend is expected to continue this year as well with the road projects gaining momentum. An important market trend that could work in ALL's favour is the balanced growth across the country seen in recent months. This has to be set against the fact that the company is facing pricing pressures in the market and may be forced to participate in the discounting game, a possible reason for the fall in margins in the fourth quarter.

The company has also begun to focus on exports, which grew 17 per cent in 2002-03. There is a pending order for about 3,322 trucks worth approximately Rs 220 crore for Iraq; there is some uncertainty on when the deal would go through. This single order is higher than the total exports made in each of the last two years. The prospects for ALL this fiscal will hinge on two major factors. First, the behaviour of the monsoon. Its cost-control programme and excellent fund management skills will cushion ALL from adverse market trends to some extent.

But real growth will depend on agricultural performance. Second, the success of its new product launches, a number of which are scheduled in the next few months. This will also be the year when the Hino platform spreads across all the product offerings which means that it is a critical period for the company.

At the current market price of about Rs 100, the ALL stock discounts 2002-03 earnings 10 times. Shareholders can stay with the stock and review their position once the picture on the monsoon front becomes clear.

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