Quant Broking analyses Ashok Leyland Q3 earnings

A: I cannot comment on the turnaround in the stock per se following the kind of operational results they have delivered and the kind of visibility we have for this stock and for this industry in the next 3-4 quarters. Definitely from a business perspective if you look at the kind of demand environment which is going to persist following the kind of macro discussion you were having in your channel just now there are no major triggers for inflation to get normalised or your fuel prices to come down significantly so that cost of operating a truck and demand for road freight moves up.

So as long as the demand environment remains muted this hefty discount theme is going to persist and if you see the gross margin level of Leyland it is down almost 5-6 percent in the last two years, so it is both the scale factor and this hefty discount impacting gross margin combine which has led to this kind of minor 5 percent operating margin this quarter. One more thing to note this quarter if you see LCV mix as a percentage of overall volume for Leyland was 42 percent and as you know they basically trade those LCV with Nissan and operate at miniscule margins, with rising mix of those impacted the gross margins further. So broadly with almost Rs 100 crore of EBITDA loss and no respite from interest outgo because of minor volatility because of working capital lead cash flow improvement, debt reduction but I do not see the structural absolute debt coming down below Rs 4,000-4,500 crore.

So quarterly interest outgo of somewhere around Rs 100 crore is going to persist for the whole of FY15. So we expect the company to report full year losses in FY15 also. So these bad days are going to continue. I do not see any immediate respite. FY16 after three bad years of CV cycle one can expect some recovery, but that is too farfetched to factor in at present juncture.

Q: While the situation might be challenging, in the concall the management said that Q3 was the worst quarter and the worst should be over for them in Q3 and from Q4 things should improve. Do you believe that? Do you think it is likely?

A: On a relative scale if you see for Leyland historically Q4 has always been the quarter of inventory piling up to boost your wholesale volume and there is a 20-30 percent volume inch up in Q4 relative to Q3 though retail level demand may not reflect that picture. So from a company number perspective the scale factor definitely helps Leyland every year in Q4. So margin-wise and volume-wise I do expect some improvement, but that is not led by ground level demand improving per se.