Ashok Leyland- Annual Report Analysis:: Edelweiss

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Revenues and margins improve; new ventures to propel future revenue growth
􀂄 Ashok Leyland’s (ALL) revenues jumped 21.1%, from INR 59.8 bn in FY09 to INR 72.4
bn in FY10, due to increased sales volume of commercial vehicles (CV).
􀂄 EBITDA margin also increased from 7.8% to 10.5%, primarily on the back of improved
realisation and reduction in excise duty rates.
􀂄 ALL invested INR 1.5 bn in joint ventures (JVs) and associates during FY10. Of these,
investments in Nissan and John Decree JVs amount to INR 0.9 bn; these are likely to
start commercial production FY11 onwards.
􀂄 In March 2010, the company commissioned a new plant in Pantnagar (Uttarakhand),
which enjoys income tax exemptions and has an installed capacity of 50,000 vehicles
(nearly half of ALL’s existing capacity).

Sale of revalued assets reduces book profits and MAT outflow
􀂄 ALL’s land and building assets amount to INR 21.4 bn as at FY10 end (FY09: INR 19.1
bn), of which, INR 13.3 bn is on account of revaluation of assets.
􀂄 Of the revalued assets the company sold few residential flats and recognized a gain of
INR 13.3 bn (in excess of revalued carrying value) while balance in revaluation reserve
pertaining to these assets of INR 13.5 have been transferred to the general reserve.
􀂄 The company is operating under MAT FY09 onwards. Consequent to the above
transaction the book profit of the company was lower by INR 13.5 mn leading to
reduced MAT outflow.

One timers aid PBT rise
􀂄 Up to FY09, ALL charged depreciation for full year on addition to fixed assets made in
the first half of the year, for six months on additions during second half and no
depreciation on deletions during the year. During FY10, the company however changed
its accounting policy of charging depreciation on pro-rata basis. This resulted in higher
net profit of INR 208.1 mn (~3.8% of PBT).
􀂄 During FY10, ALL demerged its defiance technology division and integrated it with
Defiance Technologies, an associate. Total proceeds from this demerger amounted to
INR 66.8 mn and profit on sale of division was INR 39.5 mn.
􀂄 In FY10, diminution in investments and provision for doubtful debts/advances written
back was INR 43.2 mn (FY09: provision of INR 46.6 mn), ~0.8% (FY09: 2.1%) of PBT
(before exceptional items).


Other financial highlights
􀂄 Unrealised exchange loss on translation of foreign currency loans has reduced from INR 2.6
bn in FY09 to INR 0.7 bn in FY10. Of the total loan book of INR 22.0 bn as at FY10 end
(FY09 end: INR 19.6 bn), INR 13.7 bn (FY09: 15.8 bn) is foreign currency denominated.
􀂄 Net unhedged foreign outstanding payable is INR 8.2 bn at FY10 end (FY09 end: INR 16.7
bn). With INR appreciating against the USD by 1.1% since FY10 end, the company will
stand further benefitted.
􀂄 In FY09, ALL availed the option of capitalising/deferring foreign exchange difference on
long-term monetary items provided by the Ministry of Company Affairs. Accordingly, it
capitalised exchange gain of INR 1.5 bn (FY09: exchange loss of INR 2.1 bn), which is
~3.5% (FY09: ~6.3%) of net fixed assets.
􀂄 During FY10, ALL amortised the final tranche of expenses on voluntary retirement scheme
of INR 32.7 mn (FY09: INR 134.9 mn) as an exceptional item.
􀂄 ALL has made an impairment provision of INR 112.7 mn (~2.1% of PBT) on plant and
machinery, technical know-how and building.
􀂄 Research and development expenditure charged to P&L account amounts to INR 1.5 bn
(FY09: 1.3 bn), ~2.1% (FY09: 2.2%) of the turnover.
􀂄 Export sales (on FOB basis) reduced from INR 8.6 bn in FY09 to INR 6.0 bn in FY10,
despite increase in sales to Sri Lankan associate company from INR 0.8 bn to INR 1.8 bn.
􀂄 The company amortised debenture issue expenses/expenses on raising loans of INR 14.6
mn during FY10 (FY09: 12.4 mn) over the period of borrowings.


ROE has jumped, primarily on the back of:
1) Increase in NOPAT margin, from 5.3% in FY09 to 6.3% in FY10, due to improved
realisations.
2) Decrease in net borrowing costs, from 14.6% in FY09 to 1.9% in FY10, on account of:
• increase in interest capitalised from INR 162.9 mn in FY09 to INR 361.3 mn in FY10;
• increase in investment income from INR 407.9 mn in FY09 to INJR 620.9 mn in FY10
• INR appreciation on forex loans