INSIGHT: Leyland in high gear

Ashok Leyland’s share price has jumped 12.7% in the past two days, after it announced results for the third quarter ended December 2005 and a defence order worth Rs 230 crore. Reported profit before tax and exceptionals was flat at close to Rs 81 crore, which seems disappointing compared with the 44% jump in pre-tax profit in the first two quarters. But profit was hit last quarter on account of forex losses of Rs 8 crore. In the year ago December quarter, the company had booked gains of Rs 18.6 crore on account of forex fluctuations. Adjusted for the forex impact, profit before tax and exceptionals rose 44% last quarter. This is better than the forex-adjusted profit growth of 37% in the first two quarters.

PBT margins improved by an impressive 115 basis points last quarter. In the first six months of this fiscal, margins had improved by just 20 basis points. The improvement came despite a meagre 1.6% increase in volumes last quarter. Volume growth dropped from as high as 20% in the first two quarters mainly because the impact of excessive monsoons in the company’s strong markets.

But where the company lost in volumes, it has made up through an increase in per vehicle realisations, which jumped by 20% last quarter thanks to a better product mix and higher defence sales. Besides, the company had effected a price hike in November 2005. The higher realisations last quarter would have contributed largely to the increase in margins last quarter.

Adjusted for the impact of forex fluctuations, Ashok Leyland’s profit before tax has grown at an impressive rate of 39% so far this fiscal. Besides, its sales of medium and heavy commercial vehicles have grown at a faster rate compared to Tata Motors in the first nine months of this fiscal.

This outperformance has been well appreciated by the stock markets, considering that Ashok Leyland’s valuations have risen to over 12 times trailing earnings, compared to about 9 times, less than a year ago. The company’s recent win of a Rs 230 crore defence order should keep the growth momentum going, at least in the near term.

Price & rise of Hindalco

Hindalco shares rose nearly 3% on Thursday, in a sort of late reaction to the hike in aluminium prices the company announced on Wednesday. The company raised aluminium prices for the third time this financial year by another 5% to Rs 119,800 rupees a tonne.

While the plethora of price hikes has aided profit growth in the company’s aluminium division, overall performance of the company is being pulled down by the copper division. Hindalco’s profit last quarter fell 13.4% primarily because of the losses from its copper business. The copper division reported a loss of Rs 84.5 crore last quarter, compared with a profit of Rs 79 crore in the same quarter last year. It was this profit swing of Rs 163.5 crore that caused overall profit to fall.

The losses in the copper business were primarily because of an 18% drop in volumes, owing to a 25-day planned shutdown and a forced shutdown of nineteen days due to technical problems. What made things worse was that the company had hedged its exposure to copper prices by selling copper forward in the physical market. The drop in production led to a short position on copper, leading to increased backwardation charges. Besides, the copper division was also impacted due to higher expenditure on liquid fuels and higher maintenance costs. Analysts expect production in the company’s copper smelters to come back on track in the near future, which means the profitability of this division should pick up going forward.

Profit of the aluminium division rose 17.1% to Rs 542.1 crore, thanks to rising aluminium prices on one hand and higher sales of value added products on the other. Hindalco has fully integrated aluminium operations right from the bauxite mining stage to alumina refining and aluminium smelting, which further helps its margins.

Global consumption of aluminium is expected to grow to 22.7 million tonnes in calendar year 2006, and analysts expect this to lead to a supply deficit of 380,000 tonnes. Aluminium prices, therefore, are expected to remain high. The company’s current reflects this confidence.