Ashok Leyland Ltd shares continued to decline, despite benchmark Nifty auto index recouping most of its post-COVID-19 losses.
From its then February highs, the Nifty auto index is down only 4% now. Comparatively, Ashok Leyland’s stock is 36% lower from its February highs. The June quarter results explain the divergence in performance.
COVID-19 and subsequent lockdowns affected commercial vehicle sales most, while revenue at the company slumped 88.5% in April-June. Thursday morning trade saw the stock down 0.7%.
“This was owing to the lockdown on account of the covid-19 pandemic,” Ashok Leyland said in a statement. “With virtually no operation or revenues in the first part of this quarter (Q1FY21),” added Leyland. The slump in economic activity, initial restrictions on road transport, and unavailability of drivers virtually halted sales. Sales volumes during the quarter dropped 90% from the year-ago.
Monitoring the steep fall in sales volumes, analysts projected a report in weak financial performance by the company in the June Quarter. The revenue fall is in line with Street expectations, whereas the operating loss of Rs 333 crore exceeded estimates of several analysts.
While improvements were seen in average selling price and realizations, steep falls adversely impacted operating leverage.
“The company reported an Ebitda loss of Rs333 crore (versus Jefferies estimate of Rs220 crore loss). Gross margin expanded 580 basis points year-on-year, but Ebitda margin was still negative at -51% due to the adverse impact of operating leverage on low volumes,” Jefferies India Pvt. Ltd said in a note. Ebitda is earnings before interest tax depreciation and amortization.
Ashok Leyland couldn’t fully recover costs in the June quarter, leading to operating losses due to unusually low sales and revenues. From 81% in June, the fall in sales volumes moderated to 56% last month. The recovery is being driven by light commercial vehicles.
But heavy commercial vehicles’ sales remain sluggish, dropping 75% last month.
In a July automobile sales review note, Nomura research mentioned the Medium-Heavy Commercial Vehicles (MHCV) and the 67% decline, including challenges in finance and driver availability, and economic activity remaining an impact in near-term demand. Further downside risks are estimates of -25% for FY21F and +30% for FY22F.
The weak recovery and unusually low sales can continue to exert financial pressure and big risks to earnings in the near term.