Higher finance costs impact Lanka Ashok Leyland 1Q
Lanka Ashok Leyland recorded a turnover of Rs.3.2 billion for the first quarter of 2018 (1Q19), against Rs.3.3 billion for the corresponding period of the previous year (1Q18). Vehicle sales saw a marginal decline year-on-year (YOY) to Rs.3.0 billion, whilst the revenue from other sources rose 44 percent to Rs.118.4 million, against Rs.82 million for the same period last year.
Prudent cost controls boosted the gross profit by 22 percent to Rs.308 million and saw the gross profit margin expand to 9.7 percent, against 7.8 percent recorded a year ago.
The operating expenses for the quarter stood at Rs.138.9 million, a 172 percent increase over the first quarter of 2017, which was benefitted from a one-off reversal.
The net finance costs for the quarter rose 553 percent to Rs.67.2 million as the company took on more debt to expand its stock of technologically superior Bs3-compliant vehicles with the latest safety standards. The inventory position grew 30 percent to Rs.5.7 billion, against Rs.4.4 billion in 1Q18, while the interest-bearing liabilities have risen 99 percent to Rs.4.1 billion, against Rs.2.0 billion a year ago. The increase in finance costs resulted in a profit after tax of Rs.51.7 million, against Rs.135.5 million in 1Q18, signifying a 51 percent decline YOY. Commenting on the results, Lanka Ashok Leyland CEO U. Gautam said, “The first quarter’s sales performance has historically been sluggish over the last few years. This quarter witnessed larger than normal exchange rate volatility, which affected pricing and influenced our customers’ buying decisions.
Despite these constraints, our vehicle sales continued to top the Rs.3.0 billion benchmark. Our bottom line does not fairly reflect the progress the company has made over the quarter, which witnessed margin expansion at the gross profit level and saw income from other sources like repairs, hiring and spare parts grow 44 percent. This restructuring of our revenue profile will reduce exposure to cyclical sales and improve our overall financial position. The inventory build-up adversely impacts our financial strength and profitability in the near term however the company maintains a healthy balance sheet, which can easily accommodate the leverage whilst the management is very confident in the medium to long-term success of the strategic decisions to launch safer more reliable vehicles in the market.” On the future outlook, Gautam noted that the transportation sector will see the impact of the EURO 4 standard implementation.
“We commend the government in its efforts to go green however commercially, transportation business models run on very thin margins and are cost sensitive. Higher initial investment in purchase of the vehicles and use of cheaper fuels in vehicles will be replaced by super diesel as required by EURO 4 engines adversely impacting running costs and profitability of the sector. While we expect demand from key customer segments such as construction to pick up, external shocks such as weather and variables such as exchange rate volatility and high interest rates will drive our costs and dampen our outlook.
The switch in the duty structure will work in favour of our light commercial vehicle offering, which boasts the bestin-class safety features and driving comfort in the segment and has faced sluggish sales due to cheaper alternatives in the past. We will continue to explore innovative partnerships to bolster our turnover while our strategy to expand other revenue verticals such as spare parts, workshop repair segments and business of hiring of buses will continue to build steam to look forward to.
We remain cautiously optimistic for the year ahead,” Gautam said.