Ratio Analysis - Ashok Leyland

8/6/2019 Ratio Analysis - Ashok Leyland

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current models of Ashok Leyland comewith H-series engines.

In the journey towards globalstandards of quality, Ashok Leylandreached a major milestone in 1993when it became the first in India'sautomobile history to win the ISO 9002

certification. The more comprehensive

ISO 9001 certification came in 1994,QS 9000 in 1998 and ISO 14001certification for all vehiclemanufacturing units in 2002. In 2006,Ashok Leyland became the firstautomobile company in India to receivethe TS16949 Corporate Certification.

PART- I ANALYSIS OF PROFITABILITY

Profitability Ratios

To analyze the profitability of a company profitability ratios are used. These ratios measure theoperating or income performance of a company. The goal of a business is to make a profit, sothis type of ratio examines how well a company is meeting that goal. The commonly usedratios to evaluate profitability are:

Gross Profit ratio

Net Profit ratio

Return on Assets

Asset Turnover

Return on Equity

PARTICULARS 2004-05 2005-06 2006-07 2007-08

GROSS PROFIT

12090.

5

14785.

7 17,049.85

19,644.

89

NET SALES

41818.

97

52476.

57 71681.76

77291.

23

PAT 2714.1 3273.2 4412.86 4693.1

AVG. TOTAL ASSETS

19776.

61

35253.

66 40743.05

50016.

41

AVG. EQUITY SHARE HOLDER'S

FUND

11098.

31

22515.

94 25079.82

20217.

75

Profitability Ratio Analysis

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1. 1 Gross Profit Ratio = Gross Profit 100

Net Sales2004-05 2005-06 2006-07 2007-08

GROSS PROFIT

12090.

5

14785.

7

17,049.8

5

19,644.8

9

NET SALES

41818.

97

52476.

57 71681.76 77291.23

2004-05 2005-06 2006-07 2007-08GROSS PROFIT RATIO (%) 28.91 28.18 23.79 25.42

Analysis

The GP ratio is showing continuously decreasing trend, starting from 2004/05 in 28.91% to23.79% in the financial year 2006/07. This shows that a company is loosing its productivity inmaintaining its gross profit margin. In 2007-08 the ratio again slightly been increased from23.79 to 25.42.

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1.2. Net Profit = PAT 100Sales

2004-05 2005-06 2006-07 2007-08

PAT 2714.1 3273.2 4412.86 4693.1

NET SALES

41818.

97

52476.

57 71681.76 77291.23

2004-05 2005-06 2006-07 2007-08

NETPROFIT(%) 6.49 6.24 6.16 6.07

Analysis

The NP ratio is showing declining trend from 6.49% in the year 2004/05 to 6.07% in the year2007/08 which shows that there is increased amount of expenses in the form that increasing inthe prices of row material.

1.3. Assets Turnover Ratio = Net Sales

Avg. Total Assets

2004-05 2005-06 2006-07 2007-08

AVG. TOTAL ASSETS

19776.

61

35253.

66 40743.05 50016.41

NET SALES

41818.

97

52476.

57 71681.76 77291.23

2004-05 2005-06 2006-07 2007-08

ASSET TURN OVER (times) 2.11 1.49 1.76 1.55

Analysis

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This ratio measures how efficiently a company uses its assets. The asset turnover ratio isdecreasing. Although the return on asset for the year 2008 is highest but the asset turnoverratio is least for this year. The company is not using its assets optimally.

1.4. Return of Assets = Profit after tax 100Average Total Assets

2004-05 2005-06 2006-07 2007-08

PAT 2714.1 3273.2 4412.86 4693.1

AVG. TOTAL ASSETS

19776.

61

35253.

66 40743.05 50016.41

Analysis

This ratio is used to measure a companys success in using its assets to earn income forowners and creditors, those who are financing the business. There is a steep fall in the year2006, after that there is a satisfactory utilization of the assets as the graph shows.

1.5. Return on Equity = PAT 100

Avg. Common Shareholders equity

2004-05 2005-06 2006-07 2007-08

PAT 2714.1 3273.2 4412.86 4693.1

AVG. EQUITY SHARE HOLDER'S FUND

11098.

31

22515.

94 25079.82 20217.75

2004-05 2005-06 2006-07 2007-08

RETURN ON EQUITY(%) 24.46 14.54 17.60 23.21

Analysis

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2004-05 2005-06 2006-07 2007-08

RETURN ON ASSETS (%) 13.72 9.28 10.83 9.38


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Analysis

This ratio suggests that whether company manages to earn sufficient income to cover itsexpenses. The ratio of the company indicates that company depends much on borrowedfunds. The high interest ratio means that company depends more on debt funds.

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2004-05 2005-06 2006-07 2007-08

INTEREST COVERAGE RATIO 16.39 15.93 28.29 10.46


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3.3. Debtor turnover ratio= SalesAverage Debtors

2004-05 2005-06 2006-07 2007-08

SALES 41818.97 52476.57 71681.76 77291.23

AVG. DEBTOR 4321.93 4415.51 4736.06 4493.55

2004-05 2005-06 2006-07 2007-08

DEBTORS TURNOVER RATIO 9.68 11.88 15.14 17.20

Analysis:

This ratio indicates the number of times each year the debtors turn into cash. It shows theeffectiveness of the firms collection and credit policy. The high ratio indicates the ability offirms collection of cash from the debtors. The trend of the past three years indicates that thefirm has managed to improve its credit policy.

3.4. Average collection period= Average Debtors Sales/360

2004-05 2005-06 2006-07 2007-08

SALES 41818.97 52476.57 71681.76 77291.23

AVG. DEBTOR 4321.93 4415.51 4736.06 4493.55

Analysis

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2004-05 2005-06 2006-07 2007-08

AVG. COLLECTION PERIOD(Days) 37.21 30.29 23.79 20.93


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This ratio shows that the average collection period is going lower from 37.21 days in the year2004-05 to 20.93 days in the 2008-07.It means that lower capital is getting blocked up from20004-05 to 2008-07.It shows the improvement in the credit policy of the company.

3.5. Inventory Turnover Ratio= Cost of Goods Sold___Average Inventory

2004-05 2005-06 2006-07 2007-08

COGS 29,728.47 37,690.87 54,631.91 57,646.34

AVG. INVENTORY

5375.1

1

7353.2

1 9864.41 11471.17

2004-05 2005-06 2006-07 2007-08

INVENTORY TURNOVER(TIMES) 5.53 5.13 5.54 5.03

Analysis

This ratio is used to measure how quickly a company is selling its inventory. This ratio tellshow many times each year a firms inventory is turned over. The inventory turnover of thecompany over the period of four years has remained stable more or less.

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PART IV - CASH FLOW STATEMENT

ANALYSIS

Cash Flow Statement for the year ended March 31, 2008-2007

(Rs.Millions)

2008 2007

Cash low from operating activities

Profit before tax 6,381.5 6,045.06

Adjustments for:

Depreciation, amortisation and impairment 1,773.61 1,505.74

Other amortizations 143.49 164.76

Foreign exchange (gains)/losses (63.60) (65.30)

Interest expense net of interest capitalization 615.01 196.46

Interest income (214.67) (160.94)

Income from investments (22.85) (98.85)

(Profit)/Loss on disposal of fixed assets/long term investments (375.86) (323.15)

Diminution in value of investments written back net (168.13)

Transfer from General Reserve Employee benefits (781.54)

Operating profit before working capital changes 8,236.63 6,314.11

Adjustments for changes in :

Inventories

(1,535.93

) (1,677.60)Debtors 1,426.87 (1,005.76)

Advances 261.52 (1,047.41)

Current liabilities and provisions 3,596.82 4,102.54

Cash generated from operations 11,985.91 6,685.88

Income tax including Fringe benefit tax paid(1,280.65

) (1,356.00)

Net cash low from operating activities before extraordinary expenditure 10,705.26 5,329.88

Compensation under Voluntary retirement scheme (48.41) (330.37)

Net cash low from operating activities after extraordinary expenditure 10,656.85 4,999.51

Cash low from investing activities

Payments for assets acquisition(6,209.04

) (6,812.87)

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Proceeds on sale of fixed assets 113.65 108.49

Purchase of Investments (373.82) (50.64)

Sale/redemption of investments 474.95 817.93

Income from investments Interest 106.61 59.43

Dividend 22.85 129.39

Changes in advances(2,231.98

) (1,473.70)

Net cash low used in investing activities(8,096.78

) (7,221.97)

Cash low from financing activities

Long term borrowings Raised 3,672.1 2,162.35

Repaid (404.71) (829.95)

Changes in short term borrowings 993.32

Debenture/Loan raising expenses paid (68.94) (2.47)

Interest paid net (546.59) (181.67)

Dividend paid and tax thereon (1,792.34)Interim dividend and tax thereon (2,264.32)

Net cash low from financing activities 3,645.18 (2,908.40)

Net cash inflow/(outflow) 6,205.25 (5,130.86)

Opening cash and cash equivalents 1,952.02 7,082.88

Closing cash and cash equivalents 8,157.27 1,952.02

Net increase/(decrease) in cash and cash equivalents 6,205.25 (5,130.86)

Analysis:

Figures in the brackets represent outflow. Interest paid is exclusive of purchases ofinvestments is 5831.43 millions. Cash and cash equivalents after the adjustment ofcash credits balances related to unclaimed dividend is Rs 4491.75 millions.

The statement of cash flow reveals a net cash outflow from operations of Rs.

10705.26 millions whereas the company shows a net profit of Rs 6381.50 million.There is a sharp decrease in the inventories of the company. I.e. Rs 1535.93 millionand debtors have increased Rs 1426.87 million.

Further compensation under voluntary retirement scheme is Rs 48.41 million. And anet profit on the sale of investment is Rs 474.95 million. Profit on disposal of fixedassets would be Rs 375.86 million for the year 2008.

The conversion of Foreign Currency Convertible Notes into equity shares has notbeen considered in the above statement.Cash flows from Investing activities includes acquisition of 100% shares in Albonair

GmbH (cost Rs. 1.59 million) and Defiance Testing & Engineering Services (cost Rs.141.05 million) and disposal of 60% (Rs. 0.95 million) and 51% (Rs. 71.94 million)shares respectively therein.

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The company has used more cash in operations than all of the cash it received fromits investing and financing activities resulting into a net increase in cash.

RECOMMENDATIONS & SUGGESTIONS

Ashok Leyland is the second largest manufacturer of medium and heavycommercial vehicles (M/HCV) in India. It had a 24% market share in thedomestic medium and heavy vehicles (M&HCV) segment in FY07 and amarginal presence in the LCV segment (light commercial vehicles).Ashok Leyland is also a key player in the passenger bus segment withalmost 49% share in FY07. CVs contributed to 92% of revenues in FY07while engines and spare parts contributed to the balance.

Transportation- A structural change: The CV segment in India isgoing through a structural shift. With the government's thrust on road

development projects, road sector has gained significant advantage overrailways that has been a mainstay for transportation of coal, food grainand cement till now. If one considers the trends of the developednations, almost two-third of the non-bulk goods are transported throughroads.

Bus segment is a growth story: The bus segment has the potential towitness the exponential growth witnessed in the goods commercialvehicles during last three years. We agree with the view of themanagement about the potential that the bus segment has. Our belief

stems from the fact that the State Transport Undertakings (STUs) areoperating at significantly high utilisation levels (120% to 130% of theircapacity). Though the STUs are facing resource crunch due to numberof reasons, we believe that renewal of fleet is an eventuality in the longrun.

Aggressive expansion plans: In order to cash in on the industrygrowth story, the company has lined up an aggressive expansion planwhereby it will be more than doubling its capacity over the next 2-3years by making an investment in the region of Rs 40 bn. Included in the

expansion plan is a brand new integrated plant for 50,000 vehicles per

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annum in the state of Uttaranchal, which will not only help it save ontransportation costs but will also provide certain fiscal incentives.

Sector: The growth of the auto industry is directly linked to the growth inthe industrial activity, which in turn is a function of domestic GDPgrowth. Given the projected strong economic growth in the country, theCV sector is likely to witness robust growth rate in the long term.

Sales: Net sales of the company have averaged Rs 46 bn in the last fiveyears and are expected to climb higher, given the long-term growthprospects of the economy.

Current ratio: Ashok Leylands average current ratio during the periodFY03 to FY07 has been 1.5 times. This indicates that the company iscomfortably placed to pay off its short-term obligations, which givescomfort to its lenders.

Debt to equity ratio: A highly leveraged business is the first to get hitduring times of economic downturn, as companies have to consistentlypay interest costs, despite lower profitability. We believe that a debt toequity ratio of greater than 1 is a high risk proposition. ConsideringAshok Leylands average debt to equity ratio of 0.6 over the past fivefiscals

Long term EPS growth: We expect the company's net profits to grow ata compounded rate of around 8% over the period FY08 to FY12 (CAGRof 38% during FY02 to FY07). Based on a normal scenario, we consider

a historical compounded growth of over 20% in net profits over a 5-yearperiod as healthy for a company.

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Ratio Analysis - Ashok Leyland

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