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Leyland: Cost control, volume growth show the way

Raghuvir Srinivasan

STRONG volume growth, a tight leash on costs and a constantly improving product mix are the three main factors responsible for the good performance of Ashok Leyland Ltd (ALL) in the second quarter. In fact, it has been a strong performance on the earnings front masked only by an extraordinary charge for VRS expenditure.

Earnings before tax and extraordinary charge has shot up by a massive 68 per cent to Rs 37.68 crore in the quarter ended September 30. However, this drops to a more sedate 13 per cent growth at the post-tax level following the VRS charge and a tax burden that has more than doubled compared to the same period last year.

The increased offtake of commercial vehicles, especially goods carriers, has pushed up ALL's volumes in the second quarter by 12 per cent to 8,139 vehicles. Though overall volume has grown by 16 per cent in the first half of this fiscal, offtake of passenger vehicles is still a cause for worry - it grew by a piffling four per cent in the same period. The passenger vehicle business is one of the strengths of ALL; but for the low offtake there, ALL would have seen a higher growth in the top-line.

Much of the bottomline growth is directly attributable to the tight leash on costs - financial and manufacturing. It is interesting to note that raw material costs have actually dropped by a marginal one per cent when sales volume has shown a 12 per cent growth. This shows the extent of clamp-down on costs by the company. Ditto with financial costs, which has dropped by a sharp 24 per cent to Rs 16.3 crore (Rs 21.5 crore) in the second quarter. In fact, cost control has been a feature of ALL's performance in recent times. While it helped the company show a better-than-industry performance at a time of falling volumes, it is now adding handsomely to the bottomline when volumes are on the upswing. The upswing in the commercial vehicle industry's fortunes seems to be sustaining. Demand from the construction industry and replacement demand is keeping up volume growth even as the flat trends in passenger vehicles is acting as a drag.

Going forward, ALL appears to be on track for a similar strong earnings performance in the second-half of this fiscal. A return of volumes in passenger vehicles, along with the tremendous benefit flowing from its cost control programme, should see ALL performing better in the remaining two quarters of 2002-03.

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