Currency depreciation, higher import costs hinder Lanka Ashok Leyland bottom line

28 January 2016 06:37 am - 0     - {{hitsCtrl.values.hits}}

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Lanka Ashok Leyland recorded a top line of Rs.7.4 billion, a 27 percent increase over the Rs.5.8 billion recorded for the same period last year. The third quarter recorded a turnover of Rs.2.7 billion. Robust demand from the private sector drove the sales volume up 40 percent year-on-year (YoY). P r o f i t a b i l i t y w a s squeezed as import costs rose with the weakening r u p e e a n d s o m e additional provisioning resulted in a profit before tax of Rs.242.5 million, a 51 percent decrease on 2014/15.

The gross profit margin f e l l from 11 percent to 8 percent while the net profi t m a r g i n fell to 2 percent from 6 percent for the same period last year. The depreciation of the rupee and lack of currency stability is a key factor for the company. “Our increasing import costs have eroded our margins and the rate of the Sri Lanka rupee depreciation outpaces our ability to implement price revisions. Additionally, we cannot burden our customers with the higher costs so therefore we try and absorb as much of it as possible,” Lanka Ashok Leyland CEO Umesh Gautam said.

“Our net profit margin of 2 percent reflects this fact and is not particularly healthy but we hope that the currency will stabilize toward the latter part of the year if no other external shock materializes,” he added. The company continues to have a sizeable outstanding amount due from the government sector, which has put pressure on its working capital, resulting increased borrowings, which rose 22 percent to Rs.2 billion. Finance costs, net of exchange rate losses and gains remained flat YoY at Rs.37.8 million. “We are thrilled with the demand response from the private sector despite the political changes in 2015. Again the volatility we anticipated after the general election has not been significant and our robust sales performance is indicative of that,” Gautam noted. Meanwhile, the company has been able to increase its sales in the light commercial vehicle segment as the sales jumped 104 percent YoY.

Newly launched minibus

The company said it had built up its inventory levels since 1Q14 and this would act as a hedge against the USD volatility. If the volatility continues the company may cut down its imports till it becomes stable again. “Looking ahead, while the currency volatility remains our biggest concern, we have a tapered expectation for 2016 given the uncertain external situation and the fiscal challenges that are posed to Sri Lanka’s finances. With interest rates expected to rise and restriction of 70 percent LTV on leasing, it is yet to see what effects it will have on demand for commercial vehicles which up to now has been surprisingly robust and better than expected,” Gautam said.
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