Lanka Ashok Leyland’s 1H revenue tops Rs. 9 bn.

Lanka Ashok Leyland posted a net profit for the first six months of Rs 473.9 mn, down 49 % over the corresponding period in 2011/2012.

This is despite total revenue remaining at Rs 7 bn for the six months ending September 30, 2012, similar to the previous corresponding period. The main proponents to the sluggish performance are the severe cost pressures stemming from large foreign exchange losses and finance costs.

The currency depreciation earlier this year and the high interest rates at present continue to adversely affect the bottom line going into the third quarter of the fiscal year,” said Umesh Gautam, CEO, Lanka Ashok Leyland.

Administrative costs jumped 132 % to Rs194.5 mn from Rs 83.7 mn over the previous first six months, which is largely reflected by exchange rate losses over other expenses. Despite Selling and Distribution Expenses reducing by 47 % and other expenses remaining flat over the corresponding period, these are dwarfed by administrative costs which make up over 90 % of total operating costs for the company. As a result, the operating profit was down 42 % to Rs 546 mn from Rs 942.9 mn for the same period in 2011.

The finance cost grew by 436 % to Rs 72.2 mn for the first 6 months compared to Rs 13.4 mn in the previous corresponding period.

The total interest cost for full fiscal year of 2011/2012 was only Rs17.8 mn. Contribution to the government fell to Rs 132.7 mn accordingly. Notably on the balance sheet, inventories have increased over 290 % for the first six months of 2012 over the same period in 2011. Short term borrowings have increased significantly by 387 % to Rs 4.1 bn directly resulting in the significant increase in the finance cost.

Umesh Gautam explains, we forecasted things getting worse before they began to improve at the start of our fiscal year so as much as it is not surprising, we can’t avail ourselves of the magnitude of our economic position. Firstly as mentioned earlier, demand for our product has and continues to be strong. That position has not changed, however what has affected is the high interest rates and the general dearth in liquidity in the market that has become a stumbling block for customers. With regard to the exchange rate, we are still taking on losses despite the currency losing some of the volatility that plagued it earlier in the year. There is a limit to how frequently price can be revised of our product to reflect currency fluctuations.

Combine this with the fact that funding has become harder and costlier for our customers and most of them have had to wait to receive their products; it would not have been fair on them. Despite further exchange rate losses, this will be mitigated over time if the currency finds a sustainable equilibrium to the dollar.

Gautam is very confident and maintains that our finance cost is a matter of temporary concern we foresaw earlier and we will be able retire our short term borrowings at an accelerated pace once availability of money in the economy improves and interest rates start to drop.