LAL ends 2012/13 with BTP of Rs. 455 mn

Lanka Ashok Leyland ended the 2012/13 with before tax profit of Rs. 455.2mn as against LKR 1,669.5mn the previous year.

As the leading commercial vehicle provider in the country, Lanka Ashok Leyland maintained a strong demand from the private sector as well as the government.

"Our performance and results are indicative of the volatility we have faced from our private sector customers as the devaluations, import duties, high costs of borrowing or easing and liquidity restrictions have placed significant burdens on our customers and their businesses," Umesh Gautam, CEO of Lanka Ashok Leyland said.

As a result, many customers in construction sector facing economic pressures themselves have postponed their decisions to purchase which caused a decline in tipper and truck sales this year. We've seen an increase in the number of seizures by leasing companies which have created an alternative secondary market where demand for our products can be met at lower prices.

On our part, management had taken decisions to absorb the added costs as much as possible to help our customers along with provide competitive leasing facilities to them to help mitigate some of the negatives."

Against an unfavorable macroeconomic environment in 2012/13, the firm saw its net profit drop 72% for the full year to LKR 341.5mn against LKR 1,206.2mn experienced in 2011/12.

The last fiscal year commenced with a series of macroeconomic changes with an adverse and direct effect on Lanka Ashok Leyland.

The company saw its revenue drop 37% to LKR 10.4bn in 2012/13 compared to LKR 16.7bn in 2011/12 due to a fall in sales volumes of its core business operations despite seeing revenue increases from its generators & spare part segment, and vehicle repair income..

The company saw a disproportionate decline in its gross profit which fell 66% year on year to LKR 699.9mn from LKR 2.0bn in 2011/12. This represents a sharp decline in gross profit margins falling under 7% as the company took steps to absorb the increased costs from the devaluation and the import duty hike.

In lieu of the strong demand for the products and the waiting times endured by customers, the management decided to protect its customers and restrict passing on higher costs to its customers.

With a reputation for financial prudence and cost management, operational costs fell 20% while income from non-core sources increased 397% resulting in a net increase in operational profit over gross profit. Lanka Ashok Leyland benefitted from a large reversal in its VAT accumulation of LKR 229.6mn earlier this year while its non-core recurring income from lease rental grew by a promising 82% to LKR 130.3mn.

The high interest rates during the fiscal year had a significant impact on many leveraged firms and Lanka Ashok Leyland was no exception.

The finance cost constituted the single largest expenditure for the company in 2012/13 at LKR 313.8mn, up 1658% from 2011/12 where the company paid out a mere LKR 17.6mn in interest expense to banks.

Total assets fell 6% to LKR 5.9bn due to an acute 94% fall in Cash & Cash equivalents from a healthy LKR 403mn in 2011/12 to LKR 23.1mn as of 31st March 2013. The company has managed to reduce their inventory burden by 6% to LKR 4bn compared to LKR 4.3bn the previous year. Overall liabilities fell 12% to LKR 3.6bn in 2013 from LKR 4.1bn in 2012 largely due to a LKR 340mn reduction in deposits from customers while borrowings stayed constant at LKR 3.2bn over both periods.

Another key consideration that has impaired our bottom line was the unprecedented initiative by Lanka Ashok Leyland to effectively fund the supply of buses to support the Sri Lankan Transport Board and the Government by reducing the financial burden on the Treasury.

The maintenance and improvement of a nation's transport infrastructure (buses and railways) is a core responsibility and priority of any government across the world, and is often a non-profitable and necessary endeavor. As treasury faces such heavy burdens that it cannot meet the required level of investment without jeopardizing other focuses of government investment. Lanka Ashok Leyland, whose history and success has been heavily intertwined with the economic progress of the Island for over two decades, decided to step up and take a very bold and long-term stake in Sri Lanka's transport by supplying the Sri Lanka Transport Board with much needed buses with no initial payment on earn and pay basis.

The revenue from these buses would go into their maintenance, to pay salaries and lastly to LAL. As the market leader with close to 90% market share in passenger transport in the country, our management felt a moral imperative as a responsible corporate entity to come forward at a crucial time in Sri Lanka's progression to ease the burden on the treasury with such an investment which can be surmised as a very risky win-win situation for the company.

"Going back to our fiscal performance, how this translates to our bottom line is that Lanka Ashok Leyland has committed over LKR 1bn to the CTB under this initiative paid up fully from our own working capital.

As a result, we've had to borrow this amount to meet our working capital requirements and incur the largest finance expense in our history due to the high interest rates this year."

With regard to the future outlook Gautam highlighted that "the worst is behind us for the near future. The volatility with regard to the devaluation has largely subsided and interest rates may slide towards the latter part of the year which will be a welcome relief."

" I think a priority will look at overturning the decline in our margins and reducing our burdensome inventory level and with that, all associated costs and borrowings attached to our inventory."

"We are very excited to roll out our newest offering, the Dost, a product of a new joint-venture between Ashok Leyland and Nissan combining the best of Japanese and Indian technology."

The Dost is our first in a new range of products to compete in the light commercial vehicle market in Sri Lanka, which despite a very low-key launch sold out on its first day in Sri Lanka."