A

REPORT ON

ANALYSIS OF FINANCIAL STATEMENTS

OF

ASHOK LEYLAND

SUBMITTED BY: GAURANG PATEL

ROLL NO. : 08075
BATCH No.: 2008-10

SUBMITTED TO: PROF. PARAG RIJWANI

FACULTY – FINANCE AREA

N. R. INSITITUTE OF BUSINESS MANAGEMENT,

GLS Campus, Ahmedabad.
 PRFEACE
As the world is growing rapidly, the businesses are also moving to become the huge one. And by that
result, more and more people want to become a master in these businesses. The main purpose in the
finance field is to know how the financial analysis is done. We all know that finance is the blood of any
business and without it no business can run. Financial analysis of a company is very difficult and the
most important task and by doing this I am able to know the whole financial position and financial
structure of the company.

Simply by looking at how much cash a company has does not provide enough information. The
financial statements need to be analyzed to measure a company’s performance and to compare it
with other firm’s in the same industry. The resulting information is intended to be useful to owners,
potential investors, creditors, analysts, and others as the analysis evaluates the past performance,
future potential and financial position of the firm.

This report is an analysis of financial statements of Ashok Leyland. This report has been prepared
with an objective to develop analytical skills required to interpret the information (explicit as well as
implicit) provided by the financial statements and to measure the company’s performance during the
past few years. The financial statements are analyzed using traditional evaluation techniques such as
horizontal analysis, vertical analysis and trend analysis. Details are given in chapter 3 of this report.
Ratios are an important tool in analyzing the financial statements and so in chapter 4, 5 and 6 ratios
are analyzed to measure the company’s profitability, solvency & liquidity. Sincere attempts have been
made to make this report error free but if any errors and omissions are found then I apologize for that.

Gaurang Patel

ii
 ACKNOWLEDGEMENT

This is a great opportunity as well as great honor to submit this Project to you, I am firstly thanks to
my college to give me this kind of course outline and makes me grateful by doing this project.

I sincerely thank all who have contributed to success this Report. Firstly I thanks to our faculty, Mr.
Parag Rijwani for makes us able to doing this kind of work and giving us new experience. And help us
a lot whenever we needed. He also provides an important data and makes us to understand the terms
and theory of Finance as well as gives us guidance.

Last but not the least, I am grateful to our institute, NR Institute of Business Management and Gujarat
Law Society including all their members and participants for providing such excellent infrastructure
equipped with ultra modern facilities which served as a great source of convenience and information.

iii
 EXECUTIVE SUMMARY
The Company has set itself the task of consolidating and enhancing its position in the Indian
commercial vehicle market, both in terms of volumes as well as in customer satisfaction, in
the medium term. The Company is executing various initiatives in terms of process and
product improvements to achieve this goal.

After six straight years of positive growth rate, domestic demand for M&HCVs showed a
decline during FY08 and stood lower by 2% YoY. Ashok Leyland also suffered a similar
decline in its M&HCV portfolio.

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change

Net sales 22,910 25,620 11.8% 71,682 77,291 7.8%
Expenditure 20,261 22,663 11.9% 64,655 69,251 7.1%
Operating profit (EBDITA) 2,649 2,957 11.6% 7,027 8,040 14.4%
EBDITA margin (%) 11.6% 11.5% 9.8% 10.4%
Other income 169 116 -31.3% 708 740 4.5%
Interest (net) 19 91 384.8% 53 497 832.9%
Depreciation 481 486 1.0% 1,506 1,774 17.8%
Profit before tax 2,318 2,496 7.7% 6,176 6,509 5.4%
Extraordinary income/(expense) (30) (22) (131) (84)
Tax 573 669 16.7% 1,632 1,732 6.1%
Profit after tax/(loss) 1,715 1,806 5.3% 4,413 4,693 6.4%
Net profit margin (%) 7.5% 7.0% 6.2% 6.1%
No. of shares (m) 1,323.9 1,330.3 1,323.9 1,330.3
Diluted earnings per share (Rs)* 3.3 3.5
Price to earnings ratio (x)** 11.5

All segments and geographies combined, and then volumes for the full year remained flat.
Here, apart from passenger M&HCVs, sales of LCV and exports also helped prop up

iv
volumes. In value terms, growth stood at 8% YoY for the full year, thanks mainly to improved
product mix and a series of price hikes that the company undertook during the fiscal.

Income from vehicles was Rs 68,819 mn. 4.1% over the previous year level of Rs 66,092 mn.

In addition the Company made investments in a vehicle manufacturing / assembly plant at

Ras Al Khaimah, Design Engineering services business viz., Defiance Testing and
Engineering Services Inc. USA and Albonair GmbH, Germany which is engaged in the
development of fuel emission treatment / control systems.

v
 TABLE OF CONTENTS

TOPIC PAGE NO.

Preface ii
Acknowledgment iii
Executive Summary iv

Chapter – 1 Company Profile 1

About Ashok Leyland 1
Product Range 3

Chapter – 2 Concept of Financial Statement Analysis 4

Chapter – 3 Traditional Performance Evaluation Techniques

3.1 Horizontal Analysis 8
3.2 Vertical Analysis 21
3.3 Trend Analysis 24

Chapter – 4 Analysis of Profitability 26

4.1 Gross Profit Ratio
4.2 Net Profit Ratio
4.3 Asset Turnover
4.4 Return on Asset
4.5 Return on Equity

Chapter – 5 Analysis of Solvency 29

5.1 Debt to Equity
5.2 Interest Coverage Ratio

Chapter – 6 Analysis of Liquidity 31

6.1 Current Ratio
6.2 Quick Ratio
6.3 Debtor Turnover Ratio
6.4 Average Collection Period
6.5 Inventory Turnover

Chapter – 7 Cash flow statement analysis 34

Chapter – 8 Recommendations & Suggestion 40

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 CHAPTER-1
COMPANY PROFILE

About Ashok Leyland

Ashok Leyland is a commercial vehicle manufacturing company based in Chennai, India. It is the
second largest commercial vehicle company in India in the medium and heavy commercial vehicle
(M&HCV) segment with a market share of 28% (2007-08).Ashok Leyland is a market leader in the bus
segment.

The company was established in 1948 as Ashok Motors, with an aim to assemble Austin cars.
Manufacturing of commercial vehicles was started in 1955 with equity contribution from the British
company, Leyland Motors. Today the Company is the flagship of the Hinduja Group, a British-based
and Indian originated transnational conglomerate.

Ashok Leyland is a technology leader in the commercial vehicles sector of India. Its annual turnover
exceeded USD 2 billion in 2007-08. Selling close to around 83,000 medium and heavy vehicles in
2007-08, Ashok Leyland is India's largest exporter of medium and heavy duty trucks out of India. It is
also one of the largest Private Sector Employers in India - with about 12,000 employees working in 6
factories and offices spread over the length and breadth of India

Over the years, Ashok Leyland vehicles have built a reputation for reliability and ruggedness. This
was mainly due to the product design legacy carried over from British Leyland.

In the populous Indian metros, four out of the five State Transport Undertaking (STU) buses come
from Ashok Leyland. Some of them like the double-decker and vestibule buses are unique models
from Ashok Leyland, tailor-made for high-density routes.

In 1987, the overseas holding by Land Rover Leyland International Holdings Limited (LRLIH) was
taken over by a joint venture between the Hinduja Group, the Non-Resident Indian transnational
group and IVECO Fiat SpA, part of the Fiat Group and Europe's leading truck manufacturer. This
resulted in Ashok Leyland launching the "Cargo" range of trucks. These vehicles used Iveco engines
and for the first time AL vehicles had factory-fitted cabs. The Cargo trucks are no longer in production
and the use of Iveco engine was discontinued, but the Cargo cab continues to be used on the eComet
range of trucks.

Ashok Leyland also had a collaboration with Hino Motors, Japan from whom the technology for the H-
series engines was bought. Many indigenous versions of H-series engine was developed with 4 and 6
cylinder and also conforming to BS2 and BS3 emission norms in India. These engines proved to be
extremely popular with the customers primarily for their excellent fuel efficiency. Most current models
of Ashok Leyland come with H-series engines.

In the journey towards global standards of quality, Ashok Leyland reached a major milestone in 1993
when it became the first in India's automobile history to win the ISO 9002 certification. The more
comprehensive ISO 9001 certification came in 1994, QS 9000 in 1998 and ISO 14001 certification for
all vehicle manufacturing units in 2002. In 2006, Ashok Leyland became the first automobile company
in India to receive the TS16949 Corporate Certification.

1
Branch office:

No. 1 Sardar Patel Road,

Guindy,
Chennai – 600 032,
India.
Tel: 0091 44-2220 6000
Fax: 0091 44-2220 6000

Management Team
Ashok Leyland is currently headed by Mr R. Seshasayee who is the Managing Director since 1998.
Under his leadership, the company has expanded from a purely India-centric company to a company
with global focus. Mr. Seshasayee was also the President of CII (Confederation of Indian Industry),
the apex body representing Indian Industry for the year 2006-2007.

The following are the other functional heads at Ashok Leyland

1. Mr. Vinod Dasari - Chief Operating Officer.

2. Mr. K. Sridharan - Chief Financial Officer.
3. Mr. N. Mohanakrishnan - Executive Director - Internal Audit
4. Mr. Rajive Saharia - Executive Director - Marketing
5. Mr. Shekar Arora - Executive Director - Human Resources
6. Mr. B. M. Udayashankar - Executive Director - Manufacturing
7. Mr. Anup Bhat - Executive Director - Strategic Sourcing
8. Mr. Rajindar Malhan - Executive Director - International Operations
9. Mr. R.R.G.Menon - Executive Director - Product Development
10. Mr. A. K. Jain - Executive Director - Project Planning

Achievements
• Eight out of ten metro state transport buses in India are from Ashok Leyland. At60 million
passengers a day, Ashok Leyland buses carry more people than the entire Indian rail network.

• Ashok Leyland has a near 98.5% market share in the Marine Diesel Engines Markets in India.

• In 2002, all the vehicle-manufacturing units of Ashok Leyland were ISO 14001 certified with
Environmental Management System.

• In the 2006-07 financial year, the company sold a record 83,101 vehicles which is an all time
high for Ashok Leyland.

• It is one of the leading suppliers of defense vehicles in the world and also the leading supplier
of logistics vehicles to the Indian Army.

2
Products
• Luxura
• i-Bus
• Viking BS-I - city bus
• Viking BS-II - city bus
• Viking BS-III -city bus
• Cheetah BS-I
• Cheetah BS-II
• Panther
• 12 M
• Stag Mini
• Stag CNG
• 222 CNG
• Lynx
• Double Decker
• Vestibule
• Airport Tarmac Coach
• Olympian
• Gensets

Goods segment
• Bison Haulage
• Tusker Super 1616
• Comet CO 1611
• 1613 H
• Comet Gold 1613
• Comet Tipper(4X2)
• Taurus 2516- 6 X 4 Tipper
• 2214
• Bison Tipper
• Tusker Super 2214 - 6 X 2
• Tusker Gold 2214 (6X2)
• Taurus 2516 - 6X4
• 2516 H (6X2)
• Taurus 2516 - 6 X 2
• 4018 Tractor
• Artik 30.14 Tractor
• Tusker Turbo Tractor 3516
• ecomet 912
• ecomet 111i
• 4921

3
 CHAPTER-2
CONCEPTS

Financial Statement Analysis

Objectives:
 Assessment of the firm’s past, present and future financial conditions
 Done to find firm’s financial strengths and weaknesses
 Primary Tools:
• Financial Statements
• Comparison of financial ratios to past, industry, sector and all firms

Financial Statements:
 Balance Sheet
 Income Statement
 Cash flow Statement
 Statement of Retained

Sources of Data:
 Annual reports
 Via mail, SEC or company websites
 Published collections of data
 Investment sites on the web

Techniques of Financial Statement Analysis:

 Horizontal Analysis
 Vertical Analysis
 Trend Analysis
 Ratio Analysis

Horizontal Analysis:
 This technique is also known as comparative analysis.
 It is to calculate amount changes & percentage changes from the previous years to current
years.

Trend Analysis:
 It is carried out by first assigning a value of 100 to the financial statement items in a past
financial year used as a base year and then expressing financial statement items in the
following year as a percentage of the base year value.

Vertical Analysis:
 Vertical/Cross-sectional/Common size statements came from the problems in comparing the
financial statements of firms that differ in size.

4
  In the balance sheet, for example, the assets as well as the liabilities and equity are each
expressed as a 100% and each item in these categories is expressed as a percentage of the
respective totals.
 In the common size income statement, turnover is expressed as 100% and every item in the
income statement is expressed as a percentage of turnover (sales).
 From the vertical analysis, an analyst can compare the percentage mark-up of asset items
and how they have been financed. The strategies may include increase/decrease the holding
of certain assets. The analyst may as well observe the trend of the increase in the assets and
liabilities over several years.

Ratio Analysis:
Objectives to Ratio Analysis:

 Standardize financial information for comparisons

 Evaluate current operation
 Compare performance with past performance
 Compare performance against other firms or industry standards
 Study the efficiency of operations
 Study the risk of operations

Rationale behind Ratio Analysis:

 A firm has resources

 It converts resources into profits through

• production of goods and service

• sales of goods and services

 Ratios

• Measure relationships between resources and financial flows

• Show ways in which firm’s situation deviates from

 Its own past

 Other firms
 The industry
 All firms

 Ratios can be classified into the following categories:

• Profitability Ratio
• Liquidity Ratio
• Solvency Ratio

5
Profitability Ratio:
 Profitability ratios measure the overall performance of the firm by determining the
effectiveness of the firm in generating profit, and are calculated by establishing relationship
between profit figures on the one hand, and sales and assets on the other.

Return on Total Assets:

This is measure of profitability from a given level of investments. It is an excellent indicator of overall
performance of a company. It is also called return on capital employed or return on investment. It
measures how efficiently the capital is employed.

Return on Total Assets = Net Income after Tax / Average Total Assets *100

Return on Equity:

It measures the profitability of equity funds invested in firm. It is regarded as a very important measure
because it reflect the productivity of the ownership capital employed in the firm

Return on Equity = Net Income after Tax - Dividend on Preference Share / Average
Shareholders Equity *100

Solvency Ratio:
The capacity of a company to discharge its obligations towards long-term lender indicates the
financial strength and ensures its long-term survival. It is important for an analyst to study the
solvency of a company.

Debt Coverage Ratio

The ratio measures the capacity of a company to pay the installment of the principal due and the
interest liability it has incurred on its long-term borrowing, out of its cash profits. It is also known as
Times-debt service Covered.

Debt Coverage Ratio = Internally Generated Funds / Average Debt

Interest Cover Ratio

The ratio measures the capacity of a company to pay the interest liability it has incurred on its long-
term borrowing, out of its cash profits. It is also known as Times-interest Covered.

Interest Cover Ratio = Earning Before Interest & Tax / Interest Expenses

Liquidity Ratio:

6
Liquidity is the ability of a company to meet its short-term obligations when fall due. A company should
have enough cash % other current assets, which can be converted in to cash so that it can pay its
suppliers & lenders on time.

Current Ratio

Current ratio indicates the firm’s ability to pay its current liabilities, i.e. day-to-day financial obligations.
It shows the strength of credit, strength of working capital & capacity to carry on effective operations.
Higher ratio i.e. more than 2:1 indicates sound solvency position.

Current Ratio = current Assets / current liabilities.

Debtor's Turnover

This ratio shows how many times sundry debtors (accounts receivable) turn over during the year. It is
defined as:

Debtor's Turnover = Average Debtors / Sales

7
 CHAPTER-3
TRADITIONAL PERFORMANCE
EVALUATION TECHNIQUES

3.1 Horizontal Analysis

3.1.1 Horizontal Analysis of Balance Sheet

for the year 2008-07

Table 1 Horizontal Analysis of Balance Sheet

For the year 2008-07

(Rs in millions)
Particulars Mar, 08 Mar, 07 Change Change
(Rs) (Rs) (%)

Sources of funds

A) Share Capital 1330.34 1323.87 6.47 0.49%

B) Reserves and Surplus 20159.48 17621.81 2537.67 14.40%
Total 21489.82 18945.68 2544.14 13.43%

Loan Funds:
A) Secured Loans 1902.4 3602.16 -1699.76 -47.19%
B) Unsecured Loans 6972.61 2801.82 4170.79 148.86%
Total 8875.01 6403.98 2471.03 38.59%

Deferred Tax Liability 2538.2 1969.29 568.91 28.89%

TOTAL 32903.03 27318.95 5584.08 20.44%

Application of Funds

Fixed Assets:
A) Gross Block 29424.38 26201.97 3222.41 12.30%
B) Less: Depreciation 14168.88 13131.64 1037.24 7.90%
C) Net Block 15255.5 13070.33 2185.17 16.72%

8
E) Capital work-in progress 5292.45 2374.91 2917.54 122.85%

Investments 6099 2210.94 3888.06 175.86%

Current assets, loans and
advances
A) Inventories 12239.14 10703.21 1535.93 14.35%
B) Sundry debtors 3758.35 5228.75 -1470.4 -28.12%
C) Cash & bank balances 4513.7 4349.39 164.31 3.78%
D) Loans & advances 8241.37 6695.79 1545.58 23.08%
1,775.4
Total 28752.56 26977.14 2 6.58%

Less: Current liabilities and

provisions -
2,750.8
A) Liabilities 19267.09 16516.25 4 16.66%
2,410.0
B) Provisions 3452.31 1042.3 1 231.22%
5,160.8
Total 22719.4 17558.55 5 29.39%
(3,385.4
Net current assets 6033.16 9418.59 3) -35.94%

-
(21.2
Misc. Expenses 222.92 244.18 6) -8.71%

-
5,584.0
TOTAL 32903.03 27318.95 8 20.44%

9
 Chart 1: Horizontal Analysis of Balance Sheet
For 2008-07

10
3.1.2. Horizontal Analysis of Balance Sheet
For the year 2007-06

Table 2 Horizontal Analysis of Balance Sheet

For the year 2007-06

(Rs in millions)
Particulars Mar, 07 Mar, 06 Change Change
(Rs) (Rs) (%)

Sources of funds

A) Share Capital 1323.87 1221.59 102.28 8.37%

B) Reserves and Surplus 17621.81 12902.94 4718.87 36.57%
Total 18945.68 14124.53 4821.15 34.13%

Loan Funds:
A) Secured Loans 3602.16 1846.91 1755.25 95.04%
B) Unsecured Loans 2801.82 5072.37 -2270.55 -44.76%
Total 6403.98 6919.28 -515.3 -7.45%

Deferred Tax Liability 1969.29 1796.89 172.4 9.59%

TOTAL 27318.95 22840.7 4478.25 19.61%

Application of Funds

Fixed Assets:
A) Gross Block 26201.97 21384.99 4816.98 22.53%
B) Less: Depreciation 13131.64 11952.28 1179.36 9.87%
C) Net Block 13070.33 9432.71 3637.62 38.56%
E) Capital work-in progress 2374.91 1414.17 960.74 67.94%

Investments 2210.94 3681.78 -1470.84 -39.95%

Current assets, loans and

advances
A) Inventories 10703.21 9025.61 1677.6 18.59%
B) Sundry debtors 5228.75 4243.37 985.38 23.22%

11
C) Cash & bank balances 4349.39 6028.76 -1679.37 -27.86%
D) Loans & advances 6695.79 3026.39 3669.4 121.25%
Total 26977.14 22324.13 4,653.01 20.84%

Less: Current liabilities and

provisions -
A) Liabilities 16516.25 11468.95 5,047.30 44.01%
(1,573.91
B) Provisions 1042.3 2616.21 ) -60.16%
Total 17558.55 14085.16 3,473.39 24.66%
Net current assets 9418.59 8238.97 1,179.62 14.32%
-
Misc. Expenses 244.18 73.07 171.11 234.17%
-
TOTAL 27318.95 22840.7 4,478.25 19.61%

Chart 2 Horizontal Analysis of Balance Sheet

For the year 2007-06

3.1.3 Horizontal Analysis of Balance Sheet

for the year 2006-05

12
 Table 3 Horizontal Analysis of Balance Sheet
For the Year 2006-05

(Rs in millions)
Particulars Mar, 06 Mar, 05 Change Change
(Rs) (Rs) (%)

Sources of funds

A) Share Capital 1221.59 1189.29 32.3 2.72%

B) Reserves and Surplus 12902.94 10489.36 2413.58 23.01%
Total 14124.53 11678.65 2445.88 20.94%

Loan Funds:
A) Secured Loans 1846.91 2634.96 -788.05 -29.91%
B) Unsecured Loans 5072.37 6169.1 -1096.73 -17.78%
Total 6919.28 8804.06 -1884.78 -21.41%

Deferred Tax Liability 1796.89 1708.48 88.41 5.17%

TOTAL 22840.7 22191.19 649.51 2.93%

Application of Funds

Fixed Assets:
A) Gross Block 21384.99 20022.5 1362.49 6.80%
B) Less: Depreciation 11952.28 11084.04 868.24 7.83%
C) Net Block 9432.71 8938.46 494.25 5.53%
E) Capital work-in progress 1414.17 851.55 562.62 66.07%

Investments 3681.78 2291.9 1389.88 60.64%

Current assets, loans and advances

A) Inventories 9025.61 5680.81 3344.8 58.88%
B) Sundry debtors 4243.37 4587.66 -344.29 -7.50%
C) Cash & bank balances 6028.76 7966.82 -1938.06 -24.33%
D) Loans & advances 3026.39 3337.34 -310.95 -9.32%
751.5
Total 22324.13 21572.63 0 3.48%

Less: Current liabilities and provisions

13
 -
1,857.0
A) Liabilities 11468.95 9611.87 8 19.32%
571.4
B) Provisions 2616.21 2044.8 1 27.94%
2,428.4
Total 14085.16 11656.67 9 20.83%
(1,676.9
Net current assets 8238.97 9915.96 9) -16.91%

-
(120.2
Misc. Expenses 73.07 193.32 5) -62.20%

-
649.5
TOTAL 22840.7 22191.19 1 2.93%

Chart 3 Horizontal Analysis of Balance Sheet

For the Year 2006-05

3.1.4 Horizontal Analysis of Income Statement

For the year 2008-07

14
 Table 4 Horizontal Analysis of Income Statement
For the year 2008-07

(Rs in millions)
Particulars Mar, 08 Mar, 07 Change Change
(Rs) (Rs) (Rs) (in %)

Income

Sales less returns 77,291.23 71,681.76 5,609.47 7.83%

Other Income 739.99 708.03 31.96 4.51%
Total Income 78,031.22 72,389.79 5,641.43 7.79%

Expenditure
Cost of material 57,646.34 54,631.91 3,014.43 5.52%
Employee Expenses 6,162.00 4,807.00 1,355.00 28.19%
Other Expenses 5,443.00 5,216.00 227.00 4.35%
Financial expenses 497.4 53.32 444.08 832.86%
Depreciation 1773.61 1505.74 267.87 17.79%
Total Expenditure 71,522.35 66,213.97 5,308.38 8.02%

Profit before tax 6381.5 6045.06 336.44 5.57%

provision for taxation - current tax 1014 1350.5 -336.50 -24.92%
- Deferred tax 604.4 230.2 374.20 162.55%
- Fringe benefit tax 70 51.5 18.50 35.92%
Profit after tax 4693.1 4412.86 280.24 6.35%

Balance profits carried to balance 5022.74 3616.86 1,405.88 38.87%

sheet

Chart 4 Horizontal Analysis of Income Statement

For the Year 2007-06

15
3.1.5 Horizontal Analysis of Income Statement
For the Year 2007-06

Table 5 Horizontal Analysis of Income Statement

For the Year 2007-06

16
 (Rs in millions)
Particulars Mar, 07 Mar, 06 Change Change
(Rs) (Rs) (Rs) (in %)

Income

Sales less returns 71,681.76 52,476.57 19,205.19 36.60%

Other Income 708.03 329.74 378.29 114.72%
Total Income 72,389.79 52,806.31 19,583.48 37.09%

Expenditure
Cost of material 54,631.91 37,690.87 16,941.04 44.95%
Employee Expenses 4,807.00 4,038.00 769.00 19.04%
Other Expenses 5,216.00 5,347.00 -131.00 -2.45%
Financial expenses 53.32 164.53 -111.21 -67.59%
Depreciation 1505.74 1260.06 245.68 19.50%
Total Expenditure 66,213.97 48,500.46 17,713.51 36.52%

Profit before tax 6045.06 4523 1,522.06 33.65%

provision for taxation - current tax 1350.5 1130.5 220.00 19.46%
- Deferred tax 230.2 72.3 157.90 218.40%
- Fringe benefit tax 51.5 47 4.50 9.57%
Profit after tax 4412.86 3273.2 1,139.66 34.82%

Balance profits carried to balance 3616.86 2303.7 1,313.16 57.00%

sheet

Chart 5 Horizontal Analysis of Income Statement

For the Year 2007-06

17
3.1.6 Horizontal Analysis of Income Statement
For the Year 2006-05

Table 6 Horizontal Analysis of Income Statement

For the Year 2006-05

18
 (Rs in millions)
Particulars Mar, 06 Mar, 05 Change Change
(Rs) (Rs) (Rs) (in %)

Income

Sales less returns 52,476.57 41,818.97 10,657.60 25.49%

Other Income 329.74 537.55 -207.81 -38.66%
Total Income 52,806.31 42,356.52 10,449.79 24.67%

Expenditure
Cost of material 37,690.87 29,728.47 7,962.40 26.78%
Employee Expenses 4,038.00 3,541.00 497.00 14.04%
Other Expenses 5,347.00 4,321.00 1,026.00 23.74%
Financial expenses 164.53 27.98 136.55 488.03%
Depreciation 1260.06 1092.14 167.92 15.38%
Total Expenditure 48,500.46 38,710.59 9,789.87 25.29%

Profit before tax 4523 3550.1 972.90 27.40%

provision for taxation - current tax 1130.5 895 235.50 26.31%
- Deferred tax 72.3 -59 131.30 -222.54%
- Fringe benefit tax 47 0 47.00
Profit after tax 3273.2 2714.1 559.10 20.60%

Balance profits carried to balance 2303.7 1784.13 519.57 29.12%

sheet

Chart 6 Horizontal Analysis of Income Statement

For the Year 2006-05

19
3.2 Vertical Analysis

3.2.1 Vertical Analysis of Balance Sheet

20
 Table 7 Vertical Analysis of Balance Sheet

(Rs in millions)
Particulars Mar, 08 Mar, 07 Mar,06 Mar,05

Sources of funds
Shareholders’ funds 21489.82 18945.68 14124.53 11678.65
(%) 65.31% 69.35% 61.84% 52.63%
Loan Funds: 8875.01 6403.98 6919.28 8804.06
(%) 26.97% 23.44% 30.29% 39.67%
TOTAL 32903.03 27318.95 22840.7 22191.19
(%) 100% 100% 100% 100%

Application of Funds
Fixed Assets: 15255.5 13070.33 9432.71 8938.46
(%) 46.37% 47.84% 41.30% 40.28%
Current assets, loans and advances 28752.56 26977.14 22324.13 21572.63
(%) 87.39% 98.75% 97.74% 97.21%
Less: Current liabilities and provisions 22719.4 17558.55 14085.16 11656.67
(%) 69.05% 64.27% 61.67% 52.53%
TOTAL 32903.03 27318.95 22840.7 22191.19
(%) 100% 100% 100% 100%

Chart 7 Vertical Analysis of Balance Sheet

For the Year 2008

21
 Chart 8 Vertical Analysis of Balance Sheet
For the Year 2007

Chart 9 Vertical Analysis of Balance Sheet

For the Year 2006

22
 Chart 10 Vertical Analysis of Balance Sheet
For the Year 2005

3.3 Trend Analysis

Table 9 Trend Analysis of Balance Sheet

23
 (Rs in millions)
Particulars Mar,05 Mar,06 Mar, 07 Mar, 08

Sources of funds
Shareholders’ funds 11678.65 14124.53 18945.68 21489.82
(%) 52.63% 61.84% 69.35% 65.31%
Loan Funds: 8804.06 6919.28 6403.98 8875.01
(%) 39.67% 30.29% 23.44% 26.97%
TOTAL 22191.19 22840.7 27318.95 32903.03
(%) 100% 100% 100% 100%

Application of Funds
Fixed Assets: 8938.46 9432.71 13070.33 15255.5
(%) 40.28% 41.30% 47.84% 46.37%
Current assets, loans and advances 21572.63 22324.13 26977.14 28752.56
(%) 97.21% 97.74% 98.75% 87.39%
Less: Current liabilities and provisions 11656.67 14085.16 17558.55 22719.4
(%) 52.53% 61.67% 64.27% 69.05%
TOTAL 22191.19 22840.7 27318.95 32903.03
(%) 100% 100% 100% 100%

Chart 11 Trend Analysis of Balance Sheet

Sources of Funds

24
 Chart 12 Trend Analysis of Balance Sheet
Application of funds

4. ANALYSIS OF PROFITABILITY

25
Profitability Ratios
To analyze the profitability of a company profitability ratios are used. These ratios measure the
operating or income performance of a company. The goal of a business is to make a profit, so this
type of ratio examines how well a company is meeting that goal. The commonly used ratios 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

12090. 14785. 19,644.
GROSS PROFIT 5 7 17,049.85 89
41818. 52476. 77291.
NET SALES 97 57 71681.76 23
PAT 2714.1 3273.2 4412.86 4693.1
19776. 35253. 50016.
AVG. TOTAL ASSETS 61 66 40743.05 41
AVG. EQUITY SHARE HOLDER'S 11098. 22515. 20217.
FUND 31 94 25079.82 75

Chart 13 Profitability Ratio Analysis

26
4.1. Gross Profit Ratio = Gross Profit × 100
Net Sales
2004-05 2005-06 2006-07 2007-08
12090. 14785. 17,049.8 19,644.8
GROSS PROFIT 5 7 5 9
41818. 52476.
NET SALES 97 57 71681.76 77291.23

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

GROSS 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% to 23.79% in
the financial year 2006/07. This shows that a company is loosing its productivity in maintaining its
gross profit margin. In 2007-08 the ratio again slightly been increased from 23.79 to 25.42.

4.2. Net Profit = PAT × 100

Sales
2004-05 2005-06 2006-07 2007-08
PAT 2714.1 3273.2 4412.86 4693.1
41818. 52476.
NET SALES 97 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 year 2007/08
which shows that there is increased amount of expenses in the form that increasing in the prices of
row material.

4.3. Assets Turnover Ratio = Net Sales

Avg. Total Assets

2004-05 2005-06 2006-07 2007-08
19776. 35253.
AVG. TOTAL ASSETS 61 66 40743.05 50016.41
41818. 52476.
NET SALES 97 57 71681.76 77291.23

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

27
 ASSET TURN OVER (times) 2.11 1.49 1.76 1.55

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

4.4. Return of Assets = Profit after tax × 100

Average Total Assets
2004-05 2005-06 2006-07 2007-08
PAT 2714.1 3273.2 4412.86 4693.1
19776. 35253.
AVG. TOTAL ASSETS 61 66 40743.05 50016.41

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

RETURN ON ASSETS (%) 13.72 9.28 10.83 9.38

Analysis
This ratio is used to measure a company’s success in using its assets to earn income for owners and
creditors, those who are financing the business. There is a steep fall in the year 2006, after that there
is a satisfactory utilization of the assets as the graph shows.

4.5. 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
11098. 22515.
AVG. EQUITY SHARE HOLDER'S FUND 31 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

The ROE of the company is 42.46% in the 2004/05 which has been decreased to 17.60% in the
2006/07 and then slightly increased to 23.21% in the 2008/07.Also one point here to be noted is that
ROE of the company is higher than the ROA, which may be due to the concept called trading on
equity.

28
 5. ANALYSIS OF SOLVENCY

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

8804.0 6919.2 8875.0
SECURED+UNSECURED LOANS 6 8 6403.98 1
11678. 14124. 21489.
EQUITY SHARE HOLDER'S FUND 65 53 18945.68 82
3882.8 4594.1 7197.0
PBIT 7 8 6402.11 6
INTEREST ON LONG TERM DEBT 236.94 288.33 226.29 688.19

Chart 14 Solvency Ratio Analysis

5.1. Debt - Equity Ratio = Loan funds

Total shareholders

29
 2004-05 2005-06 2006-07 2007-08
DEBT TO EQUITY RATIO 0.75 0.49 0.34 0.41

Analysis
This ratio is used to compare the amount of debt a company has with the amount the owners have
invested in the company. It compares the amount of creditors’ claims to the owners’ claims to the
assets of the firm. Trend shows that in 2005 the company was highly leverage but after it has
managed to control this ratio in the year 2006 and 2007.

5.2. Interest coverage ratio= Profit before interest & tax

Interest expense

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

INTEREST COVERAGE RATIO 16.39 15.93 28.29 10.46

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

30
 6. ANALYSIS OF LIQUIDITY

Liquidity Ratios:

LIQUIDITY RATIO Rs in millions

PARTICULARS 2004-05 2005-06 2006-07 2007-08
21572. 22324. 28752.
CURRENT ASSETS 63 13 26977.14 56
11656. 14085. 22719.
CURRENT LIABILITIES 67 16 17558.55 4
15891. 13298. 16513.
QUICK ASSETS 82 52 16273.93 42
SALES 41818.97 52476.57 71681.76 77291.23
AVG. DEBTOR 4321.93 4415.51 4736.06 4493.55
DEBTORS + BR 4321.93 4415.51 4736.06 4493.55
COGS 29,728.47 37,690.87 54,631.91 57,646.34
5375.1 7353.2 11471.
AVG. INVENTORY 1 1 9864.41 17

Chart 15 Liquidity Ratio Analysis

31
 6.1 Current Ratio = Current Assets
Current Liabilities

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

21572. 22324.
CURRENT ASSETS 63 13 26977.14 28752.56
11656. 14085.
CURRENT LIABILITIES 67 16 17558.55 22719.4

CURRENT RATIO 1.85 1.58 1.54 1.27

Analysis
This ratio is used to measure a company’s ability to pay current liabilities with current assets. This
ratio helps creditors to determine if a company can meet its short- term obligations. The gradual
decrease shows that company’s liquidity has worsened. The company should rethink over its credit
policy.

6.2. Quick Ratio = Current Assets – Inventories

Current Liabilities

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

11656. 14085.
CURRENT LIABILITIES 67 16 17558.55 22719.4
15891. 13298.
QUICK ASSETS 82 52 16273.93 16513.42

32
 2004-05 2005-06 2006-07 2007-08
QUICK RATIO 1.36 0.94 0.93 0.73

Analysis
This ratio is used to measure a company’s ability to meet its short-term obligations. This ratio is
similar to the current ratio. However by limiting the numerator to very liquid current assets, it is a
stricter test. It is often called as the acid test ratio.
The quick ratio is worse than the current ratio. This means that the current ratio was because of
inventory. The liquid asset other than inventory of the company needs considerable attention.

6.3. Debtor turnover ratio= Sales

Average 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 the
effectiveness of the firm’s collection and credit policy. The high ratio indicates the ability of firm’s
collection of cash from the debtors. The trend of the past three years indicates that the firm has
managed to improve its credit policy.

6.4. Average collection period= Average Debtors

Sales/360

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

AVG. COLLECTION PERIOD(Days) 37.21 30.29 23.79 20.93

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

This ratio shows that the average collection period is going lower from 37.21 days in the year 2004-05
to 20.93 days in the 2008-07.It means that lower capital is getting blocked up from 20004-05 to 2008-
07.It shows the improvement in the credit policy of the company.

6.5. Inventory Turnover Ratio = Cost of Goods Sold___

33
 Average Inventory

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

COGS 29,728.47 37,690.87 54,631.91 57,646.34
5375.1 7353.2
AVG. INVENTORY 1 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 tells how many
times each year a firm’s inventory is turned over. The inventory turnover of the company over the
period of four years has remained stable more or less.

7. 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 amortisations 143.49 164.76
Foreign exchange (gains)/losses (63.60) (65.30)
Interest expense net of interest capitalisation 615.01 196.46
Interest income (214.67) (160.94)

34
 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 :

(1,535.93
Inventories ) (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
(1,280.65
Income tax including Fringe benefit tax paid ) (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
(6,209.04
Payments for assets acquisition ) (6,812.87)
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
(2,231.98
Changes in advances ) (1,473.70)

(8,096.78
Net cash low used in investing activities ) (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:

35
Figures in the brackets represent outflow. Interest paid is exclusive of purchases of investments is
5831.43 millions. Cash and cash equivalents after the adjustment of cash 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 million and debtors have increased Rs 1426.87 million.

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

The conversion of Foreign Currency Convertible Notes into equity shares has not been 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.

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

Cash Flow Statement for the year ended March 31, 2007-2006

(Rs. Millions)
2007 2006
Cash flow from operating activities
Profit before tax 6,045.06 4,523.
Adjustments for:
Depreciation, amortisation and impairment 1,505.74 1,260.06
Other amortisations 164.76 132.84

Unrealized foreign exchange gains / (losses) -65.3 102.05

Interest expense net of interest capitalisation 196.46 288.33
Interest income -160.94 -193.87
Income from investments -98.85 -87.47
(Profit)/Loss on disposal of fixed assets / long term investments -323.15 -66.61

36
 Diminution in value of investments written back - net -168.13 –
Transfer from General Reserve - Employee benefits -781.54 –
Profit on sale of undertaking – -301.66
Operating profit before working capital changes 6,314.11 5,656.67

Adjustments for changes in :

Inventories -1,677.6 -3,477.99
Debtors -1,005.76 -179.55
Advances -1,047.41 314.73
Current liabilities and provisions 4,102.54 2,051.52
Cash generated from operations 6,685.88 4,365.38
Income tax including Fringe benefit tax paid -1,356. -1,135.68
Net cash flow from operating activities before extraordinary expenditure 5,329.88 3,229.7
Compensation under Voluntary retirement scheme -330.37 -9.53

Net cash flow from operating activities after extraordinary expenditure 4,999.51 3,220.17
Cash flow from investing activities
Payments for assets acquisition -6,812.87 -2,646.86
Proceeds on sale of fixed assets 108.49 54.34
Proceeds on sale of undertaking – 620.
Purchase of long term and other Investments -50.64 -138.66
Sale / redemption of long term investments 557.64 479.68
Income from investments – Interest 44.78 48.95
– Dividend 129.39 56.93

Changes in advances -1,473.7 189.77

Net cash flow used in investing activities -7,496.91 -1,335.85
Cash flow from financing activities
Long term borrowings – Raised 2,162.35 186.69
– Repaid -829.95 -1,162.88
Changes in short term borrowings – -76.79
Debenture / Loan raising expenses paid -2.47 –
Interest paid – net -167.02 -166.96

Dividend paid and tax thereon -1,792.34 -1,356.1

Interim dividend and tax thereon -2,264.32 –
Net cash flow from financing activities -2,893.75 -2,576.04
Net cash inflow / (outflow) -5,391.15 -691.72
Opening cash and cash equivalents 8,503.22 9,194.94
Closing cash and cash equivalents 3,112.07 8,503.22
Net increase / (decrease) in cash and cash equivalents -5,391.15 -691.72

Analysis:
Figures in the brackets represent outflow. Interest paid is exclusive of purchases of investments is
5340.51 millions. Cash and cash equivalents after the adjustment of cash credits balances related to
unclaimed dividend is Rs 1953.31 million.

37
The statement of cash flow reveals a net cash outflow from operations of Rs. 4999.51 millions
whereas the company shows a net profit of Rs 6045.06 million. There is a sharp decrease in the
inventories of the company. I.e. Rs 1677.60 million and debtors have decreased Rs 1005.76 million.

Further compensation under voluntary retirement scheme is Rs 330.37 million. Loss on disposal of
fixed assets would be Rs 323.15 million for the year 2008.

The conversion of Foreign Currency Convertible Notes into equity shares has not been considered
in the above statement.
Cash flows from Investing activities includes acquisition of 100% ownership interest in Avia Ashok
Leyland Motors s.r.o. (subsidiary) of Rs. 0.38 million and disposal of 60% interest therein of Rs. 0.23
million.

The borrowing of the company has been increased because of that company is not able to repay net
amount efficiently. It results into decrease in cash.

Cash Flow Statement for the year ended March 31, 2006-2005

2006 2005
Rs.
Rs. Millions Millions
Cash flow from operating activities
Profit before tax 4,523. 3,550.1
Adjustments for:
Depreciation 1,260.06 1,092.14
Other amortisations 132.84 152.81
Unrealised foreign exchange gains / losses 102.05 -61.34
Interest expense 288.33 236.94
Interest income -193.87 -258.39
Income from investments -87.47 -106.78
(Profit) / Loss on disposal of fixed assets / long term investments -66.61 -351.35
Profit on sale of undertaking -301.66 –

38
 Operating profit before working capital changes 5,656.67 4,254.13
Adjustments for changes in:
Inventories -3,477.99 -611.4
Debtors -179.55 -120.32
Advances 314.73 -1,013.
Current liabilities and provisions 2,051.52 2,675.05
Cash generated from operations 4,365.38 5,184.46
Income tax including Fringe benefit tax paid -1,135.68 -693.29
Net cash flow from operating activities before extraordinary expenditure 3,229.7 4,491.17
Compensation under voluntary retirement scheme -9.53 -17.71
Net cash flow from operating activities after extraordinary expenditure 3,220.17 4,473.46
Cash flow from investing activities
Payments for assets acquisition -2,646.86 -1,824.56
Proceeds on sale of fixed assets 54.34 48.56
Proceeds on sale of undertaking 620. –
Purchase of long term and other investments -138.66 -92.6
Sale / redemption of long term investments 479.68 154.16
Income from investments - interest 48.95 42.7
- Dividend 56.93 106.78
Changes in advances 189.77 10.49
Net cash flow used in investing activities -1,335.85 -1,554.47
Cash flow from financing activities
Long term borrowings - Raised 186.69 4,975.34
- Repaid -1,162.88 -1,131.07
Changes in short term borrowings -76.79 76.79
Debenture / Foreign currency convertible notes issue and loan raising expenses
paid – -112.86
Interest paid - net -166.96 4.16
Dividend paid and tax thereon -1,356.1 -1,008.54
Net cash flow from financing activities -2,576.04 2,803.82
Net cash inflow / (outflow) -691.72 5,722.81
Opening cash and cash equivalents 9,194.94 3,481.9
Closing cash and cash equivalents 8,503.22 9,204.71
Net increase / (decrease) in cash and cash equivalents -691.72 5,722.81

Analysis:
Figures in the brackets represent outflow. Interest paid is exclusive of purchases of investments is
553.06 millions. Cash and cash equivalents after the adjustment of cash credits balances related to
unclaimed dividend is Rs 6015.53 million.

The statement of cash flow reveals a net cash outflow from operations of Rs. 3220.17 millions
whereas the company shows a net profit of Rs 4523.00 million. There is a sharp decrease in the
inventories of the company. I.e. Rs -3477.99 million and debtors have decreased Rs 179.55 million.

Further compensation under voluntary retirement scheme is Rs 9.53 million. Profit on disposal of fixed
assets would be Rs 66.61 million for the year 2008.

The conversion of Foreign Currency Convertible Notes into equity shares has not been considered
in the above statement.

39
The borrowing of the company has been increased because of that company is not able to repay net
amount efficiently. It results into decrease in cash.

RECOMMENDATIONS & SUGGESTIONS

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

Transportation- A structural change: The CV segment in India is going through a structural shift.
With the government's thrust on road development projects, road sector has gained significant
advantage over railways that has been a mainstay for transportation of coal, food grain and cement till
now. If one considers the trends of the developed nations, almost two-third of the non-bulk goods are
transported through roads. The completion of the Golden Quadrilateral (aimed at connecting the four
metros) and East-West-North-South corridor will result in availability of a network of 15,000 kms of
connectivity. This will give a major fillip to road transport.

Bus segment is a growth story: The bus segment has the potential to witness the exponential
growth witnessed in the goods commercial vehicles during last three years. We agree with the view of

40
the management about the potential that the bus segment has. Our belief stems from the fact that the
State Transport Undertakings (STUs) are operating at significantly high utilisation levels (120% to
130% of their capacity). Though the STUs are facing resource crunch due to number of reasons, we
believe that renewal of fleet is an eventuality in the long run.

Aggressive expansion plans: In order to cash in on the industry growth story, the company has
lined up an aggressive expansion plan whereby it will be more than doubling its capacity over the
next 2-3 years 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 annum in the state of Uttaranchal, which will not
only help it save on transportation costs but will also provide certain fiscal incentives.

Sector: The growth of the auto industry is directly linked to the growth in the industrial activity, which
in turn is a function of domestic GDP growth. Given the projected strong economic growth in the
country, the CV 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 five years and are expected to
climb higher, given the long-term growth prospects of the economy.

Current ratio: Ashok Leyland’s average current ratio during the period FY03 to FY07 has been 1.5
times. This indicates that the company is comfortably placed to pay off its short-term obligations,
which gives comfort to its lenders.

Debt to equity ratio: A highly leveraged business is the first to get hit during times of economic
downturn, as companies have to consistently pay interest costs, despite lower profitability. We believe
that a debt to equity ratio of greater than 1 is a highrisk proposition. Considering Ashok Leyland’s
average debt to equity ratio of 0.6 over the past five fiscals

Long term EPS growth: We expect the company's net profits to grow at a compounded rate of
around 8% over the period FY08 to FY10 (CAGR of 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-year period
as healthy for a company.

Margin of safety: This is to determine the value of the stock relative to its price and the returns over a
risk free rate. Margin of safety of a stock lies in its earning power, which is calculated as EPS divided
by market price (reciprocal of P/E). Considering Ashok Leyland's P/E of 10.0 times its trailing
twelvemonth earnings, the earning power is 2%, which is fairly low.

Valuations
Ashok Leyland is currently trading at Rs 13 implying a P/E multiple of 4.40 times. Based on valuation
criteria, the sell limit for the stock as per FY10 cash flow comes to around Rs 50 per share. This
implies a point-to-point upside of 43% or alternatively, a CAGR of 18% from the prevailing share price.
Thus, at the current juncture, investors could do well to BUY the stock from a March 2010
perspective.

41