FINANCIAL ANALYSIS For any kind of expansion, preliminary analysis regarding the feasibility of the expansion plan according

to the current financial scenario of the company is essential. Hence, knowledge regarding the current financial status and performance of the company matters a lot as only then the suitable time for expansion and its phase wise implementation can be planned. Also financial stability and capability will help us in zeroing on the intensity and degree to which expansion can be done. Therefore, to have an idea about the current financial performance of the company, ratio analysis of the company has been done. The analysis is described below. Ratio Analysis of ASHOK LEYLAND Liquidity Ratios 1. Current Ratio [TOTAL CURRENT ASSSTS/TOTAL CURRENT LIABILITIES]

Total current Asset Total current Liabilities Current Ratio Interpretation:

March 11 45490.49 37100.78 1.23

March 10 42828.94 31039.67 1.38

March 09 32209.15 21922.45 1.47

This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm s financial stability. It is also an index of technical solvency and an index of the strength of working capital.In last 2 financial years the current asset has gone down substantially, resulting a bad current ratio reflecting a bad liquidity. This shows the deteriorating in liquidity position of the company. Though the ratio is much beyond 1, still the significant and no growth in current ratio is because of decrease in Fixed Deposits. Even though current liability for the company also increased, current assets have seen a more proportionate growth which facilitates a healthy liquidity and ability of the company to pay up short term obligations.

2. Liquid Ratio [(CURRENT ASSSTS INVENTORIES)/CURRENT LIABILITIES]

Current Asset Current Liabilities Inventories Liquid Ratio Interpretation:

March 11 45490.49 37100.78 22089.03 0.63

March 10 42828.94 31039.67 16382.40 0.85

March 09 32209.15 21922.45 13300.14 0.86

The liquid ratio is very useful in measuring the liquidity position of a firm. It measures the firm's capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Liquid ratio is more rigorous test of liquidity than the current ratio because it eliminates inventories and prepaid expenses as a part of current assets. It is obvious from looking at these ratios that the company was not maintaining its inventories every year consistently and was not having a good solvency position as the company didn t have enough quick assets to honor its immediate claims which seem to be recovering soon. The company's current assets are not dependent on inventory. It seems the company is not getting success in balancing current liability to current assets and acquiring a better solvency position fast. But any company must focus on the time it takes to convert its working capital assets to cash as that will truly describe true liquidity position of the company.

Investment Ratio 1. Dividend Payout ratio [(DPS/EARNINGS PER SHARE)*100] March 11 2.00 4.75 42.11% March 10 1.50 3.18 47.17% March 09 1.00 1.43 69.93%

DPS EPS Dividend Payout Ratio

Interpretation: This ratio indicates what percentage of Earning has been distributed to share holders. The dividend payout ratio is an indicator of how well earnings support the dividend payment. Ashok Leyland provides shareholders with a good amount of dividend and the best thing about the company's stocks for investors is the rate is increasing gradually every year. The reason being increased reinvestments, it is obvious that company is now looking at an expansion and keeping reserves for reinvestment and this influenced a slight decrease in DP ratio which is expected to decrease even more. This represents a mindset of the management which is positive towards reinvestments in expansion. This is why this time can be said to be a suitable one for expansion in the north.

2. Earnings per share(EPS) [PAT/EQUITY PAIS UP] March 11 6312.99 1330.34 4.75 March 10 4236.75 1330.34 3.18 March 09 1899.96 1330.34 1.43

PAT Equity Paid up EPS Interpretation:

EPS is the measure to relate the return to equity shareholders. From an investor perspective the higher it is, the better it is. So eventually it affects the market price of the shares of the company. This reflects the prevailing growth in the business of the company and represents the time for expansion.

Leverage Ratios 1. Debt Equity Ratio [DEBT/NET WORTH]

Debt

March 11 26581.92

March 10 22679.90

March 09 19619.85

Net Worth Debt Equity Ratio

26523.71 1.00

23304.09 0.97

20993.46 0.93

Interpretation: Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the firm s assets. The purpose is to get an idea of the cushion available to outsiders on the liquidation of the firm. The owners want to do the business with maximum of outsider's funds in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. The financial position is highly solvent. To expand the north plant the company has taken the debt which is being fully utilized by the firm.

2. Interest Coverage Ratio [PBIT/INTEREST] March 11 9907.23 1889.23 5.24 March 10 6466.26 1018.52 6.35 March 09 3687.65 1603.18 2.30

PBIT Interest Interest coverage ratio Interpretation:

The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. To expand the pantnagar plant the company has taken the debt for this reason the interst coverage of the company is low. But the weakness of the ratio may create some problems to the financial manager in raising funds from debt sources.

Profitability Ratios
1. Cash Profit Margin

[(CASH PROFIT/GROSS SALES) x100] March 11 8987.30 123418.89 7.28% March 10 6277.83 80351.15 7.81% March 09 3684.11 69839.93 5.43%

Cash Profit Gross Sales Cash Profit Margin Interpretation:

The cash profit margin is used to determine the cash profit of the firm s. It reflects efficiency with which a firm produces its product. There is no standard cash profit margin for evaluation. It may vary from business to business. However, the cash profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends.

2. PAT Margin

[(PAT/GROSS SALES)*100]

PAT Gross Sales PAT Margin Interpretation:

March 11 6312.99 123418.89 5.12%

March 10 4236.75 80351.15 5.27%

March 09 1899.96 69839.93 2.80%

Ashok Leyland sales increased around 22.5% in 3Q FY11 resulting in increase in income, but expenditure didn't increase in that proportion. So profit increased around 145 % as compared to FY10. As Ashok Leyland is a leading company in south, it's enjoying a good industry in south which keeps on increasing the income of the company year by year for which now they are trying to capture the north region as well to become the leading industry in India.

Another interesting thing which results in a good net profit ratio for this company is this company is come up with new plant in the north region which help the company in getting a good profit every year.

3. Return on Capital Employed(ROCE)

[EARNING TO SHARE HOLDER/CAPITAL EMPLOYED] March 11 20.00% March 10 14.93% March 09 10.46%

ROCE Interpretation:

Return on capital employed ratio is considered to be the best measure of profitability in order to assess the overall performance of the business. It indicates how well the management has used the investment made by owners and creditors into the business. It is commonly used as a basis for various managerial decisions. The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total "capital employed". This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. From an investor's perspective, looking at the upward trend, it can be concluded that Ashok Leyland use of capital impacts its profitability positively. The management of Ashok Leyland is generating good earnings from the company's total pool of capital. This means they are managing their capital well enough to sustain their growth specifically from FY11. That reflects the suitability of the time for reinvestment and expansion especially in north region.

PERFORMANCE HIGHLIGHTS

During 3QFY2011, ALL witnessed a 400bp yoy decline in EBITDA margin mainly on the back of a 322bp yoy surge in input cost. Raw-material cost accounted for 70.4% (67.2%) of sales. Staff cost and other expenditure, as a percentage of sales, also reported an increase of 140bp and 75bp yoy, respectively. Staff cost grew mainly on account of one-time charge of `26cr related to ex-gratia bonus to employees. Other expenditure increased due to expenses incurred for the setting and ramping up of the Pantnagar facility, increased focus on R&D and the high decibel launch of the new, innovative U-Truck platform vehicles. ALL hiked prices to the extent of ~`31,000/vehicle (~3%) in October 2010 across the board, which helped reduce raw-material cost pressures to a certain extent. The company also hiked prices by ~3% for BS III-compliant vehicles (~6% in all). ALL has

further taken pricing action from January 2011, raising prices by ~2% on an average, to mitigate raw-material cost increases, specially tyres, castings and forgings.

y HCV segment growing faster: ALL has been able to post strong volume growth, following revival in demand in the HCV segment. HCV volumes, which picked up from 1HFY2010, continued to witness good traction in 3QFY2011. The HCV segment has been growing faster than the other segments. Management expects the overall CV industry s volumes to grow by ~30% in FY2011 and by ~15% in FY2012E. y Volume guidance: Management has indicated volume guidance of ~95,000 units for FY2011E. This includes ~85,000 of domestic vehicles and ~10,000 units for exports. ALL is targeting a monthly run rate of ~10,000 units in 4QFY2011. The Pantnagar facility is expected to manufacture ~15,000 vehicles in FY2011E. y Pantnagar plant update: During the quarter, ALL faced issues in transporting vehicles from its Pantnagar facility to Southern markets. Further, around 4,000 and 6,000 units were manufactured at the Uttaranchal facility during 3QFY2011 and 9MFY2011, respectively. In December 2010, ALL produced 2,100 units at Uttaranchal. Going ahead, ALL expects to maintain a monthly run rate of `3,000 units. y During the quarter, engine business volumes were affected due to reduced supplies to the telecom sector. The company sold ~3,800 and ~11,200 engines in 3QFY2011 and 9MFY2011, respectively. Revenue from the engines business stood at ~`200cr during 9MFY2011. Around 600 kits were supplied to the vehicle factory in Jabalpur during the quarter. The company expects to supply ~1,000 kits in 4QFY2011E. The spares business posted `160cr in sales in 3QFY2011. y ALL managed to clear the majority of its ~10,000 units of BS II inventory during 3QFY2011. Overall, ALL has an inventory of ~9,500 vehicles. y According to management, ~3,600 vehicles (~20% of overall volumes) were supplied to state transport undertakings (STU) during 3QFY2011, which had a negative impact on margins. y During the quarter, staff cost increased due to one-time charges of `26cr towards ex-gratia bonus to employees. Further, `30cr of expenses were incurred for settlement and executive compensation charges.

y ALL s debt levels including cash credits stand at ~`3,000cr as of December 2010. The company plans to bring it down to `2,600cr by March 2011. Interest cost during the quarter was high on account of lack of interest capitalisation benefits and increased working capital requirements. y ALL incurred `700cr towards capex and investments during 9MFY2011 and expects to incur ~`300cr during 4QFY2011E. The company expects to incur ~`1,000cr towards capex and investments in FY2012. y ALL expects to launch new vehicles through its JV with John Deere in 1QFY2012E. y Strong volume growth traction: The strong rebound in CV demand in FY2010, on account of the revival in the Indian economy, aided ALL in posting higher growth on a low base. As a result, ALL recorded healthy 18% yoy growth in FY2010. With CV demand in its mid-cycle, we believe the industry would record double-digit volume growth in FY2011. We estimate ALL to post a volume CAGR of around 22% over FY2010 12E. y Pantnagar plant to help mitigate margin pressure: Management has indicated the new tax-free unit at Pantnagar would be relatively more profitable, with profitability estimated at around 25% higher than that of existing plants. Thus, EBITDA margins are expected to hold up at around 10.5% in FY2012E. The company expects to manufacture ~15,000 vehicles from the Uttaranchal plant in FY2011 and further ramp it to ~35,000 vehicles in FY2012. Total expenditure at the Uttaranchal plant is expected to be close to `1,100cr, out of which `1,000cr has already been spent. This capex would result in additional capacity of close to 50,000 vehicles per year. Tax benefit availed at the Pantnagar plant would help the company in saving ~`35,000/vehicle on the net realisation front in FY2011E.

STRATEGIC GOALS: Raise resources to the tune of roughly US$ 1.8 billion for funding expansion plans of AL, Nissan and other JVs over the next 3 years Achieve optimum funding mix / restructuring of companies to minimize the cost of raising of funds. Maximize tax efficiencies to improve cost competitiveness of products and improve viability of projects. Make globalization a reality through acquisitions and setting up of new ventures abroad by leveraging AL s strengths.

Bench mark financial processes to the best in the world and improve the bar; maintain high standards of financial discipline.

Maintain excellent relations with international investor community through effective communication for international offerings.

FINANCIAL CHALLENGES AHEAD: Global slow down challenging break even. Decrease in Margins due to inability to pass on cost increases due to competitive pressures partially compensated by increase in volumes. Profitability pressures due to changes in business mix and commodity price movements. Forex management unforeseen volatility in major currencies; particularly

important with forex loans Supporting inorganic growth evaluation & funding of emerging options. Need to fund major capex & investments major investments in JVs Tackling financial covenant breaches. Increase in interest rates Business integration of overseas units. Managing expectations of stakeholders Rs.2400 cr in the next 3 years;