Companies & Sectors

Ashok Leyland: Sharply lower EBITDA margin is a matter of concern

**During the quarter, there was an exceptional gain for Ashok Leyland of Rs1.34 billion mainly on sales of IndusInd shares. The company reported an EBITDA margin of 5.3% for the March quarter below Nomura's expectation of 10.9%**

Ashok Leyland declared adjusted net profit of Rs157 million for the March 2013 quarter, significantly below Nomura’s expectations. Margins came in at 5.3% compared to Nomura’s expectation of 10.9% due to higher raw materials/sales and higher other expenditure. Raw materials/sales increased by around 400bps quarter-on-quarter to 75.8% (Nomura’s estimate was 72%). Other expenses/ sales came in at 11.4% versus Nomura’s expectation of 9.6%.

Sharply lower EBITDA margin is a matter of concern, according to Nomura’s analysts, as it could mean that Ashok Leyland has been reporting better volumes than Tata Motors through higher discounting and advertisement and promotion spending. During the quarter, the company reported an EBITDA margin of 5.3%, compared with Nomura's estimate of 10.9%

During the quarter, there was an exceptional gain of Rs1.34 billion mainly on sales of IndusInd shares, point out Nomura’s analysts.

The performance of Ashok Leyland in FY13 is given in the table below:

Confusion between yield and rate of interest reflects financial illiteracy among business journalists

**Confusion between yield and rate of interest reflects financial illiteracy among business journalists**

There is an article in *The Economic Times*, Mumbai edition on corporate FDs titled, “Interest in Corporate FDs on the Rise Again” (ET, 10 May 2013). The article talks about growing popularity of corporate FDs (fixed deposits) among investors. The writer of this news item states, “Best-rated fixed deposits from Mahindra & Mahindra Finance offer 12.2% per annum and fixed deposits issued by Jaypee Group offer rates as high as 15.07% on a three-year FD on a cumulative basis. Against this, banks such as SBI (State Bank of India) offer 8.75% deposits of similar tenors and private banks like HDFC Bank offer anywhere between 8% and 8.75%”. This article shows how articles on deposits and investments need to be read with lots of attention.

First and most importantly, M&M Finance does not offer 12.21% return as of now, so the article has a factual error. M&M Financial Services offers the following returns now:

So the best yield offered now is 11.85% for 60 months deposits. However, the objective of this article is to show how financial illiteracy is even pervasive among business writers. In this particular ET article, the confusion between yield and rate on interest comes to the fore. Let us first look at M&M Financial Services advertisement which the ET article is supposedly referring to and which is attached below. The ET article uses the earlier rate offered by M&M which matches with 12.2% mentioned in the article. It is very clear from the advertisement that M&M was offering interest rates as 10 p.a. for 60 months (See data, cumulative deposit 60M) which translates into a yield of 12.21%. The yield shown in the advertisement is 12.21% which is equivalent to 10% rate of interest per annum. It is obvious that yield and rate of interest are different.

(Please note that this advertisement is being used just to show comparison. The rate offered by M&M finance has changed. Refer rate in the chart one above for current rate)

SBI, on the other hand, offers 8.75% interest per annum on fixed deposit. There is obviously no mention of yield in these deposits (except for one deposit which is tax saving deposit). So is it fair to compare yield of M&M Financial Services yield with interest rate of SBI? The answer is a firm No. The difference in rate of interest is only 1% between a SBI deposit and M&M deposit for a five-year term, if the details given in the article are to be believed, which translates into difference of 100 basis points only. A bank like Andhra Bank offers 9% on a five year fixed deposit which means the difference is only 0.75%.

Ideally, the author should have converted rate of interest of bank deposits into yield and then compared it with M&M Financial Services and other corporate fixed deposits. Using the same logic as used by M&M, Andhra Bank’s deposit for five year gives a yield of 10.77% and a SBI deposit gives a yield of 10.45%. The difference on yield basis works out to be 108 basis points in case of Andhra Bank and 140 basis points in SBI. The article says that 200 to 300 basis points difference exists between corporate FD and bank deposit which is definitely not correct in case of M&M Financial Services deposits. After all, apple to apple comparison is the fair way to compare financial products.

In fact, the bond market is an unexplored area for many writers and there is large-scale lack of understanding on basic concepts like coupon, rate of interest, yield, etc. Before making any investment decision based on such analysis, it is better to consult a financial advisor.

(Vivek Sharma—http://www.moneylife.in/author/vivek-sharma.html—has worked for 17 years in the stock market, debt market and banking. He is a post-graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

COMMENTS

http://www.devangvisaria.com

it should read as

2. effective rate of interest = (1+ coupon interest rate in % per annum /no of units of time eg. no of quarters)^ total no of units of time e.g.. 10 quarters

The rate of interest per year after taking into account the compounding nature of the paid out interest into principal.

Addendum-

Coupons are derived from interest yielding paper instruments issued in the earlier years which carried postage stamp like detachments on the bond certificate which was the interest due to the bond holder. Each time the interest was due, the bond holder had to detach the coupons and give it to the bond issuer who would give the bond holder cash in exchange for the coupon. Coupon rate is the printed interest rate on the bond certificate.

I thought there are three things in a bond

1. Coupon or interest rate - the annual rupee interest divided by rupee principal * 100

2. effective rate of interest = (1+ coupon interest rate in % per unit of time e.g. quarterly /no of units of time eg. no of quarters)^ total no of units of time e.g.. 10 quarters

The rate of interest per year after taking into account the compounding nature of the paid out interest into principal.

3. yield (yield to maturity) - the coupon rate of a bond which is actively traded in the bond markets like a share. When the price of the traded bond changes in the bond market, the yield to maturity changes.

There is no concept of "effective yield" as is mentioned in the article. Yields are typically used in traded bonds hence the term "bond yields".

The concepts explained however, are of course correct. A useful example to add could be the traded bond.

Furthermore you are correct when you say the most dangerous people in the world are half knowledged financial journalists. I know of countless people who lost their hard earned salary money listening to these financial journalists. This is what caused the disclaimer to be put on all news channels and news papers "This is in no way investment advice and we are not licensed investment advisors".

REPLY
### vivek sharma

In Reply to Naresh Nayak 4 years ago
### The crux of this article is the to show fair degree of comparison when two different parameters are used. Yield can be calculated in many different ways as you have mentioned but in the context here yield denotes the return that the customer gets if he holds an investment over a period of time.

### Naresh Nayak

In Reply to vivek sharma 4 years ago
### Hi Vivek,

There is concept called "effective yield". I just saw it on the internet. The nomenclature and jargons should be correct and used correctly. Without the use of correct names, the entire concept becomes nebulous and confusing which is what plagues most journalists/writers today. Kudos on the article.

There is concept called "effective yield". I just saw it on the internet. The nomenclature and jargons should be correct and used correctly. Without the use of correct names, the entire concept becomes nebulous and confusing which is what plagues most journalists/writers today. Kudos on the article.

The answer for the same is available at the following link:

http://www.moneycontrol.com/news/fixed-i...

REPLY
### vivek sharma

In Reply to Sanjay Matai 4 years ago
### Sanjay, I think you should start reading the note in every advertisement carefully and also start looking at advertisements properly. You have jumped to a conclusion too fast and gone wrong in the process. The first advertisement also has a note which indicates how the annualized yield has been arrived at. If you read note at the end of M and M ad, you will realize why you are wrong.( Please open the link of first ad).

The second advertisement of M and M appearing in blue, also gives amount on maturity, so the method of calculation of yield is very explicit. I understand that yield calculation is done as a practice using yield function in excel and also using APR formula. However, for your understanding I wish to ad that yield is the amount of cash that returns to the owner of security and can be expressed differently. It is fair to express yield in a particular way as long as methodology is explicit.

### Sanjay Matai

In Reply to vivek sharma 4 years ago
### I beg to differ. Howsoever explicit one may be, if the concept is misleading, it remains misleading. Just because there is explanation behind it, doesn't justify it and make it correct.

Most investors assume annualized yield as the effective returns per annum. This is a wrong perception which I tried to dispel through my article. Converting the maturity amount of a multi-year deposit into an annualized yield using 'Simple Interest' gives a misleading picture since the effect of compounding is ignored.

Ideally, you should have compared 9.75% p.a. interest on M&M deposit with the 9.04% effective annualized yield on SBI FD (8.75% interest payable on quarterly basis means that effective yield is 9.04%).

That is be the true 'yield' or 'interest' or 'returns' or whatever name anyone uses.

### Naresh Nayak

In Reply to Sanjay Matai 4 years ago
### Sanjay, please use the correct nomenclature. Now what is annualised yield? Is it the Annual Effective Rate?

This annualised yield name is totally confusing to me. Please call it Annual Effective Rate if you must.

Also what does 'effective returns per annum' mean? That is another confusing jargon. There is no such thing as effective returns per annum.

The best way to explain is to use a formula since everybody has its own financial jargons except for the professional investors who carefully sift through the relevant jargon.

### pawan

In Reply to vivek sharma 4 years ago
### Dear Vivek,

1. I could not find how the yield has been calculated by M&M in the first link as mentioned by you.

2. In this case, the annualised return which is shown as 10% by M&M correctly gives a cumulative value of 16105/- in 5 years but how this yield has been calculated by them and You is a mystery to me. if the compounding was happening monthly or quarterly or half yearly, then yield and annualised return would have been different. but in this case it is not so.

Which method you are talking is explicit is not clear to me.

As you are yourself saying that yield is a function of amount returned, if you calcuate 16105 over five years, it is 10% only on 10k investment.

### vivek sharma

In Reply to pawan 4 years ago
### Total cash return to the investor is 6105 as interest and 10000 as principal. The total amount translates into 16105. The total interest returned to a customer over a period of 5 years is 6105 which if annualised as amount is 1221 (6105/5) which translates into 12.21% per year return ( not compounded).

### vivek sharma

In Reply to pawan 4 years ago
### Please run the following formula in excel to get the calculation of effective yield in first case.

=((1+ (0.0975))^5-1)/5

This will come as 11.85%.

The second advertisement of M and M appearing in blue, also gives amount on maturity, so the method of calculation of yield is very explicit. I understand that yield calculation is done as a practice using yield function in excel and also using APR formula. However, for your understanding I wish to ad that yield is the amount of cash that returns to the owner of security and can be expressed differently. It is fair to express yield in a particular way as long as methodology is explicit.

Most investors assume annualized yield as the effective returns per annum. This is a wrong perception which I tried to dispel through my article. Converting the maturity amount of a multi-year deposit into an annualized yield using 'Simple Interest' gives a misleading picture since the effect of compounding is ignored.

Ideally, you should have compared 9.75% p.a. interest on M&M deposit with the 9.04% effective annualized yield on SBI FD (8.75% interest payable on quarterly basis means that effective yield is 9.04%).

That is be the true 'yield' or 'interest' or 'returns' or whatever name anyone uses.

This annualised yield name is totally confusing to me. Please call it Annual Effective Rate if you must.

Also what does 'effective returns per annum' mean? That is another confusing jargon. There is no such thing as effective returns per annum.

The best way to explain is to use a formula since everybody has its own financial jargons except for the professional investors who carefully sift through the relevant jargon.

1. I could not find how the yield has been calculated by M&M in the first link as mentioned by you.

2. In this case, the annualised return which is shown as 10% by M&M correctly gives a cumulative value of 16105/- in 5 years but how this yield has been calculated by them and You is a mystery to me. if the compounding was happening monthly or quarterly or half yearly, then yield and annualised return would have been different. but in this case it is not so.

Which method you are talking is explicit is not clear to me.

As you are yourself saying that yield is a function of amount returned, if you calcuate 16105 over five years, it is 10% only on 10k investment.

=((1+ (0.0975))^5-1)/5

This will come as 11.85%.

Cummins India’s guidance on the export business and sustainability of margins are key inputs for investors

**Cummins India could recoup some of its lost ground on the back of a one-time gain of Rs491 million from sale of investments, says Nomura Equity Research in its First Look on the company’s stock**

Cummins India reported weak quarterly results in the fourth quarter of FY13 on the back of a sharp fall in EBITDA margins (-236bps year-on-year and -193bps quarter-on-quarter), which resulted in EBITDA missing Nomura’s estimates by 17%. However, at the net profit level, the company could recoup some of its lost ground on the back of a one-time gain of Rs491 million from sale of investments.

Nomura looks forward to Cummins India’s management’s guidance on the export business and sustainability of margins as key inputs for investors in the stock market. The company’s conference call on the subject is slated for 13 May 2013. Overall, Nomura thinks that the stock market would be more focused on improvement in conditions in the export and domestic businesses, which are likely to drive earnings growth on a more sustainable basis.

Cummins India’s performance in FY13 is given in the table below (Rs million):

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