Still on slippery road

Insight

The markets fears regarding sales of the top two 2-wheeler companies have been confirmed following announcement of the results of Bajaj Auto (BAL) and Hero Honda for September. Hero Honda’s figures, though marginally up (4.3%) came as a pleasant surprise, while BAL reported a decline of 22.5% in sales.

For Hero Honda, which has launched a few products in 2007, part of the reason for higher sales is the company adding to the inventories in anticipation of demand during the festive season, said an analyst. Going forward, the company may continue to do well given its plans to introduce two new bikes in October itself.

Meanwhile, the share of BAL fell 1.9% to Rs 2,490 and Hero Honda dropped 1.7% to Rs 732.

While the September numbers were sluggish, the quarterly numbers aren’t exciting either. For Bajaj Auto, the performance would have been worse had exports not grown by 25-75% in each of the three months in the second quarter; domestic vehicle sales were down 23.5%. Hence, it’s not surprising that the BAL stock has underperformed as compared with Hero Honda since May this year. Even during the last one month, BAL was up just 5.9% as compared with 13% for Hero Honda.

Meanwhile, with margins likely to be under pressure, Q2 revenues are expected to decline by 3-5% for BAL and should be better by 8-9% for Hero Honda. Net profit for BAL is expected to decline by 15-17% and remain flat for Hero Honda.

Rising interest rates (overall) and tightening of finance (especially in the 100cc segment) has affected two-wheeler sales for the two companies. In the last couple of months, BAL has seen a dip in sales of motorcycles of the 100cc segment, which accounts for almost 50% of its motorcycle volumes. Sales numbers are also affected due to the product alignment (inventory reduction) BAL had undertaken.

BAL is moving ahead with its strategy to gradually shift to higher margin 125-150cc segment. It launched the 125 cc Bajaj XCD DTS-Si on September 9. While it sold 18,131 units of XCD DTS-Si in September, it hopes to sell 50,000 units in October, given that advance bookings have already crossed 50,000. On this basis, it hopes to clock positive growth (overall) in the second half of the fiscal. And if the trend continues, a higher contribution from the 125cc plus segment should reduce some pressure on its margins.

Going forward, the dynamics of domestic two-wheeler industry may undergo a change based on how customers react to the different moves by the domestic 2-wheeler companies. While Bajaj is aiming to push sales in the 125-150cc segments, which enjoys relatively better margins, Hero Honda plans to stick to the 100cc segment as of now, said an analyst.

Analysts maintain that the next two months would be crucial for both these companies and are positive on BAL and neutral on Hero Honda.

Firm? That’s steel

Global steel prices are again showing bullish signs; prices were up over 6% in the European Union besides other markets like China, CIS, etc in the past one month, thanks to robust demand for steel across many regions.

In China, though, steel prices haven’t risen as much as compared with other regions. That’s because, the Chinese government has been taking steps to curb steel exports from China, which may help Chinese domestic consumers (through increased supply and subdued prices). However, it also means limited Chinese steel supply into global markets and hence, hopefully, better steel prices globally.

As far as India is concerned, the hike in steel prices certainly bodes well for steel companies. Analysts say the difference in global and domestic prices should lead to a price hike in India some time soon. Moreover, prices of iron ore (the key input to manufacturing steel) has also been rising on account of supply constraints.

Sesa Goa, a large exporter of iron ore, has been on a run. The stock is up nearly 34% to Rs 2,600 in the last one month.

Most large Indian steel companies are integrated and produce steel using captive resources (iron ore and power) including Tata Steel, SAIL and JSW Steel. Hence, a hike in steel prices will directly contribute to the profits, as costs are likely to largely remain unchanged.

For Tata Steel, even as its large subsidiary Corus buys primary steel to produce finished products, the rise in global steel prices should have a positive rub-off. Benefits to Corus will accrue in the form of rise in product prices to some extent, and simultaneously, gains from economies of scale (some costs like Labour, etc remain fixed). Analysts say margins at Corus should improve.

Companies like JSW Steel, which happen to be partly integrated (up to around 50%) will also benefit to that extent. The company has drawn up major expansion plans, which should reflect over the long-term. JSW recently acquired a plate and pipe mill in the US and expects strong growth in volumes there. US steel prices have also inched up, though by a marginal 3% since mid-August, and that should reflect positively on JSW.

On the flipside, though, a firm rupee may offset some of the gains for companies that export steel or derive dollar revenues (from subsidiaries located outside India).

Going forward, analysts say the six-month outlook for steel continues to be robust, which is already reflecting in the recent up-move in stock prices of most steel companies. Tata Steel has jumped 21.9% in the past-one month, JSW by 30.8%, SAIL 22.3% and Jindal Steel 31.7%.

Also, the local steel stocks are relatively undervalued as compared with their global peers. Analysts say steel stocks trade at 12-14 times their earnings globally, while most Indian steel firms are trading at less than 10 times their earnings.

Contributed by Pallavi Pengonda