A touch lesser

INSIGHT

Tata Motors is back to dominating the medium & heavy commercial vehicle market, having sorted out some supply related issues it faced last year. Its M&HCV sales rose by 51.5% to 13,084 vehicles last month. In comparison, Ashok Leyland’s M&HCV sales rose by 23.3 % to 5214 vehicles.

One of the reasons for the huge differential is that Tata Motors’year-ago numbers represented a low-base. Sales had fallen by over 10% last July due to supply constraints on some components.

Ashok Leyland faced no such problems – its sales had risen by 11% last July.
Including the handful of LCV sales, Ashok Leyland’s total sales last month stood at 5,231 vehicles, which is a tad disappointing.

The company had told analysts earlier in the year that it expects sales of 75,000 this year at a monthly average of 6,250 vehicles. In the four-month period between April and July 2006, it has managed sales of 22,271 vehicles, at a monthly average of 5,568 vehicles.

This leaves the asking rate for the rest of the fiscal much higher at 6,591 vehicles a month.

For now, the markets don’t seem too bothered about this – Ashok Leyland shares fell by 0.3% on Monday, even though the markets fell by almost 1%. One of the reasons for the optimism could the company’s strong June quarter results.

Sales revenues grew by 34% last quarter, and net profit (adjusted for exceptionals) jumped by 73% year-on-year.

The company managed to increase its operating margin despite a sharp increase in raw material costs, partly due to improved realisations.

Ashok Leyland has also announced the acquisition of the truck business unit of AVIA
in Prague. AVIA makes the D line of trucks in the 6T to 9T range and will help the company expand in the LCV
space.

Ashok Leyland’s share price has fallen by over 28% since its highs this May, correcting at a much faster pace than the Nifty, which has fallen by about 16%. But as the chart alongside shows, this happened because Ashok Leyland shares had risen at a faster pace to start with.

As far as valuations go, the company trades at 13 times trailing earnings, marginally lower than Tata Motors’ price-earnings ratio of 15 times earnings.

Bank rate hikes

Net interest margins of banks have come under pressure in the recent past. Experts are of the opinion that public sector banks will face more pressure on their net interest margins in the days to come vis-a-vis their private sector counterparts.

This is despite the fact that they have a better branch network which allows them to raise retail deposits which tend to be cheaper than corporate deposits.

Private sector banks are focussed largely on urban centres, because of which they depend on corporate deposits to fuel credit growth.

The cost of raising corporate deposits is greater than retail deposits. Further these deposits tend to have a shorter term and are hence re-priced more frequently.

In case of public sector banks, the fact that deposits generally have a longer term till maturity, the cost of borrowing doesn’t not go up as fast as in case of a private sector bank.

But public sector banks seem to be at a disadvantage as far as lending rates go. With their cost of deposits not rising as fast as that of private sector banks, till the March quarter, they decided to stick to their lending rates to corporates.

This hit some of the smaller public sector banks hard as they could not raise lending rates simply because larger banks had not raised rates.

The fact that corporate lending forms the majority for most sector banks, this could lead to the net interest margins shrinking. Private banks, on the other hand, are primarily into retail banking.

As a result, their chances of passing on an increase in cost of deposits to borrowers is much better vis-a-vis public sector banks.

Also the recent diktat by the ministry of finance to public sector banks to go to their boards before deciding to raise their interest rates on home will have an impact on the net interest margins of public sector banks.

In one such case, Oriental Bank of Commerce rolled back its rate hike on home loans worth less than Rs 20 lakh.

(Contributed by Mobis Philipose and Vivek Kaul)