Net profit in the June quarter at Bajaj Auto Ltd was about 10% lower than consensus estimates of 11 analysts polled by Bloomberg. Yet, the company’s share price rose by 3.1%, much higher than the 1.3% rise in the S&P CNX Nifty on Thursday.
The company’s statement that both its top line and bottom line would be better in the second half of the year seemed to have helped the market sentiment.
But analysts point out that there’s nothing in the June quarter results announcement (including the above statement) to indicate that things have improved for the two-wheeler company.
An improvement in the second half was already factored in, what with the company launching a much-touted new motorcycle platform in September. Bajaj Auto expects sales of this bike to touch 50,000 a month from January, which will add substantially to its current monthly sales of 165,000.
The problem is that even if sales do extremely well in the second-half period, the company would still end up with flat sales for the year till March. In fact, sales would have to grow by 18% in the second half over last year’s high base (197,500 units per month) just to end up with flat sales for the whole year.
If anything, the takeaway from Bajaj Auto’s results was negative. Revenues were slightly higher than consensus estimates, because of a higher proportion of three-wheelers and premium motorcycles.
Average realizations rose 8.5% on a year-on-year basis. But these products are also more profitable, and should have arrested the decline in margins. Instead, Bajaj Auto reported a 332 basis points drop in operating margins, higher than analysts’ estimates. This should lead to a downward revision in the margin estimates for the whole year.
As far as the Bajaj’s share price goes, only about 40% of the value is derived from the auto business. The rest is accounted for by the insurance business and the value of the company’s cash and investments. Adjusted for this, Bajaj Auto trades at only about 10 times core earnings for fiscal year 2008.
Compared to Hero Honda Motors Ltd, which trades at 14 times FY08 earnings, Bajaj Auto’s shares seem cheap. But it seems more reasonable to say that Hero Honda shares are expensive, considering that earnings growth will be muted this year. Bajaj’s valuation seems to better reflect ground realities.
The debt markets will take comfort from the lower industrial production numbers for May. The data on credit growth had already indicated that the economy was slowing and the IIP (Index of industrial production) data now provides confirmation. The Reserve Bank (RBI) of India should be happy.
Bond traders too will be relieved. Bond yields have plummeted on ample liquidity, with the yield on the 10-year government bond slipping below 8%.
But although yields are down, there’s a nagging worry that it may be too good to be true and the market has been looking over its shoulder at RBI at every stage of the rally. While wholesale price inflation has come down, dealers say that risk is getting mis-priced.
Short-term yields are at ridiculously low levels, with one-year government paper trading at 0.8%. Contrast the 9% rate on one-year bank deposits.
That’s the reason why income funds are still not attractive to investors, despite the fall in yields, points out Rajiv Anand, head of investments at Standard Chartered Mutual Fund. He says that the great bond rally in the early 2000s happened at a time when the stock market had crashed and interest rates on FDs had fallen to unattractive levels, conditions that don’t exist at the moment.
Why should investors put their money in income funds when they get better returns from bank FDs? Nevertheless, mutual funds are slowly trying to wean investors away from liquid funds, for instance through investing in “strategic bond funds”, which have the flexibility to shift between durations.
The big question is: How long can the central bank tolerate market rates being so much lower than the policy rate? As A. Prasanna, economist with ICICI Securities, asserts, it can’t last long because banks will get the wrong signals. But the lower IIP numbers may increase that tolerance level.
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