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Mark to market | Further blow to 2-wheeler stocks

Mark to market | Further blow to 2-wheeler stocks
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First Published: Fri, Jun 08 2007. 12 00 AM IST
Updated: Thu, Jun 07 2007. 10 50 PM IST
There doesn’t seem to be an end to the bad news coming from the two-wheeler industry. After two months of negative growth, news reports now say that industry leaders Hero Honda Motors Ltd and Bajaj Auto Ltd are cutting production to bring it in line with demand.
Hero Honda told Bloomberg that sales in June would fall to 245,000 units, 12% lower year-on-year. Its sales had fallen by 6% in May. Analysts say things are far worse in the industry than they had earlier expected. But this picture isn’t reflected in all two-wheeler stocks. Since the beginning of May, when companies first reported a drop in monthly sales, Hero Honda and TVS Motors Ltd have risen by about 3%. Bajaj Auto has fallen by 12%, but that’s more to do with the disappointment over its disclosure about the call options with its German insurance joint venture partner.
At the beginning of this fiscal, hardly anyone had foreseen growth would be negative. But now companies are set to report a drop in sales right in the first quarter. Analysts, who had already cut their growth estimates after interest rates rose early this year, are now revisiting their earnings models. It’s surprising then that stocks haven’t really come in line with these drastic changes.
What’s been working in the favour of two-wheeler stocks is that their price-earnings valuations, at around 15 times forward earnings, look cheap relative to the market. But it’s unlikely this would continue. Once June quarter earnings are announced, the markets can be expected to wake up to the reality of negative growth. Thanks to aggressive pricing, companies in the sector had seen margins falling even when volumes had grown at a steady pace. Now, with volumes also turning against them, the impact on earnings could be worse.
Another reason stock prices have remained firm is the hope that the current demand situation is temporary, and that things would improve later in the year. But there’s no indication of such an outcome. According to analysts, two-wheeler inventory is as high as 45 days sales, three times the normal levels. In any case, demand would have to pick up significantly in the latter half of the year to justify current valuations.
Cement prices
Has the government’s effort to curb the rise in cement prices by restructuring excise duties and lowering import duties been effective? It has, but to a very small extent.
A report by ASK Securities points out that cement prices have dropped by around Rs5 per kg last month in Kolkata and by Rs6-10 per bag in Jaipur. That’s not much, considering that prices had spurted by about 30% year-on-year. Also, prices in the rest of the western region have remained flat. In Delhi, while prices fell by Rs2 per bag, they moved up again due to higher freight costs. But it’s the south of the country that has shown the highest demand, as a result of which prices in the region have moved up by Rs6 per bag in May. Analysts say that a further rise is expected in June. In other words, the benefit of the lower excise duties has not been passed on to the consumer in the southern region.
Going forward, analysts expect stable prices during the monsoons, because demand continues to be strong. The current year is expected to close with only a slight supply surplus, so prices should hold till then. A lot of new capacity, however, is expected to come up by the first quarter of FY09. That and worries about government intervention have made investors wary about investing in cement stocks.
But if the upward trend in cement prices in the South continues, there could be a positive earnings surprise in the current quarter for the southern cement companies.
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First Published: Fri, Jun 08 2007. 12 00 AM IST