Shares of Bajaj Auto Ltd’s rose by a hefty 10% in a flat market soon after its June quarter results were announced, giving the impression that its performance was superlative.
But there’s hardly anything in the results worth getting excited about. Although volumes increased at a healthy pace of 8.5% and net realization improved by 1%, operating profit fell by 5.5% year-on-year because of margin pressure. Operating margin fell by 190 basis points to 11.5%, thanks largely to higher raw material costs. And while the company raised prices earlier this year, it couldn’t entirely pass on the entire increase in costs to its customers, what with demand already being sluggish owing to high interest rates and with no reprieve from its competitors.
Bajaj Auto also reported a large mark-to-market loss of Rs98 crore on its foreign currency forward covers, which it has decided to account for in the balance sheet as a “hedging reserve”. If this charge was accounted for in the profit and loss account statement, as most others do, profit before tax would have dropped by over 40% compared with year-ago levels.
Bajaj Auto’s contention is that the mark-to-market loss is related to forward covers that were taken to protect export revenue that would occur in the future. When these revenues are actually realized, the profit or loss from the forward covers will get reflected in the profit and loss statement.
In simple language, what all this means is that because of the forward covers taken by the company, it will realize Rs98 crore less from some of its exports in the future. That’s because of the sharp depreciation in the rupee last quarter. If the rupee were to appreciate later this year, Bajaj’s forward covers may well turn out to be profitable.
But no one’s betting on that outcome, and so the disclosure of the Rs98 crore loss is a negative.
The deterioration in the operational performance, meanwhile, hasn’t really caused any alarm on the street. Instead, as one analyst put it, investors wanted to see how low margins could go because of raw material pressures and the reported figure of 11.5% has come as a relief.
Adjusted for the cash on its books and the value of its investment in KTM Power Sports AG (the second largest European motorcycle maker), Bajaj’s valuation had fallen to less than eight times estimated FY09 earnings. Hero Honda Ltd, although it’s doing much better currently, gets an extremely high 40% valuation premium. Bajaj’s results, although far from good, seems to have given investors comfort to switch their two-wheeler exposure. The 3.7% drop in Hero Honda’s shares also seems to suggest that.
How the Indian market stacks up against the rest of the world
If an investor had put in Rs100 in the MSCI India index on 1 July 2003, his investment would have been worth Rs 564.51 on 31 December 2007. Even after the dramatic fall of the last few months, that investment would be worth Rs371.13 on 9 July 2008.
The accompanying chart 1 shows the huge outperformance of the Indian market over the last five years compared to both the MSCI Emerging Markets (EM) index as well as the EM Asia index. Rs100 invested in the EM index on 1 July 2003 would be worth Rs307.94 on 9 July 2008, while the same amount invested in the EM Asia index would be worth Rs245.24.
The chart clearly shows India’s position as a high beta market—while its movement is broadly correlated to both the emerging markets and EM Asia, its movements are magnified both on the way up and the way down.
The higher they go, the harder they fall. That’s easily seen from chart 2, which shows the different trajectories of the Brazilian, Chinese, Indian and Russian markets, although they were all lumped together in the Bric category. Interestingly, while the Chinese market was the first to fall, followed by the India, both the Brazilian and Russian markets have turned downwards in the last month. The third chart shows the huge outperformance of MSCI India vis-à-vis the MSCI World index. Rs100 invested in the World Index on 1 July 2003 would have become merely Rs155.73 on 9 July 2008. That period of outperformance has come to an end now.
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