Hero Honda Ltd sprang no surprises when it announced a 20% drop in net profit for the June quarter.
The entire two-wheeler industry has been reeling under the pressure of higher interest rates and a resultant drop in demand. What’s surprising, however, is that the Hero Honda stock has risen by about 9% since April, despite the drop in earnings. The company’s valuation has risen from 14.9 times trailing earnings in April to 17.2 times currently.
One could argue that much of the correction happened in fiscal year 2007, when the stock fell 23%. But even trailing 12-month earnings have fallen 17% between last April and now. Valuations have hardly corrected to reflect the change in fortunes.
It is no wonder, then, that over 60% of the analysts tracking Hero Honda have a ‘sell’ rating on the stock, according to Bloomberg.
On a year-on-year basis, revenues rose 3.5% despite a drop in volumes, thanks to a better product mix. But despite the increase in the proportion of higher priced bikes, margins fell by 273 basis points. Operating profit per vehicle sold was 14.4% lower, primarily because of higher advertising costs and more promotional offers.
The saving grace last quarter was a marginal improvement in profitability over the March quarter. Although revenues fell 7% sequentially, operating profit per vehicle improved by 4.6%. The savings were primarily on account of overheads such as sales costs. The fact that things aren’t getting worse on a sequential basis could prompt analysts to maintain their estimate of a slight increase in earnings for the year till March 2008.
Still, that’s hardly any reason why the stock should continue enjoying a price-earnings multiple as high as 17.2 times trailing earnings.
Central Bank of India has priced its IPO at Rs85-102 per share. Its book value per equity share, according to the prospectus, is Rs77.25 as on 31 March. Deduct net non-performing assets (NPA) of Rs878.45 crore on that date and the adjusted book value per equity share works out to Rs56.7.
On that basis, the price to adjusted book (on fiscal year 2007 book value) works out to 1.8 at the higher end of the price band. That’s higher than the valuations of most of its peers: For example, Union Bank of India and Corporation Bank quote at 1.5-1.6 times fiscal year 2007 book, Vijaya Bank at 1.3 times and Bank of Baroda at 1.3 times book. The much larger State Bank of India quotes at a stand-alone price-to-book of 2.7.
Central Bank’s NPAs too are rather high, with gross NPAs at 4.8% of advances and net NPAs at 1.7% of advances, although the ratio has been improving.
The remarkable thing about the bank is its 93% rise in net profit in fiscal year 2007. But operating profit growth was far more tepid, at just 5.9%. Much lower provisions and contingencies helped boost net profit.
Despite the higher profits, return on average assets, at 0.62%, was lower than its peers.
Net interest margin for the bank declined from 3.51% in fiscal year 2006 to 3.16% and growth in net interest income was low.
However, 42% of the bank’s deposits are low cost current and savings accounts and that should keep margins high. In technology, the bank is not so well placed as several other nationalized banks. There’s no particular reason why Central Bank should not do as well or even better than its peers—in a sense, the nationalized banks can be viewed as commodity producers.
Viewed in that light, it may perhaps be more rewarding to choose from the variety of banks on offer more cheaply in the secondary markets.
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