Ten-year bond yields have fallen well below 8%, indicating that the worst fears on interest rates can be laid aside, at least for the time being. This begs the question, ‘Will the stocks of two-wheelers, the most interest-rate sensitive among auto segments, bounce back?’
The markets don’t seem to think so. Two-wheeler stocks —Hero Honda, Bajaj Auto and TVS Motors have been flat in the past week. One-month returns, too, are negative. Analysts say that it’s too early to discount the benefit of lower interest rates in the case of two-wheeler companies.
One would have to see what specific loan offers finance companies provide for two-wheeler customers, they say.
It’s important to note here that finance companies have reduced their exposure to two-wheelers in the recent past—one of them, GE Money, decided to get out of two-wheeler financing altogether. That stance may not change soon.
Besides, one has to contend for the build-up in inventory over the past few months due to falling sales. And June quarter results are round the corner, which would give a better idea of what impact falling sales are having on profit. Bajaj Auto’s two-wheeler sales fell as much as 12% last quarter and TVS’ sales fell about 15%. Hero Honda did slightly better with a 3.6% fall in sales.
Ironically, the drop in sales is happening at a time when both Bajaj Auto and TVS Motors have brought in new capacity for motorcycle production. Hero Honda, according to news reports, has deferred commencement of production at its new factory.
Higher capacity and falling sales can together work as a deadly combination, but thankfully for these companies, all of the new capacity is in tax havens. The resultant cost savings would offset some of the adverse impact of falling sales.
Dishman Pharmaceuticals & Chemicals Ltd’s stock rose sharply on Monday, on the news of the company’s acquisition of the fine chemicals and vitamin D business of Solvay Pharmaceuticals in the Netherlands.
It’s the latest move in a slew of initiatives of companies in the CRAMS (Contract Research and Manufacturing Services) space to take over assets in Europe, such as Nicholas Piramal’s purchase of Pfizer’s manufacturing facility at Morpeth, UK, or Shasun Chemicals and Drugs Ltd’s buyout of the custom synthesis business of French company Rhodia Pharma Solutions. Indeed, a large part of Dishman Pharma’s future growth will come from its acquisition of Swiss company Carbogen Amcis, which is big in contract research, in August last year.
The Dishman stock has seen plenty of action, moving up over 19% in the past month and around 35% since the beginning of May.
But Dishman is not the only stock in the CRAMS space to go up in recent times—the Divi’s Laboratories stock has done even better.
Nevertheless, with around 80% of its revenues coming from the CRAMS space, Dishman Pharma is a strong play on the business.
There are several key drivers to the stock, not least being the fact that it has notched up a host of small acquisitions and several joint ventures, including setting up a manufacturing base in Saudi Arabia.
It is also expanding capacity and signing new contract manufacturing deals. Add to that the proposed shifting of a low-margin commodity business to China and there are plenty of reasons for the stock to do well.
There’s no denying the opportunity in the CRAMS space for companies like Dishman Pharma or that it has been able to make all the right moves so far.
But at around 23 times FY08 earnings, the stock has surpassed most analyst targets. But in today’s heady markets, the fact that it quotes at a considerable discount to Divi’s Lab (around 34 times) is now being touted as a factor in its favour.
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