Ashok Leyland: The momentum question

Ashok Leyland has done well, but the question is whether it can sustain the good performance

Having got its act right on the production front in October, Ashok Leyland has gone ahead and reported an impressive set of numbers for the December quarter.

Although volumes had grown just 2.7 per cent, revenues grew 15.7 per cent thanks to a 12.6 per cent improvement in average realisation. While much of the increase in realisations were on account of a better product mix, the average two per cent price increase taken by the company also helped.

But raw material expenses jumped 20 per cent and as a result the improvement in operating margin was restricted to 50 basis points.

Operating profit rose 21 per cent, but growth in profit before exceptionals and tax was much higher at 39 per cent thanks to a jump in other income and a fall in interest cost thanks to the cheap FCCB loan the company raised in April 2004. The results were clearly much better than expected - the company's stock prices jumped almost eight per cent after results were announced.

The new wage agreement with employees in the company's Hosur plant is expected to result in a big jump in productivity. Further, the price increase taken last quarter coupled with a better product mix could continue to result in higher margins going forward.

Yet, at around 9 times estimated FY06 earnings, Ashok Leyland trades at a considerable discount to Tata Motors. Apart from the fact that its business is not diversified like that of Tata Motors, which also sells passenger cars, the lower valuation is also a reflection of the company's inconsistent track record.

Sun Pharma

Sun Pharmaceuticals declared a 14.6 per cent growth in earnings last quarter, despite surging R&D costs and an extra-ordinary expense of Rs 15.7 crore related to FCCB issue expenses. Excluding the extra-ordinary expense, earnings would have grown 37 per cent.

Net sales grew 31 per cent to Rs 352.4 crore, helped by a 24 per cent growth in its domestic sales. R&D expenses jumped 91 per cent to Rs 18.8 crore, which was expected given the run up to the new patent regime. This led to a 340 basis points drop in operating margin, and as a result operating profit growth was lower at 15.9 per cent.

Going forward, one of the growth triggers for the company could be inorganic - Sun plans to shortly acquire a company in the USA. Besides, its export turnover is expected to improve significantly, as its facilities in Bangladesh and Mexico have recently commenced production.

HDFC

HDFC's operating income for the nine months to December 2004 grew 9.8 per cent, well above the 7 per cent growth recorded in the first half of the year.

Interest earned on loans moved up by 6.98 per cent, again well above the first half's growth of 4.89 per cent. Income was also boosted in Q3 by higher net profits on sale of investments and "other interest income".

Interest paid as a percentage of interest earned on loans was at 75.3 per cent during the nine month period, the same as in the first half. Net interest margins on the housing loan portfolio were steady at 2.18 per cent, thanks to the rise in loan rates. While cost of funds was 6.3 per cent, the management points out that the incremental cost is around 6 per cent.

On a year-on-year basis, gross profits were up 27.7 per cent last quarter, compared to a y-o-y rise of 23.6 per cent in Q2.

Diluted earnings per share rose by 28.5 per cent. Non-performing loans moved up to 1.26 per cent, compared to 1.19 as at end -September, but the management says that's a seasonal phenomenon, with borrowers delaying payments.

At its current price, HDFC's price-earnings ratio is still below its diluted EPS growth., but its price to book, at around 4.5 is very high. As for the much-awaited slowdown, loan disbursements during Q3 were Rs 3669 crore, compared to Rs 2876 crore during the same quarter of FY04.

IIF projections for emerging markets

With net FII inflows continuing to remain absent from the Indian market, concerns have surfaced whether FIIs will stay away from the Indian market this year.

According to the Institute for International Finance (IIF), portfolio flows to emerging markets reached an 11-year high in 2004, and it says that net inflows to the Asia Pacific region (which includes India) will probably slow down from $31 billion last year to $30 billion.

Nearly all of the reduction will take place in India and South Korea Net portfolio inflows to China are projected to rise to $15 billion from $12 billion last year.

About the Indian market, the IIF says that "India's equity market in recent years has benefited from the recognition that corporate governance and transparency standards are superior to those in most emerging markets".

Nevertheless, it expects that "the curtailment of the privatisation program is likely to have a dampening effect on portfolio equity flows this year."

Thankfully, IIF projections have proved to be wide off the mark in the past. For instance, last October it said that net portfolio inflows to Asia would be $22.9 billion for 2004, while the actual figure was $31 billion.

Moreover, while it's true that the Indian market is down this year, so is the Chinese market, and the Korean MSCI index is already up over 4 per cent this year.

With contributions from Mobis Philipose and Amriteshwar Mathur