Bajaj Auto: Demerger pangs

Investors are unhappy that Allianz can hike its stake in insurance JVs at a nominal price

The Bajaj Auto stock had a rough ride on Thursday, tanking 6.7 per cent, possibly because investors were unhappy that Allianz, its partner in the life and general insurance joint ventures, has call options that allow it to increase its stakes in the JVs at a price equivalent to a return of 16 per cent compounded, if the expansion happens before July 2016.

At a time when analysts are valuing Bajaj Auto's 76 per cent stake in the two insurance companies at about Rs 400-600 per share, this is bad news but shareholders will still get some upside from the insurance ventures, both of which are doing exceedingly well. Whether all the disappointment has been priced into the stock remains to be seen.

Meanwhile, demerger of the auto and financial services businesses will let shareholders own the business they want to, at the same time both, if they so wish through the holding company, which will own 30 per cent in each of the auto and investment companies.

Hopefully, they should see the values of the individual businesses being unlocked. Thus, existing shareholders of Bajaj Auto will own 70 per cent in the auto and financial services businesses in the same ratio as their current holdings.

Bajaj's March quarter numbers are disappointing with volumes growth dropping to 1.5 per cent y-o-y, after the blistering pace growth seen during the past few quarters. Thanks to a better product mix, however, the top line growth was somewhat better at 6.8 per cent y-o-y.

Obviously higher interest rates are taking their toll. So are higher input costs which resulted in the company's standalone operating profit falling 23.2 per cent y-o-y for the quarter.

Not surprisingly, the operating profit margin was flat at 14.1 per cent sequentially in Q4 FY07. Overall, margins have been down for FY07 by 280 basis points to 14.9 per cent.

Competitive pressures are unlikely to ease in the near future and until Bajaj manages to upgrade customers from 100 cc bikes to bigger motorcycles, the company's margins will continue to remain weak. At present, the 100cc category accounts for 50 per cent of volumes, but contributes only 24 per cent of revenues.

Production at the Uttarakhand plant might yield some tax benefits which could help offset discounts. But only when the company manages to move out of the economy segment will margins pick up. Till such time, the stock will in all likelihood remain a market performer.

Tata Steel: Gung Ho

Tata Steel has reported an improved performance in the March 2007 quarter, thanks largely to higher steel prices on a y-o-y basis. As a result, the company's operating profit grew 46 per cent y-o-y to Rs 1,903.5 crore in Q4 FY07, while net sales grew 21.5 per cent to Rs 4,980.44 crore.

Its operating profit margin also improved 640 basis points y-o-y to 38.2 per cent in the last quarter. The stock gained 1.5 per cent to Rs 597.35 on Thursday.

The company's steel sales grew marginally on a y-o-y basis to 1.26 million tonne in Q4 FY07, but realisations improved an estimated 21 per cent y-o-y to Rs 39,510 per tonne.

No doubt, global steel prices were higher on a y-o-y basis in Q4 FY07, but larger volumes in the higher margin steel products for the auto sector contributed to the improved profitability significantly.

Auto steel sales grew 15.8 per cent y-o-y to 0.22 million tonne in the last quarter. For the full year, the company's operating profit margin also expanded 70 basis points y-o-y to 39.7 per cent.

Tata Steel had earlier outlined its financing plan for the Corus acquisition and the total dilution of its existing equity capital, after the 1:5 rights equity issue, the convertible preference share issue of 1:7 and the overseas issue, is estimated at about 45-46 per cent.

Also, synergies with Corus are expected to be realised only in the medium term, given limited availability of low-cost steel slabs in the domestic market, which could be sent to the European operations for value addition. As a result, with the stock trading at 8.8 times estimated FY08 earnings, there is little room for further upside.

Thermax: China investment

Thermax is investing $8 million (Rs 36 crore) to set up an absorption chiller manufacturing facility in China. The senior company management said the Chinese market currently accounted for about half of the $600 million global market for absorption chillers.

Thus, the investment in the neighbouring country is expected to ensure that Thermax is located close to major customers. Absorption chillers are used largely as chilling solutions in the industrial and commercial sector, including malls and offices, provided the key input of a piped gas network is readily available, say analysts.

In FY06, Thermax witnessed its absorption chiller business grow 53.4 per cent, y-o-y, to Rs 8.5 crore, which is a small proportion of its consolidated income from operations at Rs 1,625 crore. The senior management also said they chose China because of lower production costs in that country.

Thermax is also investing Rs 175 crore in Gujarat to ramp up its production capacity in the boiler and heater segment. This segment has been growing at over 40 per cent over the past three years, given the strong demand conditions from user industries such as steel, cement and refining, say analysts.

With contributions from Shobhana Subramanian and Amriteshwar Mathur