Correction call

The Hero Honda share rally may not sustain for long

The Hero Honda scrip jumped almost seven per cent in a sort of relief rally, even as the company management spoke to analysts about its plans in light of Honda's entry into the motorcycle segment in September this year.

Fears that Honda will make an aggressive entry into the Indian motorcycles market had led to a sharp correction in Hero Honda's share prices since last week.

After having touched a high of Rs 538 last Monday, the scrip had fallen over 16 per cent before it recovered some of those losses yesterday.

The rumour doing the rounds was that Honda's new offering in the 150 cc segment will give Indian players a run for their money because of aggressive pricing and also because its fuel efficiency would match that of the 100-110cc bikes.

Besides, this was expected to hurt Hero Honda more since consumers were seen preferring a vehicle manufactured 100 per cent by Honda, rather than one in collaboration with an Indian player.

Hero Honda told analysts that based on its knowledge a 150 cc bike has lower fuel efficiency compared with a 100 cc bike.

Besides, it reiterated that Honda's new product would be on an altogether different platform and will not clash with neither any of Hero Honda's existing products nor the ones it plans to introduce in the near future.

Analysts point out that although Honda's new offering will be a good value proposition, it will not compete with Splendor/Passion in terms of price. Thus, it may seem that it's not much of a threat.

But then, the executive segment is gradually upgrading to the premium segment and Hero Honda has already been hurt in the process because of the relatively lacklustre performance of 'Ambition'. Honda's entry will clearly hurt it further in this area.

Meanwhile, Hero Honda's overall sales have been zipping ahead thanks to the good monsoons and the roaring success of 'CD Dawn'.

Despite a fall in realisations owing to competition and a change in product mix, it has managed to maintain margins, mainly by squeezing its suppliers. Net profit improved by an impressive 33 per cent in the December quarter.

In comparison, the discounting of around 13 times estimated FY04 earnings doesn't seem much. But the stock has now risen over 150 per cent in the last one year and with competition set to increase after the entry of Honda, the company may not be able to sustain its current performance. In summary, the check on the unabated rise in Hero Honda's share price seems in order.

Oil marketing companies

BPCL has decided to halve its offtake from Reliance's Jamnagar refinery to 1.7 million tonnes in the coming fiscal.

BPCL is not the only company that has made this decision "" HPCL and Indian Oil Corporation are also following suit.

And this will result in Reliance's sales to the public sector dropping to approximately 4.3 million tonnes in 2004-05 from 11.3 million tonnes currently. The question is "" what will be the impact of curtailed PSU demand on Reliance?

For the oil PSUs, reducing purchases from Reliance is logical ""- they are ramping up capacity and it would be necessary for them to optimise capacity utilisation at their facilities.

Indian Oil Corporation is expanding capacity by six million tonnes while BPCL is augmenting its facilities by three million tonnes.

Apart from the current expansion underway, refining capacity in the public sector has grown by approximately 9.5 million tonnes, with ONGC taking over MRPL.

Analysts, however, point out that oil PSUs, especially IOC, could consider increasing offtake from Reliance's Jamnagar refinery in the medium term, as it would be easier (logistically) to serve the booming demand in the Northern region. IOC already has in place a five-year contract, beginning 2004, with RIL for sourcing products on need basis.

Reliance meanwhile, has two options going forward to make up for the curtailed demand ""- increase exports or find new domestic customers for its Jamnagar refinery. Reliance current exports of petroleum products amount to about 8 - 9 million tonnes annually.

Expanding exports for Reliance may not be viable as margins could take a hit "" the import parity price for diesel is pegged at Rs 15,750 a tonne whereas in the international markets, the company would be able to realise approximately Rs 12,375 a tonne (including DEPB benefits), according to analysts.

Senior Reliance officials however point out that they plan to build up to 500 petrol pumps every quarter and that should ensure utilisation of their capacity.

With contributions from Mobis Philipose and Amriteshwar Mathur