Hero Honda: Losing steam

Analysts expect motorcycle sales this year to be lower than those of the previous year.

Sagging demand, higher interest rates and rising costs have resulted in yet another weak quarter for Hero Honda. While revenues increased 3.5 per cent y-o-y - indicating that the company had pricing power in some categories - in the June 2007 quarter, its operating profit was down 17.4 per cent.

The only positive for Hero Honda was that its volume sales fell just 3.6 per cent y-o-y, while those of its competitors "" Bajaj Auto and TVS Motor-were down 10 per cent plus.

Hero Honda's operating profit margin declined 272 basis points y-o-y to 10.76 per cent in Q1 FY08. However, this was slightly better than the 10.2 per cent that it posted in the March 2007 quarter.

In the June 2007 quarter, Hero Honda's raw material costs went up only marginally owing to a high base a year ago. Other expenditure went up 24 per cent, a result of higher advertising and promotional costs and discounts.

After the disappointing results, the Hero Honda stock was down 1.6 per cent. Analysts have downgraded their forecast for motorcycle sales this year, and expect it to be lower than in FY07.

The company has postponed commencing production at its 0.5-million unit Uttaranchal plant due to lower demand. Thus, the tax benefits of this plant are unlikely to kick in this year, and the stock is likely to underperform. At its current price, Hero Honda trades at about 15 times its estimated earnings.

Exide: Hikes save day

Exide reported an improved performance in the June 2007 quarter helped by the two price hikes made by the company, which enabled it to offset higher raw material costs like lead on a y-o-y basis.

As a result, operating profit grew 64.3 per cent to Rs 131 crore in the last quarter, while net sales expanded 51.4 per cent to Rs 664 crore. Its operating profit margin also expanded 150 basis points y-o-y to 19.7 per cent in Q1 FY08.

Meanwhile, the company's adjusted raw material costs rose 130 basis points y-o-y to 61.6 per cent in the June 2007 quarter, but hikes in product prices helped it offset rising input costs. In FY07 too, Exide operating profit margin also improved 40 basis points y-o-y to 16.5 per cent.

The company is planning another hike in battery prices, in a bid to offset rising raw material prices. Also, the company has bought a 25 per cent stake in Australia-based Ceil Motive Power and it is expected to help Exide expand in that market.

However, with the stock trading at 27.3 times FY07 earnings (excluding the latest stake acquisition in Australia), it appears expensive despite its stake in ING Vysya Life Insurance, considering that the profitability of the core business depends a lot on how lead prices move.

Dr Reddy's: Generic sales dip

At Dr Reddy's Laboratories, the top line was adversely affected by the absence of authorised generics sales coupled with a dip in its custom pharmaceutical division revenues in the June 2007 quarter.

However, as authorised generics sales are typically low-margin, the company was able to improve its operating margin on a y-o-y basis in the last quarter.

As a result, operating profit (excluding other income) grew merely 2.8 per cent y-o-y to Rs 259.35 crore in the last quarter, while total operational income fell 11.1 per cent to Rs 1,199 crore.

A drop in its operational income was due to a 37 per cent reduction in its generics revenues in the last quarter, coupled with a 28 per cent fall in its custom pharmaceutical division revenues. However, its operating profit margin went up 290 basis points y-o-y to 21.6 per cent in Q1 FY08.

Meanwhile, in its generics division, sales in the key US market amounted to Rs 180 crore in Q1 FY08 compared with Rs 430 crore a year earlier owing to the absence of authorised generics sales in the last quarter. Dr Reddy's generics sales in Europe amounted to Rs 250 crore in the last quarter compared with Rs 240 crore a year earlier.

In addition, in its custom pharmaceuticals division, the company highlighted that it had to grapple with a shortfall in supplies of one of the key raw materials in its Mexican operations. To the company's credit, it has grown its total API sales by 13 per cent y-o-y in the last quarter, helped by improved sales in Europe.

Going forward, Dr Reddy's is understood to be planning several product launches across different product segments over the next few quarters. The stock is fairly valued at 15 times estimated FY08 earnings.