Driving the economy

SMARTSHARE

US analysts are obsessed by two sectors. Specialists keep track of the obscure details of every industry. But everybody and his maiden aunt tracks the housing sector and automobiles.

Even official US data includes variables such as "housing starts" and "new auto-sales". These "leading indicators" are key since the US is an extreme example of a consumer-driven economy.

Consumer activity generates about 70 per cent of GDP, and buying new houses and new cars are the two biggest segments.

Uniquely among developing nations, about 65 per cent of India's GDP is generated by consumer activity. This is due to the incompetence of India's public sector, but that's irrelevant.

In a consumer economy, you must track auto-sales and housing mortgages. If growth is healthy here, chances are the economy is doing well. Rather than wait for every detail, you can extrapolate the future from a sampling of major players' performances. You trade off accuracy for lead time with this approach.

In the auto sector, growth in Q1 2006-07 seems strong but there are warnings of a possible drop in full-year profitability. In housing finance as well, overall volume growth seems okay but spreads are getting thinner.

Topline growth will be good in both these consumer-driven industries but margins may disappoint. That means earnings estimates may be downgraded and that won't make Dalal Street too happy.

Housing major HDFC's FY 2005-06 and Q1 2006-07 results show stable and predictable growth. Loan disbursals have grown at over 28 per cent in Q1 2006-07 versus Q1 2005-06.

Compared to Q1, 2005-06, net revenues have grown at 20 per cent in Q1 2006-7 while net Non-performing loans (NPLs) have reduced significantly across both three-month and six-month timeframes.

But spreads have also reduced. In Q1, 2006-07, HDFC generated Rs 1,037 crore in interest income while paying Rs 801 crore as its cost of funds.

In Q1, 2005-06, it generated Rs 760 crore in interest income while paying Rs 566 crore in interest outgoes. I don't know if other housing finance majors will cut NPLs but they will see narrower spreads. Overall, the picture seems healthy but don't expect extraordinary growth.

In four-wheelers, January-June 2006 unit sales growth for the overall industry was in the mid-teens. In June itself, Tata Motors saw a spike of 37 per cent with sales of 45,223 units against 33,018 units in June 2005. June was a good month since Hyundai and Maruti both reported excellent sales growth as well.

TM's full-year results saw it maintain negative working capital and score about 13 per cent unit growth across all markets. Passenger vehicles sales were almost flat with 5.6 per cent growth over 2004-05.

TM itself offered a negative advisory for 2006-07 saying "global competition, hardening interest rates and rising fuel and input costs would adversely affect sales, besides the company's profitability". The price increases in steel, non-ferrous metals, rubber and plastics would hurt.

Two-wheeler major Bajaj Auto's operating margins for Q1, 2006-07 dropped to 16.4 per cent from 24 per cent in Q4, 2005-6. The input cost to sales ratio was up at 69.5 per cent.

Volumes jumped however with motorcycle sales up 35 per cent and market share rising to 33 per cent, (31 per cent in FY05-06). Net profits rose 27 per cent because of higher taxes (up 37 per cent). It seems higher fuel prices and interest costs are unlikely to impact sales much in 2/4 wheelers but profit margins will drop.