Discordant notes

Provisional results of state-run engineering firms do not paint a consistent picture

Flash results of the three engineering state undertakings do not paint a consistent picture to confirm the bullishness in the sector.

While the market has reacted positively to the performance of BHEL and Bharat Electronics (BEL), the Bharat Earth Movers (BEML), stock prices have seen an almost 20 per cent correction from its all-time high in Friday after the provisional results were announced.

Valuations for the engineering sector have zoomed in the past year, thanks to a healthy order book growth and earnings visibility. And by the market's reaction, BHEL's results are more or less in line with expectations.

BHEL has managed a 70 per cent gain in net profit, much above analyst estimates, on a 39 per cent sales growth. The stock has gained almost 200 per cent in the past year.

In case of BEL, the performance has not been as breathtaking. Its pre-tax profit went up 23 per cent, while sales went up 11 per cent.

But after a 5 per cent decline in net sales for the first nine months of FY06 over previous corresponding period, the improvement in both the top line and the pre-tax profit during the fourth quarter has helped the stock price rise. This stock has doubled in the past year, as it is a niche player catering to the defence sector.

For BEML, the top line growth was 18.6 per cent, but the pre-tax profit grew only 2.7 per cent. In the previous year, over 72 per cent of the company's pre-tax profits had come during the fourth quarter, and if the market was expecting a similar growth this year, it had to settle for just 46.7 per cent of the pre-tax profit in the fourth quarter.

As a result the stock tumbled after it announced the flash numbers. At its all time high on Friday, the BEML stock had gained 380 per cent. BHEL's outstanding order book went up to Rs 37,500 crore at the end of FY06 as compared to Rs 32,000 crore a year ago. Bharat Electronics had an order book at Rs 6,500 crore compared with Rs 6,100 crore a year ago.

BHEL has managed to deliver a strong performance for FY06, whereas BEML has disappointed, and the re-rating of the stock may continue. BEL will need to continue its strong performance for a few more quarters to justify its high valuations.

Motorcycle sales: Fast & furious

It's been an excellent year for motorcycle manufacturers with three leading players, which account for more than 90 per cent of total sales, turning in strong numbers for FY06.

While Bajaj Auto closed the year on an impressive 32 per cent y-o-y growth, Hero Honda managed a reasonably good 14 per cent growth while TVS motors clocked a decent growth of 19 per cent, albeit on a lower base.

The combined growth for the big three is around 20 per cent y-o-y, compared with around 25 per cent y-o-y in FY05. So, the numbers are good given that they are coming off a higher base.

With demand continuing to be strong, FY07 should turn out to be another good year and analysts estimate that motorcycle sales should see a growth of around of 15-16 per cent. Public transportation continues to be inadequate and financing schemes are still not expensive.

Given the intense competition in the market place, manufacturers are in any case not able to command too much pricing power. What players are doing is introduce as many new models as possible or tweaking existing products in a bid to attract customers and give them enough choice.

In March, TVS posted an excellent 31 per cent rise in sales , while Bajaj clocked 37 per cent and Hero Honda a somewhat modest 18.5 per cent. TVS' new versions of Star City and Victor GLX appear to have driven sales besides the 150cc Apache.