Eicher Motors: Well-timed exit

Eicher Motors has sold off its tractor business at an opportune time

In less than 18 months since the tractor, gears and engines businesses were transferred to it from Eicher Limited, Eicher Motors has divested it to TAFE Motors and Tractors Limited. The company has pointed out that it has decided to now focus on the commercial vehicles business.

With the tractor industry having seen a revival lately, it was certainly a good time for Eicher to exit the business. The consideration of Rs 310 crore discounts annual revenues by around 0.6 times.

But for a business with EBIT margins as low as 4.5 per cent (for the nine month period ended December 2004), the consideration is fairly high at over 13 times annualised EBIT.

There's no disputing that Eicher Motors has got a good price, and this is reflected in its stock, which has risen about 12 per cent since the announcement.

Part of the money is expected to be used to retire debt. Interest cost accounted for only 1.3 per cent of net sales, but with net profit margin is just 2.7 per cent, the bottomline would get a boost if debt is reduced.

But at the same time, the profit earned by the tractors division will no longer be there. In the nine months ended December, the tractor division accounted for 25 per cent of total segment profit.

Based on rough estimates, the gains from higher other income and lower interest outgo would be largely offset by the loss of income because of the sale of the tractor division.

Further, since the commercial vehicle business would now account for over 80 per cent of revenues and almost 88 per cent of segment profit, Eicher Motors will be almost fully exposed to the vagaries of the CV cycle.

Last fiscal, for instance, profit of the CV segment grew just 3 per cent because of raw material cost pressures. The tractor division, however, made up as its profit rose by 25 times.

This cushion will no longer be available. Given these factors, and considering that Eicher Motors now trades at around 15 times estimated FY05 earnings, further upside is expected to be limited.

Mercator Lines

Mercator Lines has reported a 2.37 per cent sequential growth in its profit before tax to Rs 59.72 crore in the March quarter, well below the 83 per cent sequential growth recorded in the December quarter.

Slower sequential growth in the March quarter is due to the recent cooling off in freight rates "" average freight rates in the VLCC segment had declined about 59 per cent in the March quarter, compared to the December quarter, and in the case of Suezmax, they fell about 50 per cent.

The company's senior management pointed out that they have entered into long term contracts in a bid to minimise the impact from the recent fall in freight rates.

However, freight rates reached in the December quarter were unsustainably high, and the return to more realistic freight rates is being viewed as healthy.

The company has succeeded in expanding the tonnage transported by about 10 - 12 per cent and also enhanced capacity utilisation levels. These steps have minimised the impact of lower freight rates and enabled net sales to grow sequentially by 3.73 per cent.

The fact remains that the company's profit after tax has grown an impressive 284 per cent to Rs 174.43 crore in FY05. In addition, at the current market price of around Rs 85, the trailing price-earnings ratio is merely 3.

Going forward, future trends in global demand for petroleum products will play a key role in determining freight rates for the key tanker segment.

Crompton Greaves

The facts about the upturn in the power capex cycle are well-known, but the concern was that higher input costs, mainly due to higher steel prices, could act as a dampener.

And in the case of Crompton Greaves, profit growth has lagged the 17.19 growth in its income from operations "" the company has reported a mere 5.65 per cent growth in its profit before tax and exceptional and extra - ordinary items to Rs 44.49 crore.

What's the reason? Consumption of raw materials has gone up by 9.5 per cent in the March quarter, but as a percentage of income from operations, it has actually fallen.

The cost management techniques initiated have helped to minimise the impact of higher steel prices. However, other expenditure has grown 39.71 per cent to Rs 93.82 crore.

To the company's credit, it has leveraged the current expansion under way in the electricity distribution network via enhanced sales of transformers and switchgears.

As a result, segment revenue of the key power systems business grew 21.69 per cent to Rs 311.44 crore in the March quarter.

However, segment profit grew only 6.64 per cent, owing to higher input costs. A larger turnover has helped overall operating profit grow 7 per cent to Rs 48.58 crore in the last quarter however, operating profit margin fell marginally to 7.12 per cent.

Going forward, synergies from its recent takeover of the transformer businesses of the Belgium-based Pauwels Group should help drive growth. In addition, the company is also expected to benefit by the government's emphasis to expand the rural power network across the country.

This is expected to result in further strengthening of Crompton's order book position which amounted to approximately Rs 1065 crore at the end of March 05, a y-o-y growth of 59 per cent.

With contributions by Mobis Philipose and Amriteshwar Mathur