Business Standard

Fundamentally fine

Strong manufacturing and services growth continues

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Emcee Mumbai
It wouldn't be right to focus on the slowdown in growth in third-quarter GDP to 6.2 per cent from 6.6 per cent in the second quarter.
 
That was a no-brainer, given that GDP growth in Q3, FY 04 had accelerated to 11 per cent from 8.8 per cent in the second quarter, and because of the less-than-normal monsoon in FY05.
 
What's interesting is that the economy has done so well in spite of these handicaps. The success story has clearly been manufacturing, with the sector growing at 10.4 per cent in the third quarter. Manufacturing's strength had already been seen from the IIP data, and there are no surprises here.
 
The construction sector has grown by 8 per cent, up from 5.2 per cent in Q2. But that's due to the base effect "" construction growth was 7.8 per cent in Q2, FY 04 and a much lower 5.9 per cent in Q3.
 
The other major gains have been seen in the "financing, insurance, real estate and business services" sector, where growth accelerated from 5.9 per cent in Q2 to 8.1 per cent in Q3.
 
The electricity, gas and water supply sector showed a marked deceleration from 9.3 per cent growth in Q2 to 4.4 per cent, but one reason for that is growth in this sector in Q2, FY 04 was unusually depressed, and it rebounded in Q3.
 
GDP growth is going to be higher in Q4, because growth slowed down from 11 per cent in Q3, FY04 to 8.4 per cent in Q4. But reaching the government estimate of 6.9 per cent growth for FY 05 is not going to be easy""it will require 7.4 per cent growth in Q4.
 
M&M
 
Mahindra & Mahindra has sold the 15.88 per cent stake it held in Ford India Pvt Ltd. The company hasn't disclosed the amount for which it sold its stake, but the move is expected to bolster both earnings and cash flow in the year till March 2005.
 
M&M's investment in Ford India had cost Rs 135 crore or Rs 12 per share. Analysts expect the sale proceeds to be in the region of Rs 250 crore, based on which cash flow would increase by almost Rs 22 per share.
 
The impact on earnings would be lower, since only the profit booked on the sale would find its way into the P&L. M&M is expected to report an EPS of Rs 41 in FY05 before accounting for extraordinary items.
 
Earlier this year, M&M had announced a 51:49 JV with Renault to produce and market 'Logan', a car in the Crore segment. Production will start in 2007 with a capacity of 50000 units per annum. Needless to say, the funds raised from the Ford sale would be useful in the setting up of the new JV, which would require an investment of approximately Rs 700 crore.
 
M&M currently sells about 110,000 UVs annually, and the entry into the lucrative car market will increase its presence in the passenger segment. This would further protect the company from the vagaries of the tractor business.
 
This fiscal, the company had the best of both worlds - while the automotive segment reported an impressive 40.6 per cent growth in profit, the farm equipment (tractor) segment turned in a profit growth of 140 per cent. As a result, earnings have jumped substantially and the M&M stock currently trades at only around 12 times estimated FY05 earnings.
 
Bata India: Time to walk out
 
Investor concerns regarding Bata India's performance had already led this scrip to fall about 10.5 per cent over the last three months. do the Q4 results bear out the concerns?
 
The company's net loss in Q4 CY04 has risen 53.14 per cent to Rs 21.94 crore on a y-o-y basis. However, the company's losses had increased a massive 335 per cent in Q3 CY03, on a y-o-y basis. On a sequential basis, losses in Q4 have actually declined 10.2 per cent. That's a small comfort.
 
Sales growth in both Q3 and Q4 CY04 have been more or less absent on a y-o-y basis, but in the last quarter, sales have grown sequentially by 11.8 per cent. Clearly, the company's efforts to sharpen its marketing mix via product launches as well as refurbishing its showrooms have shown signs of paying off.
 
But total expenditure too has grown 10.92 per cent in the last quarter, on a sequential basis "" VRS payments and higher staff costs have been responsible. Total expenditure to net sales, however, has been more or less steady at 110 per cent in Q4 CY 04 vis-a-vis the earlier quarter.
 
As a result, the operating loss too has been almost unchanged in the December quarter, on a sequential basis. Profit growth in the December quarter has been aided by other income growing 169 per cent, largely due to higher treasury earnings.
 
Despite a moderately improved performance on a sequential basis, the company's track record is patchy "" in the five-year period between 1998 and 2003, average growth in revenues was in negative territory.
 
The company's forthcoming rights issue is in the price band of Rs 45-54 per share and the stock currently trades at about Rs 83. Investors could consider exiting from this stock at current levels.
 
With contributions from Mobis Philipose and Amriteshwar Mathur

 
 

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First Published: Apr 01 2005 | 12:00 AM IST

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