Hero Honda: On slippery track

The challenge for Hero Honda will be to improve volumes in entry-level and premium segments

That Hero Honda's performance for the September quarter was going to be weak was understandable given that despite promotional offers volumes had, in the quarter, increased just 1.3 per cent, y-o-y.

However, the sharp decline of 15 per cent in its operating profit was worse than the 8-9 per cent fall that analysts had anticipated.

Intense competition from Bajaj Auto, which has increased its market share to 34 per cent from 24 per cent two years ago, affected Hero Honda's volume growth.

However, 1.6 per cent y-o-y rise in realisations helped the company's net sales improve by 2.94 per cent. Bajaj Auto too is feeling the heat as its price realisations improved by just 2 per cent. But an impressive 28 per cent growth in volumes helped the company post a robust 30 per cent growth in its top line.

Hero Honda faced pressure on the cost front, as adjusted raw material costs rose 146 basis points as a percentage of sales in the September quarter. Higher steel, aluminium and rubber prices led to the surge in raw material costs. Besides, 13.7 per cent rise in other expenditure was responsible for the lower growth in operating profit.

The company's operating profit margin declined 268 basis points, y-o-y, to 12.71 per cent in the quarter.

Pricing pressure has forced the Hero Honda stock to move out of the buy list of broking firms. The stock has been a laggard "� in the past three months, it has risen only 5.6 per cent compared with the Sensex gain of 25 per cent and Bajaj Auto's upmove of 14 per cent.

The challenge for Hero Honda will be to improve volumes in both the entry-level and premium segments. At 14 times its estimated FY07 earnings, the stock trades at a discount to Bajaj Auto, which goes at 21 times FY07 EPS.

Reliance Energy: Input cost blues

Rising input costs have once again affected the performance of Reliance Energy in the September quarter. The company saw its operating profit fall 10.7 per cent, y-o-y, to Rs 177.5 crore in Q2FY07, compared with 35.4 per cent growth in net sales to Rs 1407.6 crore.

Its operating profit margin dipped 650 basis points, y-o-y, to 12.6 per cent in the quarter.

The company felt pressure on margins because the costs of materials and sub-contract charges for its EPC and contracts division jumped a whopping 158.8 per cent in the September quarter.

In the June quarter too, the company had seen its operating profit margin slump 540 basis points, y-o-y, to 11.55 per cent.

For the September quarter, in the company's key electrical energy division, sales of electricity rose 12.5 per cent, y-o-y, to 2,187 million units. The growth in electricity unit sales was helped by the purchases from external sources, which rose 5.3 per cent, y-o-y, in Q2FY07.

The company's realisations per unit were, however, more or less flat at Rs 4.2 in the quarter. Reliance Energy recently decided to postpone the tariff hike for its customers, which will have an impact on its profitability.

However, declining natural gas prices will ease some pressure on input costs. The Reliance Energy stock trades at 15.2 times its estimated FY07 earnings.