Hero Honda: On the ball

Hero Honda's operating profit, however, has slid 85 bps

Hero Honda's results for the second quarter ended September were largely in line with expectations. Revenues grew 39.4 per cent, tracking the 38 per cent volume growth in the quarter.

Hero Honda continues to be the biggest beneficiary of the spurt in two-wheeler sales this year, and this trend is expected to continue into the festive season.

The only hitch for the company in the near-term could be extraordinary success of Bajaj's 'Discover', which (if it happens) could hit sales of Hero Honda's Splendor/Passion.

Although sales growth has been impressive, higher raw material cost has caught up with Hero Honda. As a percentage of sales, it rose 130 basis points year-on-year.

Even in the June quarter, raw material cost had jumped 200 basis points, but this was offset by savings on "other" expenses. This time around, there were some savings on staff costs, but not enough to prevent an 85 basis points drop in operating profit.

Thankfully, other income was maintained at last year's level of around Rs 40 crore (14 per cent of PBT), unlike the June quarter when it had fallen to Rs 23 crore. In the six months till September, the company has clocked an EPS of Rs 19.25, which means achieving the consensus target of Rs 40-41 for FY05 shouldn't be a difficult task.

Especially so since performance peaks in the second half of the year because of the festive season. Considering that, Hero Honda's valuation of around 10.4 times FY05 earnings is inexpensive.

In comparison, Bajaj Auto gets a forward discounting of around 12 times. Apart from the expected success of 'Discover', the markets also seem to perceive that the entry of Honda in the motorcycles segment will be negative for Hero Honda in the long-term.

Meltdown in metals?

Metals prices and metal stocks fell across Asia on Thursday, following the sell-off on the London Metals Exchange. The fear: the old bogey of a slowdown in Chinese demand, this time because of high oil prices. Metal prices had moved up sharply on speculative buying, and they've collapsed on profit-taking.

But is the collapse entirely due to speculation? Chinese imports rose only 22 per cent last month, their slowest growth rate in two years, implying that the government's efforts to cool the economy is working.

But what's the extent of this "cooling"? Economists expect China's Q3 GDP growth to be 8.9 per cent, down from 9.6 per cent in Q2. Some cooling.

Also, the Chinese central bank said on Wednesday that a soft landing is in sight. A sudden collapse of demand is unlikely.

Back home, stocks such as Nalco, Hindalco, Sesa Goa and the steel and sponge iron manufacturers bore the brunt of the selling. The BSE Metals index fell by 4.68 per cent.

But no immediate impact in terms of lower product realisations is anticipated for domestic metal companies "" in the case of aluminium, domestic prices are still lower than the imported price by approximately Rs 1,500 - Rs 2,000 per tonne.

Also for copper smelting companies like Hindalco and Sterlite, the treatment and refining (TC/RC) rate is more relevant than LME metal prices, since they convert copper concentrate into value added products like copper rods.

And TC/RC rates have improved to around 18 cents a pound vis-a-vis around 3-4 cents per pound in March-April 2004.

Nevertheless, it will pay to keep a wary eye on China.

With contributions by Mobis Philipose and Amriteshwar Mathur