Hero Honda: Squeezing the numbers out

Although Hero Honda can be impacted by the monsoon, its valuation is undemanding

Hero Honda's earnings of Rs 190 crore in the June quarter missed analysts' estimates of a Rs 200 crore net profit. But that was only because other income was Rs 13 crore lower compared with the previous year.

At the operating level, the company did well to hold margins despite a 200 basis points jump in raw material expenses as a percentage of sales. This was achieved mainly through the control of ad spend, as a result of which other expenditure fell 200 basis points as a percentage of sales.

Average realisation was two per cent lower and prices of steel, rubber and plastic have been much higher on a year-on-year comparison. This explains the jump in raw material cost.

The savings under the other expenditure head are expected to continue, which means margins would be maintained at close to last year's levels. The drop in other income, it seems, could be an aberration.

But the markets are worried more about the erratic monsoon, as a big chunk of the company's sales come from rural and semi-urban areas. There's also the Rs 1,000 discount the company is now giving on the Splendor/Passion models, which will hit profitability of these models.

Although it's difficult to say to what extent the company could be impacted, it's unlikely that the 15 per cent-odd earnings growth estimates for FY05 would be under threat, what with a growth of 20 per cent already in the June quarter and a minimal impact expected in this quarter. In any case, the valuations are not too expensive at less than 11 times estimated FY05 earnings.

Biocon does it again

Biocon reported an impressive 112 per cent jump in net profit, which led to a three per cent rise in its stock price within minutes of the results being announced.

Turnover of statins, a cholesterol reducing substance, grew 79 per cent to 95.7 crore in the June quarter and profitability of this product segment has remained strong.

Statins, unlike other product segments, have not become commoditised in the US - the company's facilities were the only US FDA approved in the country.

Another important revenue stream for the company is contract research fees, and even this segment grew by 79 per cent, as the company got 10 new projects last quarter.

While the company's topline has grown significantly, net profit growth was also aided by a jump in other income to Rs 3.7 crore. In fact, operating profit growth was lower at 53 per cent.

Going forward, the company is aggressively working towards leveraging the opportunities created by simvastatin going OTC, enabling patients to get medication without a doctor's prescription.

And with the growing proportion of senior citizens in the West, this cardiovascular therapeutic segment is expected to see higher growth rates from approximately 16 per cent currently.

Also Biocon's subsidiary, Syngene's expansion plan is expected to be completed shortly and this will help the company move up the value chain, in custom research capabilities.

HDFC Bank does well sans treasury prop

The question that everybody wants to know about banks' first quarter results is how well they have stood up to the loss of their treasury income. HDFC Bank has done very well indeed, posting a growth of 30.5 per cent over Q1 last year.

As expected, "other income" was lower, due wholly to loss on sale/revaluation of investments. Compared with a gain of Rs 42.3 crore for Q1 last year, this figure was a negative Rs 65.2 crore in Q1 this year""the hit on account of revaluation has been substantial.

This was partially made up by higher fee income. The big increase, however, was in net interest income, which went up by 43.6 per cent, more than sufficient to make up for the loss on revaluation of investments.

Net interest margin was maintained at 3.8 per cent. Wholesale banking margins rose as cost of funds was pushed down on account of float funds. What's more, the rise in net interest income also took care of a 26 per cent rise in operating expenses.

So what net effect has the loss on account of revaluation of investments had on the bottomline? Operating profits are up by 21 per cent, well below the 42 per cent rise notched up in FY 2004.

However, the bank management points out that the loss on revaluation used to be part of the provision line in earlier years, and has been shifted into the "other income" category this year.

With the duration of its investments ar a little less than two years and with good loan growth, HDFC Bank looks set to ride out the looming rise in interest rates.

With contributions from Mobis Philipose and Amriteshwar Mathur