IIP: Primed for growth

The manufacturing sector is going strong in spite of the central bank's measures.

After posting a robust growth through FY07, industrial production data was once again strong in the first month of FY08. The IIP was up 13.6 per cent in April 2007 compared with 9.9 per cent growth a year ago.

According to Bloomberg, economists had estimated an increase of 11.3 per cent. Even for March 2007, the government has revised the IIP growth from 12.9 per cent earlier to 14.5 per cent.

Manufacturing is still going strong-it grew 15.1 per cent in April after a 12.5 per cent growth last year. Electricity with an 8.7 per cent growth also contributed though the growth in the mining index was somewhat muted at 3.4 per cent.

In April 2007, the high weight food products sector grew 55 per cent, contributing substantially to the growth in the index. Machinery and equipment other than transport equipment and basic metals were the other two industries that grew faster than the others at 19.2 and 18 per cent, respectively. In terms of use-based classification, both capital goods and consumer goods grew at 17.7 per cent each.

The consumer durables sector, which has been subdued for the past six months, grew at 5.3 per cent, better than the growth rates in the previous two months. Consumer non-durables grew an impressive 21.9 per cent, some of which would mirror the growth in food products.

The manufacturing sector is going strong in spite of the central bank's measures. Higher interest rates have not yet started impacting consumption, and this may result in RBI looking at some further tightening once again.

Pantaloon Retail: Margin pinch

Pantaloon Retail reported a lacklustre sales growth in May 2007, with the same-store value retailing segment reporting 1.55 per cent y-o-y growth, while the lifestyle segment grew 1.52 per cent.

Analysts point out to a high base effect in the corresponding period of the previous year, which led to slower same-store sales growth in May 2007.

Meanwhile, Pantaloon Retail's operating margins in the March 2007 quarter were adversely affected owing to surging sales in the low-margin value retailing segment.

As a result, operating profit grew 56.6 per cent y-o-y to Rs 60.28 crore in the March 2007 quarter compared with 89.1 per cent growth in net sales to Rs 861.04 crore. Sales in the value retailing segment expanded 87.5 per cent y-o-y in the last quarter and accounted for 64.85 per cent of its net sales.

As a result, operating profit margin fell 145 basis points y-o-y to 7 per cent in the last quarter. Operating margin declined by 30 basis points even at competitor Shoppers' Stop to 7.1 per cent in the last quarter.

Pantaloon's total retail space amounted to 4.7 million square feet at the end of the March 2007 quarter, which is expected to reach 5.6 million square feet by the end of the June 2007 quarter. At Rs 440, the stock trades at about 36 times estimated June 2008 earnings as investor interest in the retail sector is still strong.

Omax Autos: Revving it up

Omax Autos, which supplies a range of components to the two-wheeler industry (nearly 90 per cent of its total sales) and four-wheeler industry, reported an improved performance in the March 2007 quarter, thanks to higher demand from key customers such as Hero Honda and Maruti Udyog. In addition, lower other expenditure and power, fuel costs helped boost operating margins in the last quarter.

As a result, operating profit grew 42.2 per cent y-o-y to Rs 16.3 in the March 2007 quarter compared with 27.6 per cent growth in net sales to Rs 181.2 crore.

Operating profit margin also improved 90 basis points y-o-y to 9 per cent in Q4 FY07. Analysts also highlight that the company's growth momentum was provided by 113 per cent y-o-y growth in exports in the last quarter.

For FY07, the consolidated operating profit margin grew 110 basis points y-o-y to 9.7 per cent. The company's mini steel plant set up via through subsidiary Omax Steels has recently become operational and the cost synergies from this captive facility, are expected to accrue in FY08.

In addition, Omax is also attempting to reduce its dependence on the two-wheeler segment (which is currently grappling with sluggish demand conditions) by setting up a manufacturing facility for chassis for supply to Tata Motors. At Rs 89, the stock trades at a reasonable 6.5 times estimated FY08 earnings.