In cruise mode

Hero Honda returns telling numbers in Q3

Hero Honda has turned in a much better performance in the December quarter, compared with a rather lacklustre show in the first half of the year.

Sales grew 14.9 per cent to Rs 1,581 crore, on the back of a 26 per cent jump in volumes thanks to the favourable festive season. There continues to be a big difference between the growth rates in volumes and revenues because of a higher proportion of sales of entry-level bikes this year thanks to the success of CD Dawn.

Yet, margins have not been affected - last quarter, operating margin improved slightly by about 50 basis points. This was possible because of a fall in the 'other expenditure' component, for a change.

Previously, savings came from raw material expenses, leading to the belief that the company was squeezing its suppliers, who are dependent on Hero Honda for most of their sales. Last quarter, however, raw material costs actually jumped 200 basis points as a percentage of sales.

It looks like the inevitable has happened. Higher input costs and a shift in product mix towards lower-end bikes was bound to impact profitability, and this is reflected in the jump in raw material costs. Nevertheless, the fall in other expenditure made up and operating profit increased 18.2 per cent.

Other income, once again, increased sharply by 104 per cent to Rs 44.5 crore or 15 per cent of PBT. But this time around, the increase in other income accounted for about 35 per cent of incremental EBITDA, against 88 per cent in the first half.

Importantly, the company has announced a dividend of Rs 10 per share, which would involve a payout of Rs 225 crore (including dividend tax). Given the huge size of the company's coffers, the outflow wouldn't make much difference to the overall cash position.

In the past month, the Hero Honda scrip has been the best performing share in the two-wheeler sector, gaining around 30 per cent in value. This is mainly because the company has gained significant market share in the last quarter, and it looks like it would continue to do so in the near future.

The only thing is margins may be under pressure going forward, unless of course it's able to pass on some of the increase in input costs to consumers. This is because of shift in product mix. Besides, the company's only offering in the premium segment, 'Ambition' has been taken off the roads temporarily because of underperformance.

Glenmark Pharmaceuticals

Glenmark's US subsidiary has entered into a product development and marketing license agreement with KVKV Pharmaceutical Company (KVKV), to initially develop and license to KVKV eight generic products for regulatory approval and marketing in North American markets.

The move will bring Glenmark large financial benefits in the short term, in the form of upfront and milestone payments amounting to approximately $80 million (Rs 360 crore) over the next 15 to 18 months. That's a lot of money, considering that Glenmark had posted sales of Rs 105.59 crore in the September quarter.

KVKV is one of America's fastest growing small pharmaceutical companies, and has a wide distribution network across the country. In addition, it has plenty of experience in filing patents in the USA. The benefit for Glenmark arises because it wouldn't need to incur hefty legal and marketing costs for these eight products, since KVKV would take the necessary steps to make the generics available to American consumers.

The generics business is getting increasingly very competitive and as a result is one of low margins. Consequently, every effort to prune costs is welcome. Glenmark's latest move would help it to expand its overseas operations without substantially increasing costs.

The first product launch under the agreement is expected only during the latter half of 2005. Apart from initial upfront payments, Glenmark would also receive royalty payments.

With the market for these eight products estimated at $2.5 billion per annum, analysts point out that royalty payments would help Glenmark to substantially grow its exports turnover, which amounted to Rs 29.6 crore during FY03.

Moreover, the agreement is also expected to help Glenmark upgrade its research and development capabilities, which is crucial in the product patent regime to be introduced on January 1, 2005.

The markets, however, didn't seem too excited as the stock inched up just 1.5 per cent to Rs 185. But that's probably because the stock has already jumped around 140 per cent in less than two months' time.

With contributions by Mobis Philipose and Amriteshwar Mathur