Little deceleration

BS Compass

Strike at DCM has had little impact on Maruti Udyog's share price

Maruti's managing director, Jagdish Khattar, has said that his company's production continues to be hit by the strike at DCM Engineering, which supplies nearly 70 per cent of its cylinder blocks.

Maruti's sales were down three per cent in August, and according to Khattar, sales will be down in September as well.

In the April-July period , the company's sales had jumped over 53 per cent, and it's clear that the strike at the supplier has spoiled the party somewhat.

Needless to say, Maruti would have lost some of its prospective customers to competitors in the process, besides having to take a hit on the costs front because of lower capacity utilisation.

The Maruti stock, however, has not been affected much by this development. It continues to trade around the Rs 220 levels, or about six per cent lower than the stock's close in August.

Since its listing, the stock has outperformed the market by a huge margin, having gained 35 per cent against the Nifty's rise of around 20 per cent.

The main reason for this is that the problem with the strike is short-term in nature, and is expected to be resolved soon.

Already, the company has managed to maintain production at close to last year's levels by asking its other suppliers to make up for the shortage.

Once the supply of cylinder blocks gets normalised, sales growth is expected to be in high double-digit figures again.

The company has a financing tie-up with SBI in 29 cities, which was one of the reasons for the high growth rates recorded earlier in the year.

The tie-up will be extended to 165 cities by the end of this fiscal, and this is expected to give a boost to the company's volumes.

Besides, according to analysts, the company's cost reduction programme is on track, which means Maruti's production costs would decline 30 per cent by the end of FY05.

In summary, the long-term story remains intact for Maruti. Besides, at 14 times FY04 earnings, valuations aren't that stretched for short-term problems to have a big impact on the stock.

Punjab Tractors

Punjab Tractors' stock price has seen impressive gains in the last few days. Over the last couple of weeks, the stock has gained around 15 per cent while trading volumes have risen 7 times.

There are two main drivers for the stock. First, the good monsoons are expected to result in a growth in tractor offtake, and lead to a significant jump in earnings.

Secondly, some expect the company's performance to improve after its divestment to the CDC group.

The bane of the industry over the last four years has been declining volumes on the back of errant monsoons and the consequent pressure on margins because of price discounts.

Further, in an effort to report stable topline numbers, industry players had resorted to pushing volumes to the dealers.

Thus, while inventory days in the balance sheet may be for only around 20-30 days, analysts put actual inventories (including those with dealers) at around 10-12 months.

Therefore, either the industry will have to grow at phenomenal rates for the inventories to get cleared and for annual volumes to grow or the entire process of inventory correction will take a few years to occur.

Apart from the fundamental improvement in industry, it is expected that entry of CDC will also help the company to bag greater export orders from the US.

These benefits will only become evident over the next few years. But that has not stopped the market from discounting future earnings.

Analysts expect debtors to witness a significant reduction by around 48 per cent over the next couple of years and earnings to double.

But despite that, the company's FY05 earnings are discounted around 13 times. That is quite expensive, especially since the trend in inventory reduction has not been observed on a sustained basis.

With contributions from Mobis Philipose and Sameer Ranade