Mico: Bright spark

Mico's rising exports have benefited investors

Mico's is one of the rare cases where an MNC parent company decided to pump in funds into its Indian subsidiary without any intention of raising its stake by buying out minority shareholders.

Robert Bosch, Mico's parent company, had announced last year that it would invest about 100 million euros (about Rs 580 crore) over a three year time period in a common rail direct injection (CRDi) plant.

The Indian company plans to use the new plant, which should commence production in 2006, to service the domestic diesel car and commercial vehicle industries and exports.

Meanwhile, the parent company also relocated the manufacture of some key products such as single-cylinder pumps, multi-pumps and KCA injectors from locations in Europe to India.

As a result, exports as a percentage of sales has risen to around 17 per cent of sales currently. The proportion of exports is expected to rise further in 2005 to over 20 per cent.

These moves by the parent company have resulted in big gains for investors in the past two years "" there has been a near-500 per cent jump in the company's share price.

The Mico stock did well also because of a significant improvement in its domestic business, which in turn rode on the upturn in the commercial vehicle and tractor business.

Significantly, the value of minority shareholding in the company has risen from just Rs 430 crore at the beginning of 2003 to Rs 2,440 crore currently.

Considering the amount of money being brought in currently, the parent company could easily have bought minority stake before the rally in Mico's shares began.

Investors would be the last ones complaining, but at around 16 times estimated CY04 earnings and with the stock near an all-time high, they should be cautious.

After all, the company still derives over 80 per cent of its revenues from the domestic market and much of this comes from the commercial vehicle and tractor segments, which are cyclical in nature.

Cement despatches

Cement stocks were once again in the limelight in Tuesday trading, with Gujarat Ambuja Cement Ltd (GACL) touching a five-year high of Rs 416.5 in intra-day trading .Sentiment was boosted by a 9.4 per cent y-o-y growth in December despatch figures by the top 4 players.

However, in the case of ACC, they had increased by 14.33 per cent y-on-y to 13.48 lakh tonne, while for GACL they had improved 11.7 per cent y-o-y to 1.254 million tonne.

Of equal importance is that GACL's export despatches which had slipped 22.5 per cent y-o-y in November, had bounced back in December. Last month, they grew 14 per cent to 1.57 tonne.

Strong despatch figures recorded each month during the last quarter coupled with domestic realisations also improving an estimated 13 per cent in the last quarter y-on-y, on all India basis, is once again making it increasingly likely that cement majors will shortly report another quarter of aggressive profit growth.

Domestic cement companies are also expected to benefit from lower fuel oil and naphtha ( used for captive power plants) costs and it should help minimise the impact of the recent hike in railway freight rates.

Further, the benefits of a possible reconstruction boom in tsunami hit areas will only be felt in the March quarter. The extent of the improvement in the cement industry can be gauged from the fact that ACC is likely to report a 125 - 150 per cent jump in q3 net profit while for GACL a growth of 150 - 175 per cent is anticipated.

Balance of Payments

It wasn't only the huge rise in oil imports that was responsible for a current account deficit in the second quarter.

To be sure, high oil prices have been a key factor adding to the deficit, but non-oil imports too have been rising very fast, indicating the strength of industrial demand, which has been captured in the quarterly GDP data.

The deficit also increased because exports in Q2 were lower than in Q1, but that's due to a temporary deceleration during July and August.

However, even remittances, which make up the largest "invisible" item, were much lower in Q2. Net private transfers were only Rs 4679 crore against Rs 6435 crore in Q1. The other major item, software exports, was at more or less the same level as in Q1.

During Q2, net external commercial borrowings were lower than in Q1, with fresh borrowings being lower and repayments higher. Net portfolio inflows were higher than in Q1, but not significant.

The net result was that there was hardly any accretion to forex reserves during the second quarter.

Going forward, higher exports and lower oil prices will ease the pressure on the current account, although the November data shows that non-oil imports have been rising very substantially.

But the biggest influence on the rupee today comes from the resumption of portfolio inflows into the stock market. The recent rise in forex reserves indicates that Q3's BoP statistics will be very different from those of the second quarter.

With contributions from Mobis Philipose and Amriteshwar Mathur