Nalco: The sheen is off

Margins of the aluminium major could remain under pressure

The Nalco stock has lost 25 per cent since January 2008, underperforming the Sensex by a wide margin. It lost 6 per cent on Wednesday to close at Rs 379.5 in a weak market.

This at a time when aluminium prices are at $2,805 a tonne, having risen nearly 18.5 per cent since January because of power shortage at smelter facilities in China and South Africa.

The reason for the underperformance is that Nalco and Hindalco are also grappling with a rising rupee and also lower import duties on aluminium of 5.2 per cent, down from 7.7 per cent.

The Hindalco counter has lost 18 per cent since the start of the year, also underpeforming the Sensex, which has yielded 13 per cent.

Nalco's operating margin crashed 1,860 basis points to 39.7 per cent in the December 2007 quarter on net sales that fell 23.4 per cent to Rs 1,109.3 crore. Lower production of aluminium, lower realisations of about 10 per cent and the rising fuel and employee costs were to blame.

The average price of aluminium was $2,443 a tonne in the December quarter, lower by about 10 per cent y-o-y. That apart, Nalco also took a hit of Rs 43 crore due to a disruption in the supply of coal, forcing it to import coal and electricity at higher prices.

Rival Hindalco's margin too dropped 470 basis points y-o-y to 17.7 per cent on a revenue fall of 3 per cent. Nalco's earnings per share (EPS) for FY09 are expected to fall to Rs 21-22 levels from Rs 24-25 levels for FY08. At Rs 379, the stock trades at 18 times estimated FY09 earnings and is expensive.

Peer Hindalco at Rs 177, trades at a more reasonable 10 times estimated FY09 earnings and is expected by analysts to come off to Rs 17.5 levels compared with an estimated Rs 18 in FY08.

TVS Motors: Flame's out

Being restrained from manufacturing the Flame with a CCVTi engine, albeit temporarily, is a huge setback for the Rs 3,918 crore TVS Motors. Even otherwise, the Chennai-based two-wheeler player is struggling to hold on to the market share.

Over the past two years, it has lost share in the motorcycles segment, which is down to 8.9 per cent from 11.5 per cent a year ago and in the scooters space, where the share has dipped to 23.5 per cent from 24.5 per cent a year ago. Not surprisingly, the stock has lost 47 per cent since January 2008.

Despite the festive season, the December 2007 quarter results were a big disappointment. Motorcycle volumes dropped 20 per cent in the quarter resulting in a fall in revenues of 6.5 per cent to Rs 875 crore.

The operating profit margin was dented by 150 basis points crashing to 1.7 per cent. As a result, the net profit plunged 49 per cent to Rs 5.8 crore with the net margin at just 0.7 per cent.

Bajaj Auto's net sales in the December quarter fell 2.6 per cent to Rs 2,500 crore, owing to a 3.5 per cent fall in volumes and flat realisations. Operating margins fell 150 basis points to 14.5 per cent, thanks to a lower other expenditure.

Hero Honda, on the other hand, grew revenues by 2.9 per cent in the quarter though volumes were marginally lower thanks to better average realisations. As a result, operating margins rose by 260 basis points to 13.9 per cent.

Given the fierce competition in the two-wheeler space and the consequent price discounting in the wake of a sluggish demand, TVS may well see its market share eroded further.

At the current price of Rs 38, the stock trades at 29 times estimated FY09 earnings and is way too expensive. At Rs 2,339, Bajaj Auto, which trades at 17 times estimated FY09 earnings and Hero Honda, which at Rs 717, trades at 14 times, are likely to move in line with the market.