On a different track

Commercial vehicle majors have done well for the past two months, and are expanding capacities

After underperforming the market for the whole of 2005, Tata Motors has bounced back to outperform the Sensex in the past two months. That's because commercial vehicle (CV) sales have improved in the last few months.

After three years of high growth in the region of 25 per cent, the current fiscal has not been a particularly great year for CVs, especially medium and heavy commercial vehicles (M&HCVs).

Between April and February, domestic sales of M&HCVs have grown at a paltry 2.64 per cent y-o-y and it is the light commercial vehicles (LCVs) segment that has saved the day, growing at 18.68 per cent y-o-y, to help the sector post a respectable 8.75 per cent volume growth. Exports too have helped boost overall sales with LCV sales growing 54 per cent and M&HCV sales up 7.09 per cent.

However, while sales were subdued in the first half of the year, they have picked up in the last couple of months: total M&HCVs were up 12.5 per cent in January and 17.6 per cent in February. This has been attributed to both increasing freight rates and some year-end demand.

Freight rates are up around 30 per cent since October which means that the economics of freight operators has improved significantly. As a result, companies could hike prices by 2.5 per cent in December enabling them to pass on some of the higher raw material costs.

While this pace of the growth may not be maintained, FY07 could see a growth of around 10-12 per cent for the sector driven by LCV sales and exports.

With roads projects on track and the economy expected to grow at 7-8 per cent, demand for CVs should be better. So, it's not surprising that both Tata Motors and Ashok Leyland are adding to capacity.

Tata Motors has announced that it will invest around Rs 5000 crore over the next three years, and is doubling its capacity for LCVs by end 2006. While its M&HCV sales in the domestic market may not exceed 4-5 per cent, it is looking at new export markets.

Ashok Leyland too is looking at a higher capacity of one lakh vehicles in another two years from 77,000 units at present, out of a total capex plan of Rs 5,500 crore over a two year period.

At the current price of Rs 939, Tata Motors, trades at 18.4 times estimated consolidated FY07 EPS. Ashok Leyland, too underperformed last year and has performed in line with the market since then. At the current price of Rs 41, the stock trades at a multiple of 11 times estimated FY07 EPS.

While Leyland has historically traded at a lower multiple, the gap appears to have widened. That's probably because the stake sales in subsidiaries (like in Telcon) are likely to help unlock their value.

Cadila: Retail push

With the acquisition of a 14.96 per cent stake in Carnation Nutra-Analogue Foods, Cadila Healthcare is seems to be looking at increasing its presence in the retail market.

Carnation has the Nutralite, the margarine brand, which has a market share of 60 per cent. Cadila markets sugar substitute Sugar Free and its extensions, and Nutralite will be the second product in the health supplement category.

With the open offer price of Rs 150, Cadila is not paying much premium over Carnation' average price for the last two months.

Nevertheless, the acquisition does seem expensive at enterprise value-FY06 sales multiple of 2.7 times and a 17 per cent operating profit margin in the nine months ended December 2005.

Obviously, Cadila has major expectations from this business as the 35 per cent acquisition could end up costing it almost Rs 30 crore, if the open offer is fully subscribed. Its consumer business (which includes Sugar Free and EverYuth brands) had revenues of Rs 50.4 crore in FY05, less than 5 per cent of the total turnover.

On the other hand, Cadila's core business of generics is doing quite well. First, the operating environment for generics companies is improving, especially in the US, where they had faced severe pricing pressure in the past few quarters. With newly developed products, domestic pharma companies such as Cadila are once again gaining strength.

Earlier this month, Cadila received two tentative approvals for marketing cardiovascular drug cardevilol, which has global sales of $1.24 billion and CNS drug sertraline hydrochloride, with sales of $3.2 billion.

The company has been preparing itself with tentative approvals this financial year, and could launch around 15 products in FY07, according to analysts. It also received permission to conduct phase II trials for its metabolic disorders treatment drug, developed by the company. Its French generics business and the contract manufacturing businesses are also doing well.

For the quarter ended December 2006, Cadila's consolidated operating profit grew a huge 31.31 per cent to Rs 65 crore, compared to a sales growth of 15.7 per cent.

Operating profit margin improved by 209 basis points to 17.59 per cent. At the current price of Rs 595, the stock trades at about 17.5 times FY07 EPS, which is reasonable compared to the P/Es of other stocks in the sector.