On tenterhooks

Overseas, domestic rates hikes may hit market run

The global interest rate situation does not seem as benign as it used to a couple of months ago. The yield on the 10-year US treasury has gone up by 19 basis points to 4.74 per cent in four trading sessions, and is now at the highest level since the Federal Reserve started increasing rates in June 2004.

In 2005 thus far, the 10-year yields are up 35 basis points.

The reason for the rise is expectations of a possible hike in Fed rates, which could go up from the present 4.5 per cent to 5 per cent or even 5.25 per cent in the next few months as the US Fed pre-empts inflation.

At home, the government raised Rs 10,000 crore through a private placement on Tuesday, marking the end of the government's borrowing programme for 2005-06.

This led to a relief rally in the bond market on Tuesday. Nevertheless, if the US Fed hikes rates, RBI too is likely to follow suit. Interest rates have already begun hardening, though lower oil prices an improvement in the tight liquidity situation are bringing some bullishness.

In the past few months, foreign inflows have pushed up emerging stock markets, and the main reason for these flows was that the tightening of the US interest rate cycle would end in the first quarter of 2006.

But if the Fed changes its stance, we could see some change in international flows into the stock market. Emerging markets have started falling and one trigger is the interest rate hike fear.

Valuations of our markets are already stretched, and if foreign flows continue to taper as we saw on Wednesday in the derivatives segment, a correction could just be around the corner.

CVs: Overdrive

Tata Motors and Ashok Leyland have both reported strong sales growth figures in February 2006. The benefit from the recent court decision banning overloading of trucks has resulted in a corresponding improvement in commercial vehicle sales.

Ashok Leyland reported a 19.8 per cent y-o-y growth in its truck sales to 4,424 units, which helped in offsetting the overall 31.6 per cent y-o-y decline in its exports to 521 units.

Tata Motors too saw its sales of M&HCV segment grow almost 20 per cent y-o-y to 14,426 units in February 2006 and LCV sales (mainly the Ace model) grew 42.67 per cent to 10,982 units. For Tata Motors, the commercial vehicle segment has grown faster than the 14.5 per cent growth in passenger car sales.

The improvement in February has come after strong numbers in the previous month.

In January 2006 too, Ashok Leyland's truck sales grew 30.9 per cent y-o-y to 4,545 units. Meanwhile, in January, Tata Motors saw its M&HCV sales expand 15.15 per cent y-o-y to 13,977 units and its LCV sales went up by 43.9 per cent to 10,154 units.

The market has reacted positively to the commercial vehicle growth numbers with both stocks touching their all-time highs. Tata Motors has gained 8 per cent since February 28, while Ashok Leyland is up 5 per cent.

Grindwell Norton: Split in time

Grindwell Norton's performance for CY05, was propped up by a 108 per cent increase in net profit in the December 2005 quarter.

The stock has gone up 75 per cent in just a fortnight thanks to strong numbers. The 1:1 bonus and a 1:2 split have also helped in investors flocking to the stock.

In the December 2005 quarter, Grindwell's operating profit went up 192 per cent to Rs 15.5 crore. Operating profit margin for the quarter also improved by 1043 basis points to 18.36 per cent, thanks to a 410 basis point fall in raw material cost as a percentage of sales.

For the full year, operating profit went up 29 per cent and the margin improvement was modest by 115 basis points.

With user industries such as automobiles and ancillaries doing well, the abrasives division saw segment profitability improve by 420 basis points q-o-q. Even the ceramics and plastics division, which manufactures silicon carbide and refractories, did well, buoyed by the metals and construction sectors.

The company also signed an MoU with Orient Abrasives to acquire the latter's bonded abrasives business in December.

On Wednesday, the Grindwell stock gained over 16 per cent to Rs 614. With the recent run-up, the stock appears slightly expensive at a P/E of 24.