Stepping on the gas

Automobile demand continues to be robust

Passenger vehicle majors Maruti Udyog, Hero Honda and Bajaj Auto have collectively reported flat sales in the festive month of November when compared with October.

Maruti and Hero Honda saw domestic sales declining 7 per cent and 4 per cent respectively, while Bajaj Auto did much better to post an over 7 per cent month-on-month improvement in its motorcycle sales.

Bajaj, notwithstanding its relatively better performance, said that its overall sales would have been higher by about 10 per cent, but for production and/or distribution constraints. Maruti, too, complained that production and distribution was affected because of the large number of holidays on account of festivals.

But November's flat sales shouldn't be cause for worry""""-festive demand this year is better captured by taking sales for both October and November.

Average monthly sales during this period for the three companies was about 12.5 per cent higher compared with September. Year-on-year growth for October-November was 26.4 per cent. That indicates very strong demand growth.

Bajaj outperformed, with a 17.7 per cent growth rate (average for Oct-Nov compared with September), compared with 10.8 per cent for Hero Honda and 5.3 per cent for Maruti. Bajaj continues to do well in the entry-segment, thanks to the success of the "CT 100".

Besides, the newly launched "Discover" is also doing well - its sales grew 21.5 per cent last month (over October). For the eight months ended November, Bajaj's growth has overtaken that of Hero Honda's. It's because of this, coupled with high expectations for "Discover", Bajaj still enjoys a slight valuation premium compared to hero Honda.

Maruti, meanwhile, has to now contend with higher selling prices because of a rise in input costs, apart from higher interest rates. These factors could mean that sequential growth continues to be in single-digits for the car company. It's surprising, therefore, that Maruti stock is now even higher than its levels prior to the controversial joint venture announcement in September.

The name is bond

State Bank of India (SBI) has raised $ 400mn through 5-year overseas bonds at an extremely fine rate of Libor-plus 73.5 basis points. The bank was assigned a Baa2 foreign currency rating by Moody's which is one notch higher than the investment -grade Baa3 foreign currency sovereign debt rating for India.

The timing couldn't have been better since there is tremendous appetite for Asian paper especially from the US and European banks. Unable to find paper with good enough yields in their countries, these banks are willing to consider paper with lower credit rating in a bid to get a better yield. Spreads on paper have been contracting over the last few months.

For instance, when ICICI Bank issued bonds in August it managed to borrow at a rate of Libor plus 122 basis points. Even adjusting for the fact that ICICI's rating was sovereign and not above sovereign like SBI's, there has been a definite contraction in spreads.

The aggressive pricing was evident from the fact that ICICI's August 2009 bond trades at over 100 basis points above Libor. The SBI bond rate, therefore, sets a new benchmark for Indian paper and Indian corporates should lose no time in cashing in on the appetite for Indian paper.

Indian paper has been fairly illiquid in the secondary market. The size of this issue at $400mn should impart more liquidity and attract investors.

One last thought: perhaps its time for S&P which has not yet assigned India an investment grade rating, unlike Moody's, to do a rethink.

Jindal Stainless: in growth orbit

Jindal Stainless' acquisition of Indonesia-based PT Maspion Stainless Steel is aimed at improving operational efficiency of its parent as well as expanding its marketing foot print in the key East Asian market.

All the legal requirements relating to the acquisition were completed on November 30.

Jindal Stainless will be investing approximately Rs 450 crore at its existing plant in Hisar over two to three years to increase its melting and slab casting capacities as well as enhancing proportion of value-added production "" its hot rolling capacity is set to grow to 750,000 tonne and 250,000 tonne of cold rolling facilities.

However, this expansion may not be adequate to meet its cold rolling needs.

Hence, operational synergies with its overseas plant would be crucial ""-Jindal steel would be able to send its domestically manufactured hot-rolled stainless steel to its Indonesian plant where it could be cold rolled and then delivered to customers in the region.

The Indonesian operations currently comprise a 50,000 tonne stainless steel cold rolling mill which is expected to be ramped up to a lakh tonne annually shortly.

Also, the buyout is expected to enable the Jindals to move closer to their key customers in East Asia. With demand in China growing at 15-20 per cent despite the recent measures to check demand, and with demand in Malaysia and the Philippines also growing, the Indonesian plant should be well placed to cater to the region's needs.

With contributions from Mobis Philipose, Shobhana Subramanian & Amriteshwar Mathur