Tata Motors: Chugging along

FY07 turned out to be a robust year for India's top two commercial vehicle manufacturers with Tata Motors and Ashok Leyland registering strong sales growth of 39.2 and 34.5 per cent to 299,173 and 83,101 vehicles, respectively.

The full impact of the Supreme Court ban on overloading of saw robust growth in the medium and heavy commercial segment, which grew by 35 per cent for Tata Motors and 36 per cent for Ashok Leyland.

Within this segment, there was a shift in demand from the 7-16 tonne segment to the 16-25 tonne segment. Tata Ace helped Tata Motors increase its market share in the LCV segment by 600 basis points to about 66 per cent y-o-y, and its LCV sales grew 46 per cent.

For Ashok Leyland, the bus segment dipped marginally in FY07, while the LCV segment declined sharply by 62 per cent. With the recent acquisition of the Czech company Avia, Ashok Leyland will have more products in the 5-tonne and above segment, and improve its LCV product portfolio.

At present, over 90 per cent of its revenues come from the M&HCV segment, which makes it vulnerable to the CV cycle.

On the macro front, however, analysts believe that a rising interest rate scenario and base effect may catch up moderating industry growth rates to 12-14 per cent in FY08. On the upside, a strong replacement cycle (27 per cent of the existing fleet in India is over 15 years old), stable freight rates, massive government investments in infrastructure and a favourable fiscal regime like the phasing out of the central sales tax should continue fuelling demand next year.

Since the beginning of this year, both Tata Motors and Ashok Leyland have severely underperformed the Sensex, declining 24 per cent and 22 per cent respectively compared with Sensex decline of 6.8 per cent in the same period as concerns of input cost pressures and firming interest rates have affected market sentiment. As a result, P/E multiples too have declined""Tata Motors trades at about 12 times estimated FY08 earnings and Ashok Leyland is valued at 10 times.

BHEL: Charged up

If the BHEL stock was up 9 per cent between Tuesday and Thursday, it was because the company announced a sterling performance for FY07 in its provisional results. Its order inflow for FY07 was 1.9 times sales against 1.3 times in the previous year.

BHEL's FY07 turnover increased by 29 per cent to Rs 18,70 crore, while net profit was up 42 per cent to Rs 2,385 crore.

For the fourth quarter, its net profit has increased by nearly 27 per cent, while turnover has gone up over 23 per cent.

BHEL has managed to improve its net profit margin by 120 basis points year-on-year to 12.75 per cent. At the end of the year, BHEL's order book stood at Rs 55,000 crore, up 46.7 per cent y-o-y.

For the past few months, there were concerns that cheaper Chinese imports, especially in ultra-mega power projects, would adversely affect BHEL, but analysts are changing their view now as the company plans to address these issues.

Also, some analysts say that Chinese demand for power equipment will be large enough for them to look outside.

Also, BHEL is likely to be benefited from a proven track record in supplying equipment for the local market while the dynamics for the Chinese market are different in terms of capacity utilisation as well as coal specifications.

Going forward, BHEL plans to increase its capacity by 50 per cent to 15,000 MW in the Eleventh Plan at a cost of Rs 3,200 crore, and will also have super-critical technology.

Given the positive outlook, the BHEL stock trades at 20 times estimated FY08 earnings and about 16.5 times FY09 earnings, and should outperform the market.