Bumpy ride

Insight

Problems for motorcycle major Hero Honda continue. For the quarter ended December 2006 (Q3), its operating margins fell by 501 basis points to 11.3%, the lowest in last 27 quarters. Analysts had been expecting the fall.

“We expect Ebitda margins to be flat QoQ and decline by 360 bps YoY to 12.7% for Q3 FY07,” Edelweiss Securities had said in an earnings preview. Operating margins fell despite sales going up 15.2% to Rs 2,666.05 crore.

The company sold 881,540 motorcycles during Q3, up by 11.3% year on year. An increase in sales was also due to sales incentives given to distributors as well as new models being launched.

Net profit though fell 20.09% to Rs 209.18 crore, primarily on account of faster rise in expenditure (up 22.1% to Rs 2,364.13 crore) and inability of the company to pass on this increase to the consumer.

Within expenditure, raw material costs increased 22.6% to Rs 1,962.9 crore, largely due to higher cost of inputs like non-ferrous metals, plastics and rubber.

With a renewed Bajaj Auto constantly on its back and MNCs like Honda and Suzuki also getting aggressive, the company is not in a position to pass on the increase in the cost of raw materials to its customers, as it was a few years back.

In Q3 2006-07, the top three motorcycle companies sold 1753,874 units. Hero Honda share fell 116 basis points to 50.26% over Q3 last year, while Bajaj Auto accounted for 37.20%, an increase of 305 basis points during the same period.

Other than this the other expenditure for the company went up by 24.2% to Rs 309.49 crore. This was due to various reasons. The company was one of the major sponsors of the ICC Championship trophy. The marketing expenditure related to the sponsorship would have been accounted for in Q3.

The company had also run “Mobike Pe Mobile” offer during October 2006, which would have involved some costs. Further there would have been expenses related to the launch of new models like CBX extreme and variants of Passion Plus and Glamour.

Going forward things will continue to remain difficult for the company. Bajaj Auto will continue to remain a big threat. The gap between the motorcycles sold during the quarter between Hero Honda and Bajaj Auto has come down to 65399 units in comparison to 96841 units as compared to the quarter ending December 2005.

Also with new models being launched, the sales might go up but margins can come under pressure because of the model fees paid to Honda, will have to be amortised in the days to come.

Advantage overseas

Oil and Natural Gas Corporation (ONGC) posted a net profit of Rs 4,668 crore, up 20% y-o-y, in Q3 2006-07, while revenues increased 25% to Rs 15,631 crore, despite a subsidy pay-out of Rs 2,204 crore to oil marketing companies, as per government instructions.

The subsidy burden amounted to Rs 12,356 crore during the current nine months compared with Rs 8,550 crore in the corresponding period last year. The net realisations on crude at $50.9/barrel were on the back of higher volumes and $11 towards subsidy sharing. The results have been as per expectations.

Considering the regulated environment in India, the real growth for ONGC will come from ONGC Videsh, the overseas arm of ONGC and British Gas. ONGC Videsh will benefit from the upsurge in exploration and the production activities taking place world wide.

The company has been looking at various tie-ups in different parts of the world like Nigeria, Caspian Regions, Latin America and Russia for spreading its global footprint. The balance sheet size of ONGC coupled with the government support will stand it in good stead for bagging overseas projects.

The stock has been an underperformer in the past one year. However, it can be attributed more to the regulatory environment. The fortunes of the stock would change if and when it is disinvested. Till then, the triggers would be in the form of news on ONGC Videsh and new finds by ONGC.

 It must also be noted that the stock price of ONGC is closely linked to the crude oil prices to a great extent. The stock may be rewarding for those backing it as a defensive stock over a long-term horizon.

Contributed by Vivek Kaul and Devangi Bhuta