Category: Breaking Corporate India Earnings News

Automobile sales saw very high y-o-y sales growth in December [but lower than Novermber-2009], benefiting from economic recovery, improving bank financing and a low comparison base. Two wheeler sales are benefiting from strong farm income and a revival in urban sales.

Here is the Sales Snapshot YoY increase for the Month of December [NOTE – December 2008 can be termed as a Low Base Effect]

• Hero Honda – 74%
• Bajaj Auto – 77%
• TVS Motors – 34%
• Maruti Suzuki – 50%
• Mahindra & Mahindra – 100%
• Tata Motors – 104%

The impact of an excise duty hike should be the least on two wheeler makers as they have about one-third of production coming from factories situated in tax havens. Also, two wheeler makers have taken various price hikes in the last year to protect margins, which gives us confidence that they should be able to protect margins by taking further price hikes, in the event that input costs start rising.

India’s balance of payments (BOP) projections for 2QFY10E suggest that the current account deficit (CAD) is set to widen to over 3% of GDP from little over 2% in 1QFY10. Kotak expects trade gap to widen to US$29.8 bn in 2Q from US$26 bn in 1Q and CAD to widen to US$9.2 bn in 2Q from US$5.8 bn in 1Q.

Given the large discrepancy between RBI and DGCIS data on foreign trade, the trade gap could contain potential surprises. The discrepancy had widened sharply to nearly US$14 bn for 1QFY10 data, 2.4X of the current account gap itself, making reliable projections difficult.

Strong foreign investments likely to strengthen capital account – net FII inflow of over US$ 8 bn. Banking capital likely turning positive with US$3 bn inflows in 2Q versus outflow of US$3.4 bn in 1Q. Capital account had turned positive in 1QFY10 after US$9.6 bn of net outflows in the two preceding quarters.

Update:
The current account deficit increased significantly to US$12.6 bn (4.2% of GDP, annualized) in QE-Sept 09 compared with a deficit of US$5.9bn in QE-June 09. The market was expecting a current account deficit of US$5.6bn in QE-Sept 09. The current account deficit (excluding remittances) widened to 8.8% of GDP, annualized, in QE-Sept 09 compared with 6.4% of GDP in QE-Jun 09. On a trailing 4Q basis, current account deficit remained stable at 2.25% of GDP as of QE-Sept 09 from 2.3% of GDP as of QE-Jun 09.

Corporate learning solutions continue to show diverging trends with discretionary spend items namely, custom content and print learning products remaining soft. With 50% revenue coming from these two segments, prospects for the segment remain muted.

Momentum in government school sign-up has ebbed after a strong start to the year. However March quarter is usually a strong quarter for school additions and NIIT hopes to get a fair share of the current school pipeline. NIIT is also exploring opportunities in public private partnerships in model schools and skills enhancement. NIIT has ceded leadership in private schools to competitors.

NIIT has changed its strategy and is transitioning itself from an IT training firm to a full services training company.

Shriram Transport Finance (STFC) has bought loan receivables from GE Capital Services India and GE Capital Financial Services for a consideration of about Rs11 bn. The book value of these loans is about Rs12 bn (loans backed by new CVs of about Rs9 bn and new construction equipment loans of about Rs3 bn), thereby implying a high yield of ~23-24% on the transaction for STFC (as against a coupon rate of 13-14% on new vehicle loans).

STFC will service the aforesaid loans as the originator plans to reduce its focus on CV finance business. STFC’s strong franchisee network of about 480 branches, assets of Rs260 bn, across the country will likely enable it to service the loans. According to the management, all the loans are current (non-delinquent) and have a balance maturity of about two years.

The transaction will imply faster disbursements and higher loan growth at STFC. The loan pool (Rs11 bn) is approximately equal to one month of STFC’s disbursements. STFC will earn a yield of ~23-24% on the transaction though the operating and credit costs may be somewhat higher than loans originated by STFC.

Colgate continues to witness steady toothpaste volume growth of 12-13%. The company has been witnessing market share improvement in both its flagship toothpaste brands,
Colgate Dental Cream (CDC) and Cibaca.

Management is effectively guiding for 15-16% adspend to sales ratio in H2F2010. Since Colgate’s adspend to sales ratio in H2F2009 was 13%, it is likely to witness an increase of around 180 to 380 bps rise in adspend to sales ratio in H2F2010.

Management notes that HUL has increased its adspend in the last couple of months and has taken some price correction by increasing the size of SKU at the same price points. Although, there are no market share gains by Dabur.

Although the company is open to increase its presence by introducing new product offerings from its parent’s basket, currently there is no new category that is being test marketed and the focus is solely on Oral Care.

Colgate is witnessing input cost inflation of 5-6% on yoy basis and this is on account of the increase in Sorbitol and packaging costs. The company has a forward cover on Sorbitol for the next two quarters, and hence there is unlikely to be any significant impact on gross margins.

Woes for Ranbaxy continued as the FDA has issued a warning letter to Ranbaxy’s liquid manufacturing plant at Gloversville (NY), citing cGMP violations (inspected in Jul/Aug 2009). It is one of the three plants in Ohm Labs; the others did not have any material deviations. Ranbaxy has engaged a consulting firm to address the issues.

Ranbaxy has indicated the plant accounts for under 10% of US (c.2%-3% of total) sales. Sales would continue and while approvals are likely to be on hold, there are not too many major filings pending approval from this plant. We see a worst case impact at c.2%-3% and c.5% of core sales and EPS respectively, and believe the FTF pipeline appears secure.

While this development, by itself, does not appear to have a material impact on financials or the key drivers, it is likely to affect recently rising confidence levels w.r.t. the stock among investors, given its past issues with the FDA [Whether targeted because American Pharma giant failed to outbid Japanese major, Daiichi Sankyo]

However, Daiichi Sankyo is committed to its plans and long term investors need not worry.