Profit booking takes toll

Tue, 11 May 11:30 am

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The benchmark indices continued their south-bound journey during the previous two hours of trade as profit booking gripped index heavyweights. Almost all indices were seen trading lower led by stocks from the power, metal and realty space. However, some buying interest was seen in stocks from the auto and banking space. Buying interest was also seen in smallcap stocks.

BSE-Sensex is trading lower by 98 points while NSE-Nifty is trading 27 points below the dotted line. BSE-Midcap Index is trading lower by 0.1% while BSE-Smallcap index is trading 0.2% above yesterday’s closing. The rupee is trading at 44.87 to the US dollar.

Elecon Engineering announced its 4QFY10 results. The company’s sales grew by 14% YoY on the back of its transmission equipment segment. This business grew by 39% YoY during the quarter. Its material handling equipment business on the other hand turned in a growth of 5.5% YoY. Operating margins declined by 2.3% during the quarter as a result of increase in raw material prices as a percentage of sales. The fall in operating margins could have been steeper but for lower staff costs and lower other expenditure as a percentage of sales. The company’s bottom line grew by 59% during the quarter as a result of profit from the sale of investment. When adjusting for this profit, the bottom line grew by 11% YoY. This growth came in spite of fall in operating income and was aided by a fall of 26% YoY in interest costs.

The auto industry has been on a roll over the past few quarters. Strong sales across categories made FY10 a remarkable year for the auto players as sales volumes sky rocketed. The reason behind the same varied from lower pricing, financing availability and a general economic growth. The same is not expected to continue during the current fiscal considering that the interest rates have marginally moved up and also the excise duty on cars has risen, making them more expensive. However, the first month of FY11 i.e. April 2010 saw sales volumes climb still further. In fact, car sales in India posted their strongest April in at least a decade. But it is too early to say whether this momentum will continue going forward.

However, apart for concerns such as higher raw material prices and interest rates, the industry is also facing another major problem. The problem is of capacity constraints. This may take a toll on the industry’s growth prospects. As per the Society of Indian Automobile Manufacturers (SIAM), the sector will clock 10% to 14% growth in FY11 as compared to a 26% that it witnessed last year. While a handful of players are in the process of expansion, they have not been able to time it too well considering that the demand for vehicles bounced back at a much faster pace than expected. It is believed that leading carmakers such as Maruti Suzuki, Hyundai Motor India and Tata Motors are already facing this problem. As such, this may result in these companies losing market share to the new players who have entered India in recent times. However, this would depend on how much free capacity the new players have.