Investors dump Maruti on poor results

Mon, 26 Jul 01:30 pm

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The Indian markets continued to trade below the dotted line during the previous two hours of trade. Stocks from the auto space continued to lead the pack of losers with the BSE-Auto Index trading lower by 2.3%. It was followed by stocks from the realty, banking and capital goods spaces as the BSE-Realty, BSE-Bankex and the BSE-Capital Goods indices were trading lower by about 0.5% to 1%. On the overall BSE, the decline to advance ratio is poised at 1.2 to 1.

The BSE-Sensex is trading lower by around 60 points (down 0.4%), while the NSE-Nifty is down by about 17 points (down 0.3%). Stocks from the small cap stocks and midcap spaces are also seeing some pressure as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.4% and 0.1% respectively. The rupee is trading at 46.86 to the US dollar.

Auto stocks are currently trading weak led by Maruti Suzuki and Hero Honda. Weakness in Maruti is on the back of the company reporting a decline in profits for the quarter ended June 2010. This was despite a healthy 27% YoY increase in revenues. The growth in revenues was on the back of a 25% YoY increase in volumes. While domestic sales (about 84% of total volumes) rose by 23% YoY, exports increased by faster 38% YoY. Within the domestic market, the company's A3 (SX4, Dzire), C (Omni, Versa) and A2 (Alto, Wagon-R, etc) categories reported volumes increases of 45% YoY, 51% YoY and 16% YoY respectively. It may be noted that the A2 segment forms about 70% of the domestic volumes of the company.

Maruti Suzuki took a beating at the operating level as operating profits were flat during the quarter. Operating margins contracted by a sharp 2.6% YoY during the quarter and stood at 9.6%. The decline in margins was on account of higher raw material costs and royalty expenses. During the quarter, the company paid an additional royalty of Rs 1.9 bn, which includes about Rs 652 m for the December 2009 to March 2010 period. This basically means that the company had to pay royalty expenses with a retrospective effect. Apart from a poor operating performance, lower other income and higher depreciation charges led to a 20% YoY decline in profits. This is the first drop in profits in the previous five quarters.

Realty stocks are trading down with JP Associates and HDIL as the biggest losers. As per a leading financial daily, DLF is buying out the stake of its partner, Limitless Group, in the 50:50 joint venture to make Bidadi Knowledge City in Karnataka. The transaction is estimated at Rs 2 bn. The Bidadi project was to come up in an area of 9,178 acres and was expected to generate around Rs 500 bn as per DLF's estimates in 2007. However, it should be born in mind that this valuation was given before the financial crisis stuck; affecting real estate valuation and shortly after DLF was listed. The project which still has not taken off was to have office complexes, shopping malls and entertainment space. Besides this, the project was to have housing facility for 700,000 people. The work was to start in the first half of 2008 and get completed by 2016.

However, DLF is purchasing Limitless' equity in the JV at a price lower to what Limitless had paid. This is because the JV was not able to secure the land and Limitless' parent company, Dubai World is restructuring its businesses, in particular, Limitless' real estate assets. Another possible reason for Limitless' exit could be the three-year lock-in clause for foreign investment in real estate sector. Foreign direct investment (FDI) norms do not allow repatriation of original investment up to three years from the time of minimum capitalization of realty projects. But foreign investors have a window of exit before the lock-in period ends if the Foreign Investment Promotion Board (FIPB) allows it.