Companies & Sectors
Kotak forecasts lower two-wheeler sales growth in FY12

Just when two-wheeler makers are reporting bumper December sales numbers, Kotak says it expects a slowdown in this segment next year, due to high petrol and loan rates

In a report to clients today, Kotak researchers say they expect domestic two-wheeler industry growth to moderate from 20% in the current fiscal year to 14% in FY12, due to high petrol prices and higher interest rates.

Two-wheeler companies reported good numbers in December. India Yamaha Motor reported a 70% rise in total sales at 34,839 units. The company's domestic sales for the calendar year 2010 were up 18% at 2,58,987 units and exports were up a substantial 85% to 91,277 units. Hero Honda Motors' sales in December were up 33% to 5,01,111 units, whereas it sold over 5 million units for the full year, a growth of 16%. Bajaj Auto reported subdued growth of 11% at 2,43,675 units for December, 5% growth in commercial vehicle sales at 31,575 units and 4% growth in exports to 95,388 units.

Honda Motorcycle & Scooter India has a target of 1.6 million units for FY11 versus 1.3 million units in FY10. In December, both Hero Honda and Bajaj Auto hiked the prices of two-wheelers by Rs500-Rs1,000 with effect from new year day on account of the rise in input costs.

Kotak believes that the factors that supported a 20%-plus growth for two-wheelers over the past couple of years will not be there in FY12. Some of these factors were the government stimulus measures, substantial salary hikes for government employees on pay commission reforms and pent up demand from FY08-09 when there was flat growth.

"We forecast Bajaj Auto's domestic motorcycle sales to grow at 13% CAGR (compounded annual growth rate) over the next two years." Bajaj's total sales in the nine-month period from April to December 2010 were up 42% at 2.87 million units. Kotak also believes that Bajaj Auto's margins will decline by 120 basis points y-o-y in FY12 and that the company's exports will also moderate to 15% CAGR in FY11-13 compared to 36% CAGR between 2007 and 2011.

Margins will decline because the "limited pricing power in the industry will not be able to fully offset rising material cost pressures and the moderate improvement in product mix will not be able to positively impact margins," the Kotak report says. Exports will moderate, because unlike the last three years Bajaj will find it difficult to gain market share in the countries it exports to-in neighbouring Sri Lanka and Bangladesh, and from Africa, to the Middle East and Latin America-going forward, since it has already achieved a share of about 15% in these markets.

Three-wheeler growth, too, will not be as good as it was in FY09-11 (21% CAGR), Kotak says, because of a high base effect and an increase in personal vehicle ownership. Three-wheeler growth was superb in the last 2-3 years because state governments issued fresh permits.

It must be noted that while Kotak has put a 'Reduce' rating on Bajaj Auto, its target price is only 5% below the current market price. Also, Kotak says in its report, that "at 15 times price-to-earnings on our FY12 earnings per share estimate, Bajaj is currently trading at a 19% discount to Hero Honda which we believe is unjustified. From a relative perspective, we prefer Bajaj Auto to Hero Honda in the two-wheeler sector".

Despite the split between Hero Honda and Honda, the brokerage does not expect any major change in the industry structure over the next two years, but it believes that "Honda could take some market share from Hero Honda". Bajaj's market share will remain relatively stable over this period, it says.


Jones Lang LaSalle India appoints Ramesh Nair as managing director for western India operations

“Residential projects with units below Rs25 lakh will increase dramatically outside Mumbai,” says Ramesh Nair

Ramesh Nair, former managing director of Jones Lang LaSalle India's Chennai and Hyderabad regions, has assumed overall responsibility for the company's western India operations. West India encompasses Mumbai and Pune.

Ramesh Nair, who has been with Jones Lang LaSalle India since 1999, is a real estate veteran with fourteen years' multi-faceted experience. In this period, he has tackled diverse real estate asset classes such as office, retail, land, residential, warehousing and industrial, and he has helped change the real estate fortunes of many domestic and multinational owners, occupiers and investors in South India.

Ramesh Nair's Mumbai real estate predictions for 2011 include that the commercial property market rentals will drop due to a massive addition of stock, leading to higher vacancies. In case of residential property, housing will become even less affordable in the island city; many aspiring home buyers will opt for rentals over the purchase option. Rentals for high-end homes will drop in the face of increased supply of quality apartments across the city. Housing prices will marginally correct in locations with oversupply and inadequate infrastructure where prices have overshot the 2007 peak; the number of speculators will decrease, reducing volatility. Residential projects with units below Rs25 lakh will increase dramatically outside Mumbai. In case of mid-term elections, there will be a wide-spread correction across asset classes and city locations.


Manufacturing growth slows down in December, HSBC PMI shows

Mumbai: The seasonally adjusted HSBC Purchasing Managers' Index (PMI-a headline index designed to measure the overall health of the manufacturing sector-posted 56.7 in December, slightly lower than November's reading of 58.4. The latest number pointed to a marked improvement of business conditions in the Indian manufacturing sector. While the rate of growth slowed, it remained above the long-run series average, according to data posted on the HSBC Markit website.

December data signalled a marked rise in incoming new business received by manufacturers in India. However, the latest expansion in new order volumes was slightly weaker than in the previous survey period. Growth of new business received from overseas markets also eased marginally at the end of 2010, but remained strong and comfortably above the historical trend.

Output increased substantially in December, which reflected sustained growth in overall new orders. However, backlogs of work increased for a ninth successive month. The rate at which outstanding business accumulated was weaker than in the previous survey period, but remained fast in the context of historical data. This suggested that pressures on operating capacity persisted as workloads continued to rise. In some cases, shortages of materials and labour compounded delays in production. Stocks of finished goods increased only slightly in December. Despite sustained expansions of new business and output, employment in the Indian manufacturing sector was unchanged during the month.

Purchasing activity at manufacturers in India continued to rise markedly during December. However, in line with slower growth of output, the increase in input buying eased. Nonetheless, delivery times lengthened again. Analysts opined that short supply and excess demand for materials had led to the deterioration in vendor performance. Stocks of purchases rose for the 22nd successive month in December as manufacturers continued to increase pre-production inventories.

The December data signalled a substantial rise in input prices faced by manufacturers in India. Input costs have increased in each month since April 2009, with the latest rate of inflation the strongest in eight months and notably sharp in the context of historical data. Output prices also rose markedly during the month and at the fastest pace since May.


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