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Prashant Kothari & Sachchidanand Shukla

LML, one of the late entrants into the motorcycles segment has finally started reaping benefits of its strategy to focus on the fast expanding motorcycles segment. The company reported a growth of 20 per cent in its operating income to Rs 133 crore for the quarter to June 2001. Motorcycle sales, which were negligible in the previous year, stood at 11,258 vehicles. However, scooter sales have taken a beating and were down 23 per cent to 38,000 vehicles, clearly reflecting the change in lifestyles among the yuppie youth, as well as market conditions.

The company forayed into the motorcycle segment with its 100-cc bikes Energy & Adreno in September 2000 and, has since sold more than 50,000 vehicles. It launched 110-cc variants of motorcycles in the month of August 2001 to take on similar offerings from other manufacturers, such as Bajaj Auto’s Caliber. Egged on by its success, LML has made plans to increase its production capacity to 1.4 lakh vehicles from the present 70,000 units. However, competition from its formidable rivals, such as Hero Honda and TVS-Suzuki may put significant pressure on its operating margin, which is already low.

Operating profit at Rs 23 lakhs is almost negligible when seen in the light of a turnover of Rs 133 crore. Integration of production facility for the new 4-stroke 110 cc motorcycle series has increased operating cost significantly.

Higher depreciation and interest costs of Rs 6 crore and Rs 9 crore have further increased the net loss, which stood at Rs 15 crore as compared to a loss of Rs 5 crore in the corresponding quarter.

LML has been steadily increasing its operating income by pushing sales of motorcycles. However, competition has been increasing, what with industry majors such as Hero Honda, Bajaj Auto etc. vying for a pie of this lucrative market. The threat of cheap imports from China is also looming large over Indian motorcycle manufacturers, which if materialises, could spell trouble for them. This will definitely make the going tough for LML, more so as it does not have tight control over its costs.

Crisil
Though the Crisil stock is largely immune from oil shocks and vagaries of tech boom, it is play on the economic conditions in the country. Crisil,the domestic leader with a 65 per cent market share of the credit rating business, had been caught in an adverse industry spiral lately. Despite a soft interest regime, investment and credit demand has been lacklustre. This has caused corporate debt to decline, besides affecting adversely growth prospects of rating companies.

Crisil’s return on net worth (RONW) that inched up during the period 1997-99, declined to 21.7 per cent in 2000 and further to 14.8 per cent in 2001. The share of rating business of the total revenues fell to 64.5 per cent (74.4 per cent) in 2001, as there was a fall in the number of instruments rated to 272 (283). However, in revenue terms Crisil bucked the trend with a 12 per cent growth in its rating business during 2001.

The high entry barrier in the business and it’s dominant market-share augurs well for the company. The total market size for rating services is around Rs 1,500-2,000 crore. Though the total debt in outstanding by companies stands at Rs 1,680,754 crore, (lower than the peak amounts of 1994-95) it holds good prospects for Crisil in the long term. And even half of this pie could enhance Crisil’s earnings significantly.

Given its dependence on the rating business, that makes it cyclical, the company has been tying to increase the share of non-rating revenues to 45 per cent in the next five years. Also, Crisil has doubled its upper ceiling for billing at Rs 40 lakh per client per annum that should boost the revenues. Crisil’s is a high cash flow business. However, analysts have been wary of Crisil’s cash management. During 2001 the company deployed cash surplus in real estate and mutual funds and suffered losses in the bargain.

Crisil currently trades at a P/E of 6.5 historic earnings. At these levels, there is a limited downside and even if the company achieves it’s 2001 growth rates it could provide decent returns.