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Illusive growth

LML: Caveats of shifting to motorcycles

LML’s strategy to shift from scooter to motorcycle manufacturing might have paid off as far as topline growth is concerned. Apart from better value realisation in motor cycles than that in scooters, the volume growth in motor cycles has done its bit. But LML is yet to face the pitfalls of shifting to motorcycles for sales growth.

Although the company’s sales data for November 2001 shows 96.6 per cent increase in motorcycle sales to 5,873 units, the phenomenal growth rate is slightly misleading as it has come on a small base.

LML, which makes motorcycles under technical alliance with South Korea’s Daelim Motor Company, had launched two 100cc models ‘Energy’ and ‘Adreno’ only in September 2000. Hence, the motorcycle sales were negligible in November 2000 The company’s scooter sales fell 28 per cent to 9,863 units.

LML’s performance during the quarter to September 2001 reflects the increasing pressure on OPM as a result of motorcycle sales. Scooter sales normally yield better OPM than motorcycle sales. Though the company could achieve topline growth of 6.7 per cent to Rs 108.9 crore, the raw material consumption was significantly higher at Rs 67.9 crore, up 17.5 per cent.

Operating loss inched up to Rs 5.2 crore (Rs 4.8 crore). Interest cost surged 43.4 per cent to Rs 9.8 crore. Consequently, net loss increased 10.9 per cent to Rs 18.8 crore.

The problem of lower OPM in the motorcycle segment can only be overcome only through a consistent growth in volumes. However, competition has been increasing with industry majors such as Hero Honda, Bajaj Auto etc. vying for a pie of this lucrative market.

Although LML has recently launched two new 110cc models ‘Adreno FX’ and ‘Energy FX’, the product promotion expenditure is likely to shoot up. LML’s reasonably good financials may help for the time being, but sustenance of heavy ad-spend is very difficult even for cash rich companies like Bajaj Auto.

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.

Engineers India

The decision to privatise Engineers India (EIL) has been hanging fire for quite some time now, owing to the debate over modalities of divestment.

EIL is the leading public sector consultancy company in hydrocarbons, petrochemicals and fertilisers and posted best performance ranking for 1999-2000 amongst all public sector units under the Ministry of Petroleum.

But the stock market has not taken kindly to the dithering over the entire divestment process of EIL despite the company’s consistently good track record. Its return on capital employed has been in excess of 30 per cent while return on networth has been above 20 per cent during the last three years.

The company has reserves of over Rs 650-crore whereas its equity capital of Rs 56 crore looks pale in comparison. However, EIL’s growth has tapered off lately because of the slowdown in the economy.

During the quarter to September 2001, sales delined 51 per cent to Rs 86 crore, while the bottomline dipped 42 per cent to Rs 25 crore.

EIL is trying to diversify into various areas of infrastructure as the project execution scenario has been changing from engineering, procurement, construction and management (EPCM) to lumpsum turnkey (LSTK) mode. So far, LSTK has helped the company to increase turnover.

The turnkey projects hold the key to an enhanced topline in the long run. EIL is counting on enhanced government spending on infrastruture and is to set up strategic business units in various areas of infrastructure. EIL’s OPM (including other income) was very high at 52 per cent during financial year 1998-99.

However, the same dipped considerably to 45 per cent in financial year 1999-2000, as EIL had to account for wage arrears in the fourth quarter of the fiscal.

The current public holding in EIL at around six per cent is a dampener for the stock.

Moreover, another dampener could be the divestment commision’s suggestion that the Government stake in EIL be offloaded to the PSUs like IOC, given the fact that the company operates in sensitive areas.

— Manish Joshi & Sachchidanand Shukla