The Hero Honda Motors scrip has been amongst the most favoured stocks in 1999-00. A fact clearly reflected in the northward spiral of the scrip from the Rs 600 levels in February 1999 to an all time high of Rs 1549 in July 1999 which is now trading strongly around the Rs 1200 levels. Interestingly though the gain in stock value reflects a recognition of the company's fundamentals, which are visible in ample abundance for the six month period ended September 1999.

The company has undoubtedly been the star performer in the two wheeler industry in 1999-00. That the sales of 3.38 lakh units, have helped the company improve its market shares to a dominating 43 per cent, also re-iterates the company's growth story. Helping put this in proper perspective is the fact that annual sales last year stood at 4.08 lakh units, a milestone which Hero Honda could well cross in the third quarter of the current fiscal. Importantly, the growth in unit sales outstrips the industry growth by miles, with TVSSuzuki coming a distant second.

As far as the financial performance for the six months ended September 1999, is concerned - it is the 37 per cent volume growth which has buoyed the bottomline. Clearly volumes at Hero Honda have been aided by the capacity expansion of the Gurgaon facility, which helped drive revenues. Another factor that has helped Hero Honda, has been the swing in two wheeler demand from scooter to motorcycles. Additionally, the company is also enjoying the huge success (constrained only by low production) of the recently launched CBZ model, which is currently the only two wheeler selling for on-money over and above the price tag. In fact, all this coupled with stringent cost control has also helped buoy the operating margins which improved from 12.49 per cent to 13.35 per cent. This together with lower interest costs which dipped 11.63 per cent have given a further boost to the company's bottomline to Rs 81.32 crore.

But the company looks far from satisfied with this performance and isnot ready to rest on its laurels just yet. News reports suggest that Hero Honda has drawn up a Rs 300 crore investment plan, which is expected to boost turnover to Rs 3000 crore in two years and Rs 5000 crore in five years.

Thanks largely to capacity increases to 1 million units in two years and 1.5 million units in five years. The company is also beefing up its dealer networks to facilitate higher sales. Also, perhaps most important is the fact that, Hero Honda has also decided to keep out of the scooter market for the time being and concentrate on the motorcycle segment. Which interestingly is in sharp contrast to its major competitor namely - TVS Suzuki.

India Cements

After closing at Rs 99 on the day of announcement of results, India Cements (ICL) stock declined till Friday when sensex gained 112.53 points. Equity dilutions not withstanding, the third quarter will be an excellent quarter for south based cement companies compared to the corresponding period of the previous year. The reasonbeing third quarter of 1998-99 was a disaster for cement companies in south except probably ICL.

The worrying factors could be the pile up of clinker stock at erstwhile Raasi Cements (for both August and September) and ICL (other than AP unit of Raasi) in September. Another factor is the cement consumption in southern states which is declining on a month-on-month basis and October can not be an exception. However, in South the prices are cartel controlled and whenever a cartel is formed the biggest beneficiary is normally the largest player. To confirm this, one only has to compare the performance of Madras Cements and ICL in the second half of 1998-99. For the period, MCL managed to post PAT of just Rs 0.11 crore and ICL had a PAT of Rs 58.22 crore as against Rs 25.67 crore in the first half of last year. Even the third quarter of ICL in 1998-99 was significantly better than MCL.

According to the management, power consumption at Dalavoi unit in TN was just 79 units per tonne of OPC produced (the plantoperated at the highest capacity in the first half and recorded the second highest dispatches among ICL plants including Visaka Cement). The average power consumption of other units declined to 105 from 113. The reduction in workforce by 1012 employees could have helped in improving margins. The clinker pile up in September at Sankamagar (the unit has the second highest capacity among ICl plants), unit of erstwhile Raasi Cements (the highest capacity) and at Chilamkur and Visaka Cement units remain a cause for concern. The capacity utilisation at 77 percent in September is the lowest in the first half (for all months except August-98 percent, operated at above capacity). However, the same is the case with other two majors in South-L&T and Madras though the fall in September is steepest for ICL and lowest for L&T.

Pharma merger

One more mega merger in the pharmaceutical industry is on the cards. This time however, merger is not expected to be smooth as a lot is on stake. American Home Products Co.and Warner Lambert Co. announced a merger to create a giant, in a $72 billion deal, with a market capitalisation of $145 billion on a combined sales of $26 billion. So much is at stake, that within an hour of announcement of the merger, Pfizer Inc. jumped into the race by mounting the biggest hostile bid ever at $82.4 billion. It has to be seen wether American Home Products Co. is likely to hike its price. As far as mergers are concerned American Home Products has a bad track record with its deal with Smithkline Beecham and Monsanto falling through. This time too Pfizer seem to have put a spanner in the wheel in what would have been a smooth merger with both the boards agreeing on it.

In any case the mute point is What is at stake? The most important point is that marketing costs are on the rise and substantial number of products are expected to go off-patent by the year 2004, which is likely to cause a dent in some of the top companies profitability. Companies research and development wings are undertremendous pressure to come out with a blockbuster discovery. In such a case a company with a blockbuster drug already in the market and with a well established network makes an attractive target. Warner Lambert has major drugs like Lipitor and Neosporin apart from having a big R&D budget.

Savings in either cases of merger (Warner Lambert with American Home Products or Pfizer) is expected in the range of $1.2 billion on a turnover of around $25-26 billion. Apart from this the pool of scientists with thousands of hours of research and testing of thousands of compounds offer added advantage. The huge cost involved in carrying out research is another important factor. In case of a American Home Product-Warner Lamber merger, the two will have a combined R&D spend of around 1/8th of the pharmaceutical industry, while in the case of a Pfizer-Warner Lambert deal it will be 1/6th. For any company that falls back from the deal it would mean a lot to catch up on. With drug discovery process increasing in speed thiswould result in valuable opportunity and prospects of good future earnings lost.

With contributions from Percy Dubash, Urmik Chhaya and Shishir Asthana