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India's Biggest Wealth (Contn.)
The ability to earn a return far in excess of the cost of capital is a common characteristic among EVA listers. In HLL's case, this is reinforced by a performance measurement system that shares with managers the basis of appraisal: the kind of contribution their division is making to the overall balance sheet. Add to this an obsession with inventory levels-crucial to the management of working capital-that extends to suppliers and channel-members, and you end up with an efficient capital management process. Today, HLL has a ROCE far in excess of its cost of capital, allowing it the leeway to create shareholder value. But 2000, has been annus horribilis for the company with growth plateauing out across product categories. So, what happens to profits? And what happens to shareholder value? Sundaram is confidence personified as he says: ''We have consistently been notching profits in excess of 20 per cent and I believe this can continue. We look to improve margins through effective all-round cost management in addition to the aggressive pursuit of topline growth.'' That top-line growth will have to happen. As Shalini Gupta, an FMCG analyst at Motilal Oswal, puts it: ''In the short-term, a strong company like HLL may be able to maintain profitability at current levels. But in the long-term, growth in sales is crucial.'' Indeed, as has been shown in the accompanying article, a company can't grow its EVA beyond a certain level unless there is a corresponding increase in its topline. Analysts are also watching to see what HLL does with its substantial cash reserves (close to Rs 1,500 crore). Since treasury operations fetch returns between 20-25 per cent, the company will be better off investing this amount in its own business. Sundaram in non-committal, but acquisitions or new businesses (may be both) could be just what Lever needs to capture that elusive topline growth. -Abir Pal
Customer focus is what Munjal attributes Hero Honda's success to: ''We came with the right mix of product, price, and service.'' Still, part of the company's success can be attributed to its efficient operations: its return on capital employed exceeds its cost of capital by a huge margin. Adds Vice-President (Finance), Ravi Sud:''Local ancillaries supply to us an hourly basis and we keep only a one-day inventory of those parts''. There is a touch of grey to this happy aria: while the relaunched Street (now Street Smart) hasn't been a total failure, the numbers remain low. And competition is intensifying in the motorcycles market: LML has entered the fray; Kinetic soon will; and Bajaj and TVS Suzuki have narrowed their focus exclusively to motorcycles. But the real test for Hero Honda will come in 2004, when Honda will start manufacturing motorcycles in India through its fully-owned subsidiary. ''There could be a problem after 2004,'' says Majumdar. But Munjal has so far excelled at managing relations with his JV partner (he actually gave Honda a No-Objection Certificate to create a fully-owned subsidiary at a time when other Indian companies were busy blocking such moves by their foreign partners). ''Do you think they would like to kill the golden goose?'' says a confident Munjal. To be fair, Hero Honda is very much that. As for relationships, suffice it to say that Joint Managing Director Takehiko Nakajima, who represents the Japanese partner, is often heard referring to himself as Nakajima Munjal. -Suveen K.Sinha
February 13: The M&M stock has moved almost 25 per cent in less than a month. Today, on the back of huge volumes, it has see-sawed between Rs 164 and Rs 177. What gives? Has M&M suddenly begun recovering the market share it yielded to Toyota's Qualis? Are the over-capacity problems of the tractor business history, and are farmers buying tractors despite drought conditions? And is Vice-Chairman & Managing Director Anand Mahindra finally close to making M&M a creator of shareholder value, rather than a destroyer of it-which explains why it is somewhere down there in our EVA rankings? To answer these: No, M&M's MUVs are not quite proving successful in containing the Qualis, which has cornered 20 per cent of the market in quick time, most of it at M&M's expense. Answer 2: No, the tractor industry is still reeling under a glut, and although market share has inched up here, there's not much to be had by way of margins. And that explains why M&M's Q3 profits slumped by 43 per cent. For answer 3, read on. The euphoria on the bourses last week had little to do with M&M's businesses, but with its infotech subsidiary, Mahindra British Telecom (MBT), in which M&M holds 60 per cent. MBT's imminent initial public offering threatens to pitchfork M&M into the bracket of value creators. '' MBT offers a big payoff for shareholders,'' exults Jigar Shah, an analyst at brokerage K.R. Choksey. The IPO will result in an equity dilution in M&M, and the cash created can be deployed elsewhere. And the M&M scrip will gain from the ripple effect of the MBT stock (once its listed). Analysts expect MBT to command a respectable P/E-surely higher than M&M's 11-because it's in the high-growth niche of telecom software. M&M's market cap at a price of Rs 170 works out to close to Rs 1,900 crore. Shah believes MBT could command a valuation of Rs 1,200 crore. Thus, the current market cap of M&M doesn't do justice to all its businesses. After all, if you factor in the MBT price in the current market price of M&M, the stock is available for roughly Rs 100, and a P/E of just 6. We know that M&M's businesses are faring badly, but surely Anand Mahindra doesn't deserve that. -Brian Carvalho |
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It
may have slipped down the rankings-a wee bit-in terms of Market Value
Added, but in terms of EVA, the country's largest FMCG company still
reigns supreme. Ask the behemoth's Finance Director D. Sundaram, about
this and he launches into an animated explanation: ''The most important
reason for this is because we measure the performance of each of our
divisions on the basis of Trading Contributions (Tracon). This EVAluates
performance on the basis of operating profit after charging the cost of
capital.''
There's
a tale in these numbers. Hero Honda sold 7.55 lakh motorcycles and
step-throughs in the first nine months of the current financial year, and
is set to sell over a million vehicles this fiscal to overtake its Pune-based
rival Bajaj Auto which sold 7.63 lakh units of vehicles from its
considerable portfolio during April-December, 2000. (Tell Munjal that and
he lunges to touch the nearest piece of wood). Hero Honda's net sales grew
44.2 per cent to Rs 849.22 crore in the three months to December 31, 2000,
from Rs 589.01 crore in the previous corresponding period; its profit
after tax increased 44.6 per cent to Rs 70.18 crore from Rs 48.52 crore;
and the operating profit margin went up to 13.8 per cent from 13 per cent.
''With the largest capacity in the industry as well as the largest share
of the market, the company is in a unique position to capitalise on the
market growth,'' says Anupam Majumdar, who tracks automobiles for
Delhi-based rating agency ICRA. Compare these numbers with the 9.9 per
cent drop in Bajaj Auto's net sales in the same period; the 57.3 per cent
drop in the company's profit after tax; and the astounding slide in its
operating profit margin from 14.9 per cent to 6.5 per cent.
Mid-January:
Against a backdrop of a slump in profits for the December-ended quarter,
and the sluggish market for its main businesses of Multi-Utility Vehicles
(MUVs) and tractors, the Mahindra & Mahindra (M&M) stock has been
beaten down to Rs 140. That's a drop from its 52-week high of Rs 664, and
close to its 52-week low of Rs 126.