The Hero Honda Motors scrip has been among the most favoured stocks in 1997-98. A fact which is clearly reflected in the northward spiral of the scrip from the Rs 300 levels in April 1997 to the current close of Rs 1,311 on Friday last. In the process, it has registered a 333 per cent gain and outperformed the BSE Sensex by miles. Interestingly though the gain in stock value reflects a recognition of the company's fundamentals, which are visible in ample abundance for the year ended March 1998.

Hero Honda was undoubtedly the star performer in the two-wheeler industry in 1997-98. That the sales of 4.08 lakh units (a jump of 51.55 per cent), have helped the company improve its market shares from 27.5 per cent last year to 36 per cent, also reiterates the company's growth story. As far as the financial performance, is concerned--it is volume growth which has buoyed the bottomline. Clearly volumes at Hero Honda have been aided by the capacity expansion of the Gurgaon facility, which helpeddrive revenues. Another factor that has helped Hero Honda, has been the swing in two-wheeler demand from scooter to motorcycles. A fact which is clearly reflected in the 15.72 per cent jump in motorcycle sales compared to the 3 per cent slump in scooter offtakes. Thus sales at Rs 1,149.06 crore, were up 49.63 per cent compared to Rs 767.92 crore last year.

Stringent cost control has also helped buoy the operating margins which improved from 9.39 per cent to 10.84 per cent. Lower interest costs have further boosted the net profits which jumped 52.18 per cent to Rs 76.64 crore. This despite an increase in the effective tax rate to 30.06 per cent, augurs well for the company.

Furthermore, the company 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, which is putting up a scooter plant near Mysore. Furthermore the name of the company has become synonymous withfuel efficiency and low emission level and this, alongwith, the fact that the company's products are designed for the local market and driving conditions gives the company a distinct competitive advantage. Incidentally the company has projected a growth of 25 per cent, which it looks well on the way to achieving in 1998-99.

BIFR intrigue

One of the strange consequences of the BIFR rules is that third party guarantees cannot be enforced once a company has been referred to the BIFR. Section 22 of the Sica prohibits such guarantees from being enforced once a company finds refuge in the BIFR proceedings. As a result of this rule, several finance companies who had lent money to corporates on the strength of a third party guarantee find themselves without recourse.

For example, suppose a finance company had lent money to a not-altogether-healthy corporate on the basis of a guarantee given by a financial institution. The lender perhaps thought that, because of the FI's guarantee, the loan was as good asa loan to the FI. Not so. As soon as the corporate goes to the BIFR, it turns out that, under Section 22 of Sica, the lender cannot even proceed against the FI. Strange logic indeed. Perhaps the rule was framed so that promoter directors who give their personal guarantees are protected against creditors, since it can be argued that they would need to have unencumbered funds to put into the company under any scheme of rehabilitation. But why extend the immunity to third party guarantors, such as financial institutions? All that is achieved by this piece of restrictive legislation is a refusal to lend money to companies in trouble, even if they have a guarantee from a financial institution.

Computer sales tax

The Maharashtra government has caught the information technology industry unawares with the recent hike in sales tax. Incidentally, the modifications to the exim policy announced by the commerce ministry recently had proven to be a shot in the arm for the industry. Sales tax on computers hasbeen hiked by 100 per cent (2 to 4 per cent), while on electric components the increase is 333 per cent (4 to 13 per cent) and on software by 400 per cent (1 to 4 per cent). Interestingly this move is in stark contrast to the lead taken by the Maharashtra government in 1995, when it had reduced taxes on infotech products to just 2 per cent of the sales value.

Commensurately, the prices of computers will shoot up by 10 per cent. This move will also have severe repercussions, in the sense that manufacturers in the state would shut shop and moveover to nearby states. Moreover, this would prove to be a big boost to software piracy. Since customers would be better off paying cash upfront rather than pay a sales tax of 4 per cent. The state would thus also have to incur a massive revenue loss. Which in effect points towards the possibility of the move to increase sales tax collections backfiring.

Emcee (With contributions fromPercy Dubash and AG Krishnan)