Operational profits slid to Rs 118 crore from Rs 151 crore. Predictably, the net sales income has dropped 8 per cent to Rs 1,901 crore. Even a 53 per cent increase in export earnings at Rs 218 crore does not seem to have stemmed the slide.

The Tata Engineering stock has received a thumbs down from the stock market. The scrip has hit a 52-week low of Rs 70 from a high of Rs 360. Moreover, there is little to be happy about the operating profit margin (OPM)'s fractional fall to 6.2 per cent. Tata Engineering's improved product mix, which tilts more towards the higher margin utility vehicles - the Sumo and the Safari, bucked the downward pressure on margins.

The Indica project may be blighted because of bad performance, but the fact remains that a sluggish market for commercial vehicles has also told on Telco. A 23 per cent dip in units sales to 17,572 units has also affected the company's performance. Utility vehicles and passenger cars, too, recorded a 16 per cent negative growth to 17,992 units.

The results are not strictly comparable because the company has moved out of the machine tools, gear box and axle manufacturing segments - components that are required for vehicle manufacturing. It means that these components now have to be outsourced. This clearly shows the company's intention to reduce its level of vertical integration. Though the company's decision to move down in vertical integration is of a piece with the international practice, it would be in Tata Engineering's interest to tread cautiously in this regard, as customisation may suffer as a result. However, the spin-off in terms of savings on fixed cost of component division may outweigh the drawbacks. In all likelihood, this exercise should help because the company can now concentrate on distribution and sales.

The other reason that renders the comparison of results difficult is that Rs 137 crore on account of interest and depreciation of the Indica project was capitalised up to September 2000. In the current quarter, the same is charged to the revenue account.

Tata Engineering can heave a sigh of relief in the fact that the passenger car project has achieved cash break-even in the quarter under review.

Hero Honda
The two-wheeler segment has been relatively insulated from the general slowdown in the Indian auto industry. The motor cycle segment has been growing apace. The off-take of two-wheelers has been largely aided by the paucity of transport facilities, particularly in rural areas. The rural and urban youth, who account for a bulk of incremental demand, have activated the shift in demand from scooters and mopeds towards motorcycles. Moreover, the trend is likely to persist.

Hero Honda, the market leader in this segment, has reported a 35.8 per cent growth in the sale of motorbikes to 2.40 lakh units in the second quarter ended September 2000, up from 1.76 lakh in same quarter of the previous year. This exceeds the 26.2 per cent growth rate of this industry segment. Yet, the growth was down from the 42 per cent achieved in the half-year to September 2000, implying that a slowdown may be round the corner.

Hero Honda's showing in the quarter ended September, 2000 has been along expected lines. The company has been able to notch up a 43 per cent increase in the topline to Rs 746 crore from Rs 518 crore in the corresponding period last year. It has not been able to keep a tab on total expenditure which went up by 45 per cent, largely nullifying the benefit from topline growth. That is why, in spite of a growth of 44 per cent in operating profits to Rs 71 crore in the quarter, the OPM has declined to 13.9 per cent. Net profit shot up to Rs 60 crore from Rs 43 crore. Yet, the net profit margin has eroded severely to 8.4 per cent from 11.8 per cent. A part of this decline can be attributed to the sales tax rationalisation carried out in a few northern states where the company has a dominant presence. Hero Honda may have to take cognisance of the fact that competition has been increasing in the motorcycle segment. Bajaj Auto is a close rival with a 104 per cent rise in its motor cycle sales. Besides, it has a slewof models lined up in the near future.

Hero Honda has, on its part, refused to sit on its laurels, cashing in on its strong brand value and tasting success even with new variants in the segment.

The 'CBZ' model has provided a major boost to sales. This comes on the back of the highly successful 'Splendour' model that accounts for more than 50 per cent of the company's total sales. Fuel efficiency, marketing muscle and premium product launches, besides a strong technological support from the parent company, have helped Hero Honda increase market share. The moot question is - can it sustain it in the future?

Manish Joshi and Sachchidanand Shukla