IT bellwether disappoints

QUARTERLY RESULT ANALYSIS: MARCH 2005

Significantly, during H1 FY05, the company's operating profit rose 32.10 per cent, in line with the 35.30 per cent growth in topline. However, during H2, operating profit growth fell to 8.8 per cent, much lower than the 20.90 per cent rise in sales, indicating the mounting pressure on margins.

The company recorded a 11 per cent growth in net profit to Rs 810.47 crore in FY05 against Rs 728.38 crore in FY04. Net sales improved to Rs 7,421.65 crore from Rs 5,832.43 crore in FY04, a rise of 27.25 per cent.

Profitability during the quarter was mainly impacted by the discount of Rs 1,001 offered by the company on key products as well as rising input costs. Raw material costs increased by nearly 19 per cent. Other expenses (29.84 per cent) and staff costs (15.45 per cent) rose significantly.

Operating profit margins were down to 16.95 per cent from 19.63 per cent while net margins were down to 10.67 per cent from 12.58 per cent.

However, average realisations were down only marginally, indicating that a better product mix made up for the discounts given.

Hero Honda has announced a dividend of 1,000 per cent for FY05, for the second consecutive year.  Though the company has withdrawn price discounts - this translates to a 2-3 per cent rise in price - the pressure on margins is expected to continue with the continuing rise in input costs.  Going forward, volume growth is expected to be around 15 per cent, lower than the 26.60 per cent growth recorded in FY05. This is likely to result in a single digit earnings growth in FY06.  Though the company ranks high in terms of growth parameters and efficiency ratios, analysts believe that the upside from current levels is capped due to poor expected earnings growth.  However, a dividend yield of 5.2 per cent (2006E) still makes it worth a look. The stock trades at Rs 518 on a trailing 12-month P/E of 12.76.  HDFC BANK
Growth in core business drives growth  HDFC Bank once again met analysts' expectations, posting a 30.80 per cent jump in net profits to Rs 202.37 crore in Q4 FY05, on the back of a 42.44 per cent rise in net interest income to Rs 513.58 crore. 

HDFC Bank
(Rs crore)	Q4FY05	Q4FY04	% change
Interest income	867.21	665.82	30.25
Interest expended	353.63	305.25	15.85
Net interest income	513.58	360.57	42.44
Other income	220.06	140.49	56.64
Operating profit	404.94	284.34	42.41
OPM (%)	37.24	35.26	-
Net profit	202.37	154.72	30.80
NPM (%)	18.61	19.18	-
EPS	6.7	5.4	-
Trailing 12-month P/E			24.9

 This was in turn induced by a 30.25 per cent leap in interest income to Rs 867.21 crore while interest expended increased just 15.85 per cent to Rs 353.63 crore.

The bank's total balance-sheet size grew at an impressive 21.6 per cent to Rs 51,429 crore during the year. Total advances grew 44.08 per cent to Rs 25,566 crore, driven by a 47.5 per cent growth in retail to Rs 1,1696 crore.

Meanwhile, deposits grew 19.5 per cent to Rs 36,354 crore. What helped the bank was a healthy increase in low-cost savings accounts which rose to Rs 11,418 crore (up 46.3 per cent). The credit-deposit ratio improved to 0.7 from 0.5.

Consequent to an ADS issue of the bank, the capital adequacy ratio (CAR) improved to 12.2 per cent to stand, above the prescribed norm of 9 per cent. Of this, tier I CAR was 9.6 per cent.

The bank's non-performing assets (NPAs) remained at a manageable 0.2 per cent. However, provisions during the quarter was stepped up 48.87 per cent to Rs 107.07 crore.

 HDFC Bank has been growing steadily at 30 per cent and there is no reason to believe this will change radically going forward. The stock trades a P/E of 18.07 times its FY06 earnings per share (Rs 29.7) at a current market price of Rs 536.75 (trailing 12-month P/E at 24.9 times).  RELIANCE ENERGY
EPC division shields profits  Reliance Energy sprang a surprise this quarter with its engineering and procurement contracts (EPC) division contributing over 50 per cent to revenues - the segment on an average used to contribute about 20-25 per cent to revenues. 

Reliance Energy
(Rs crore)	Q4FY05	Q4FY04	% change
Net sales of electrical energy	654.69	650.49	0.65
Income from EPC & contracts	812.34	173.13	369.21
Other income	122.91	52.94	132.17
Operating profit	189.09	154.94	22.04
OPM (%)	12.88	18.81	-
Net profit	147.93	103.79	42.53
NPM (%)	10.08	12.6	-
EPS	7.97	6.64	-
Trailing 12-month P/E			17.8

 The division helped company grow its net profit 42.53 per cent to Rs 147.93 crore. Operating profits grew 22.04 per cent to Rs 189.09 crore.

EPC segment grew a whopping 369.21 per cent to Rs 812.34 crore, mainly due to the increased procurement of power projects by the company. Analysts say the capacity expansions in the power industry have helped Reliance Energy bag contracts in that space. The segment is expected to be a significant contributor to sales. The division has an order-book position of Rs 3,500 crore at the end of the year, up from Rs 1,200 crore last year.

Income from sale of electrical energy remained stagnant, posting a marginal increase of 0.65 per cent to Rs 654.69 crore. The flat sales can be attributed to high levels of PLF (plant load factor) already achieved by the company. For instance, the company' s Dahanu plant already operates at a PLF of more than 100 per cent and its other plants, too, are operating at a PLF of nearly 90 per cent (except the Samalkot plant which operated on lower PLF due to lesser availability of gas). Income from this segment has declined to 41 per cent from 74 per cent as a percentage of total sales.

EBIT for the electrical energy division declined by a huge margin - 40 per cent down to Rs 44.13 crore, mainly on account of higher fuel costs, tax on electricity and other provisions. Overall margins of the company, too, were hit on account of the expenses mentioned above combined with other costs related to materials and subcontracting. Operating margins were down 590 basis points to 12.89 per cent.

Number of units sold declined 6.38 per cent to 1819 million units while units of power purchased remained stagnant at 651 million units. Cost of electrical energy purchased, too, remained around Rs 195 crore. Average realisations per unit went up from Rs 3.3 per unit to Rs 3.6 per unit.

Other income saw a rise of 132.17 per cent to Rs 122.91, on the back of treasury gains. As a percentage of total sales, this contributed close to 8 per cent, up 170 basis points.

 Clearly, the profits this quarter have been driven by the EPC and contracts division. Analysts are of the opinion that the division will be the major contributor to revenues in the short term.  Moreover, the only way to increase its revenues from electrical energy is to set up new capacity. The company is planning new capacities in Uttar Pradesh (3740 mw) which is expected to be operational by 2007. So till then, there will be huge reliance on power project contracts that they bag. The stock now trades at a P/E of 17.8 times trailing 12-month earnings at a current market price of Rs 507.9.  ABB
Buoyant order-book aids performance  The power equipment major ABB has once again posted impressive results for the first quarter of 2005. Growth was mainly driven by a surge in sales owing to higher order intake - net sales grew 37.68 per cent to Rs 607.67 crore. Order intake improved 50.63 per cent to Rs 894 crore. Consequently, net profit rose 64.46 per cent to Rs 27.81 crore. 

ABB
(Rs crore)	Q1FY05	Q1FY04	% change
Net sales	607.67	441.36	37.68
Other income	11.92	7.57	57.46
Operating profit	37.12	23.61	57.22
OPM (%)	6.11	5.35	-
Net profit	27.81	16.91	64.46
NPM (%)	4.58	3.83	-
EPS	6.49	3.99	-
Trailing 12-month P/E			34.06

The company was able to manage its costs well even as steel prices rose about 8 per cent during the year as it added a clause - to increase the project cost in case of an increase in raw material costs - to its new orders. Operating margins improved 76 basis points to 6.11 per cent while net profit margin improved 75 basis points to 4.58 per cent.

The power automation division continued to contribute over 60 per cent of total income. Revenues from this segment increased 37.28 per cent to Rs 380 crore on the back of an increase in orders. Profit from the segment grew 71.18 per cent while margins expanded 128 basis points to 6.46 per cent.

The automation division, too, performed well, contributing about 40 per cent to the total income. Revenues from this segment saw an increase of 41.47 per cent to Rs 241.58 crore and while earnings grew 54.82 per cent to Rs 17.65.

The total capital employed by the company increased 18.27 per cent to Rs 833.23 crore. Return on capital employed (RoCE) from the power technologies segment saw a decline of 28 basis points to 7.14 per cent while that from the automation technologies segment posted a rise of 67 basis points to 15.52.

 The order backlog of the company is burgeoning at Rs 1583 crore, up 35.8 per cent. The company looks all set to cash in on the growing demand for power which in turn is inducing companies to set up newer and greater capacities.  Also, the intention of the parent to make ABB (India) a hub of exports, will get the company more orders. ABB plans to spend about Rs 200 crore this year to expand its capacities. At the current price of Rs 1295, the stock trades at a P/E of 34.06 times trailing 12-month earnings.