Markets fail to cheer RIL

QUARTERLY RESULT ANALYSIS: March 2005

Strong refining margins drive profits

Reliance Industries' results for the fourth quarter were better than even the most optimistic analysts' forecast with net profit surging 61.52 per cent.

Net was up a stunning 48.33 per cent even before extra-ordinary items. The sharp jump in profits was driven primarily by strong refining margins. 

Reliance Industries
(In Rs Cr)	Q3FY05	Q3FY04	% change
Net sales	17839.00	14108.00	26.45
Other income	476.00	477.00	-0.21
Operating profit	3546.00	2646.00	34.01
OPM (%)	19.88	18.76	-
Net profit	2292.00	1419.00	61.52
NPM (%)	12.85	10.06	-
EPS (Rs)	16.40	10.00	-
Trailing 12-month P/E			17.59

But stock markets failed to cheer the good numbers as the battle between the two brothers continued with the younger Ambani refusing to sign the final accounts on a day marked by high drama. Pending issues related to governance remained unattended.

Gross refining margins (GRM) were pegged at $10 per barrel in the last quarter compared to $ 7.2 per barrel a year ago and $9.8 per barrel in the December quarter. Refining profits jumped 45 per cent.

RIL's refining margins were significantly higher than the benchmark Singapore refining margins, which averaged about $ 4.27 per barrel in Q4 FY05. This is because Reliance's refinery can refine sour (Dubai) crude which is now selling at a significant discount to sweet (Brent) crude.

RIL's petrochemical division has also benefited from a revival in sales volumes. Petrochemical revenues grew 39.12 per cent but profits from the segment were up only 9.82 per cent, essentially because of a rise in naphtha prices.

Margins improved overall. Operating margins were up 112 basis points while net profit margins (excluding the Rs 32 crore extra-ordinary expense last year) were up 257 basis points.

Reliance Infocomm has turned around - net profit was at Rs 51 crore in FY05 compared to a loss of Rs 390 crore in the previous year.

Business-wise, Reliance is doing exceptionally well with both refining and petrochemicals on an uptrend. Based on trailing 12-month earnings of Rs 54, the stock is trading at a multiple of less than 10x and seems to offer considerable value.

But the public spat between the brothers and the unresolved issues related to corporate governance are keeping institutional investors non-committal. The stock offers value for opportunistic investors willing to wait till the lull is over.

MTNL
Revision of ADC dents profits

Trai's (Telecom Regulatory Authority of India) decision to lower access deficit charges (ADC) has hit MTNL's profitability. Operating profit was down 7.21 per cent to Rs 458.89 crore while profit before tax slumped 9 per cent to Rs 395.58 crore. 

MTNL
(In Rs Cr)	Q4FY05	Q4FY04	% change
Net sales	1557.82	1492.68	4.36
Other income	99.79	92.08	8.37
Operating profit	458.89	494.54	-7.21
OPM (%)	29.46	33.13	-
Net profit	323.27	307.09	5.27
NPM (%)	20.75	20.57	-
EPS	5.13	4.87	-
12-month trailing P/E			7.75

This was the result of losses on account of revised ADC - down to around Rs 0.50 per minute from Rs 1.50 per minute. ADC losses amounted to Rs 570 crore.

Operating margins were down 367 basis points to 29.46 per cent partly due to a 61 per cent jump in revenue-sharing expenses.

However, net profit and margins were not significantly affected due to lower provisioning for taxes - net profit jumped 5.27 per cent to Rs 323.27 crore while net margin expanded 18 basis points to 20.75.

The number of cellular subscribers rose 69 per cent in the year to 8.82 lakh. However, the company could not add more clients in the last quarter due to capacity constraints.

Revenues from the cellular segment grew 56.7 per cent to Rs 90 crore, forming 5.7 per cent of sales against 3.8 per cent.

Revenues from basic services (fixed line) remained more or less stagnant - about 2.3 per cent up to Rs 1467.8 crore. Analysts don't expect this segment to contribute to growth. Instead, the cellular business will drive revenues, they say.

Competition has taken a toll on MTNL's revenues and earnings this year. FY05 figures look bleak with revenues and profit down 10 per cent and 18 per cent respectively.

However, given that the merger with BSNL is under consideration, MTNL may get an advantage in terms of scalability. Besides, the growth in mobile and broadband business will even out the loss due to the reduction in ADC.

For FY06, an EPS of Rs 18 is expected. Given that, the stock trades at a P/E of 6.4 times its FY06 earnings (current P/E is 7.75 times).

ARVIND MILLS
Tax write-backs, lower depreciation charges buoy net

Arvind Mills' net profits surged 110.65 per cent, driven by tax write-backs, sharply lower depreciation charges, lower interest expenses and a surge in other income. 

Arvind Mills
(In Rs Cr)	Q3FY05	Q3FY04	% change
Net sales	445.00	349.33	27.39
Other income	5.02	2.34	114.53
Operating profit	111.83	87.86	27.28
OPM (%)	25.13	25.15	-
Net profit	53.00	25.16	110.65
NPM (%)	11.91	7.20	-
EPS (Rs)	2.71	1.29	-
Trailing 12-month P/E			17.59

At the net level, margins improved significantly. Sales grew 27.39 per cent, pretty much in line with expectations.

Raw material costs were well within control, rising only 25 per cent. After several disappointing quarters marked by rising input costs, the company covered its cotton requirement for FY06 in order to insulate its earnings.

Power and fuel costs were down 18.76 per cent as the company has switched from high cost naphtha to gas for internal power generation.

Staff costs were up a modest 14.18 per cent; as a proportion of sales, they were down from 8.5 per cent to 7.5 per cent.

Arvind Mills has decided to buy the remaining 53.4 per cent holding of ICICI Venture Funds Management in Arvind Brands for Rs 106 crore, making it a 100 per cent subsidiary.

Arvind Brands sells apparel through its own brands like Newport, Flying Machine and Ruf & Tuf and is the Indian licensee for international brands like Arrow, Lee, Wrangler and Tommy Hilfiger.

The company proposes to raise capital by issuing GDRs of 14 million equity shares amounting to $30-40 million (Rs 120-170 crore), constituting upto 7 per cent of its equity base.

After a gap of six years, the company declared a dividend, albeit a small one (10 per cent).

The company believes that the acquisition of Arvind Brands would allow it to leverage its expertise in fabric manufacturing and help it build a strong national brand in apparel.

The company had de-bottlenecked its capacity by seven million meters per annum and is planning to put up an additional plant with a capacity of 10 million meters per annum, augmenting its overall capacity to 120 million meters.

Similarly, the company is expecting to increase its garment capacity to 20 million (13 million currently) by introducing an additional shift. Arvind is geared to grow steadily but based on consensus analysts' estimate of Rs 7.9 for FY06, the stock enjoys a multiple of 15.18 times at the current price of Rs 120. Valuations do not look all that cheap.

BHARTI TELE-VENTURES
Growth in mobile business boosts profit

Bharti Tele-Ventures reported a 17.23 per cent rise in net profit to Rs 436.8 crore on a sequential basis on the back of magnificent mobile telephony numbers. 

Bharti Tele-Ventures
(In Rs Cr)	Q4FY05	Q3FY05	% change
Net sales	2317.20	2153.00	7.63
Operating profit	905.30	780.20	16.03
OPM (%)	39.07	36.24	-
Net profit	436.80	372.60	17.23
NPM (%)	18.85	17.31	-
EPS	2.35	2.01	-
12-month trailing P/E			26.68

Mobile telephone business grew 8.9 per cent to record revenues of Rs 1,614.5 crore, pushing Bharti's market share to 26.8 per cent in the GSM space and 21.2 per cent in the overall wireless segment (both up 50 basis points).

Even as operating margins were up 283 basis points, the mobile division's EBITDA (earnings before interest, tax, depreciation and amortisation) margin increased 219 basis points to 34.5 per cent, mainly due to lower ADC and operational efficiencies.

One segment that deserves mention is the long distance service - the division posted a whopping 28.7 per cent rise in EBITDA to Rs 192.7 crore while its margins shot up 747 basis points to 38 per cent.

However, such high margins - boosted by lower ADC and a right-back of Rs 13 crore of bad debts during the quarter - may not be sustainable in the future.

Bharti's subscriber base grew 12 per cent to 10.9 million. Net customer additions grew 3 per cent in the quarter compared to last quarter (the number of wireless subscribers in the country fell 16 per cent during the period).

With a growing customer base, the company's ARPU (average revenue per user) has also declined to Rs 504 from Rs 519 since new customers tend to use mobile phones less.

Going forward, analysts do not see any concerns for Bharti as the company is positioned well against its competitors. Growth is expected to be impressive going ahead, too.

At a price of Rs 207, the stock now trades at a P/E of 18 times its FY06 earnings (EPS of Rs 11) and a current P/E of 26.68 times.

BHEL
Power division aids profitability

Power equipment major Bhel posted handsome gains in its net profit - up 34.33 per cent to Rs 584.6 crore, aided by the power equipment division which saw revenues jump 30 per cent to Rs 3,601.3 crore. 

Bhel
(In Rs Cr)	Q4FY05	Q4FY04	% change
Net sales	4967.10	3968.60	25.16
Other income	162.80	191.00	-14.76
Operating profit	872.00	613.20	42.20
OPM (%)	17.56	15.45	-
Net profit	584.60	435.20	34.33
NPM (%)	11.77	10.97	-
EPS	23.89	17.78	-
12-month trailing P/E			19.34

The division, which contributes about 70 per cent to total revenues, posted a 15 per cent jump in earnings before interest and tax (EBIT) to Rs 887.1 crore.

Margins in the power segment were down to 24.6 per cent from 27 per cent, mainly due to an increase in raw material costs. Total raw material costs rose 50 per cent to Rs 2,503.6 crore on the back of higher cost of inputs like steel and aluminium.

Overall operating profit margins improved 210 basis points to 17.56 per cent while net margins rose 80 basis points to 11.77 per cent. The industrial segment saw a handsome ascent in margins - up over 800 basis points to 16 per cent.

The order-book position stands at Rs 32,000 crore, up 35.3 per cent. The company has bagged several power contracts, including a recent one from NTPC.

Bhel is a beneficiary of the reforms in the power sector. It is expected to bag a significant share of power projects due in the years to come. For FY06, analysts expect an EPS of around Rs 53.

At the given price of Rs 793, the stock trades at a P/E of 14.9 times its FY06 earnings and 19.34 times 12-month trailing earnings.

SUN PHARMACEUTICALS
Higher expenditure pulls net down

Though Sun Pharma recorded a 22.32 per cent rise in net sales to Rs 320.49 crore, there was only a 1.21 per cent improvement in net profit (Rs 118.30 crore). 

Sun Pharmaceuticals
(In Rs Cr)	Q4FY05	Q4FY04	% change
Net sales	320.49	262.00	22.32
Other income	3.90	12.67	-69.22
Operating profit	103.62	104.88	-1.20
OPM (%)	32.33	40.03	-
Net profit	118.30	116.88	1.21
NPM (%)	36.91	44.61	-
EPS (Rs)	6.40	6.30	-
Trailing 12-month P/E			29.14

This was mainly because of a 38 per cent rise in expenditure, and a lower offtake of domestic dosages (-12 per cent) because of VAT. For FY05, the company recorded a 22 per cent growth in sales to Rs 1301.32 crore, while net profit improved 19.80 per cent to Rs 419.78 crore.

Other income declined 69.22 per cent to Rs 3.90 crore, while higher expenditure - mostly costs of materials (up 65.50 per cent at Rs 131.91 crore) and R&D expenses (up 29.21 per cent at Rs 30.79 crore) - led to a drop in operating profit margins to 32.33 per cent (40.03 per cent in Q4 FY04). Net margins, too, recorded a similar fall.

The company's domestic sales were down by 7.20 per cent at Rs 157.89 crore during the quarter, with both formulations (-6 per cent) and bulk drugs (-15.90 per cent) recording a fall.

However, this was more than offset by a 58 per cent rise in export income (Rs 153.75 crore). On the exports front, both formulations (33.90 per cent) and bulk drugs (156.60 per cent) recorded healthy growth rates.

Despite the poor performance in the past quarter, the stock is quoting at a trailing 12-month P/E of 29x. Analysts are of the view that the scrip is still attractive as the benefit of the company's $350 million FCCBs (foreign currency convertible bonds) has yet to come in.

The proceeds are likely to be utilised for inorganic expansion in the US markets, apart from increased R&D spends which are expected to result in new product launches.

CIPLA
VAT hits sales

Pharma major, Cipla has recorded a marginal increase in net profit to Rs 105.58 crore. However, net sales declined by 6.08 per cent to Rs 534.98 crore. 

Cipla
(In Rs Cr)	Q4FY05	Q4FY04	% change
Net sales	534.98	569.64	-6.08
Other income	15.45	10.95	41.10
Operating profit	136.89	129.19	5.96
OPM (%)	25.59	22.68	-
Net profit	105.58	101.74	3.77
NPM (%)	19.74	17.86	-
EPS (Rs)	3.52	3.39	-
Trailing 12-month P/E			19.02

The performances was a reflection of the impact of VAT as well as the fact that dealers stopped purchases on account of the changes in excise laws on medicines.

The decline in the company's domestic sales also didn't help matters. Despite the poor quarter, Cipla recorded a 28.50 per cent jump in bottomline to Rs 406.38 crore for FY05, while net sales went up 16.58 per cent to Rs 2,241.92 crore.

The company's domestic sales went down by 15.40 per cent to Rs 223.53 crore during the quarter. The export income from APIs (active pharmaceutical ingredients) also went down by 49.20 per cent to Rs 67.04 crore, but was more than offset by a 70 per cent rise in export of formulations at Rs 254.64 crore.

Overall, there was a 14.20 per cent rise in total exports to Rs 321.68 crore.

Also, exports as a percentage of total income went up to 59 per cent from 51.60 per cent.

There was a 24.28 per cent rise in staff costs to Rs 32.09 crore, which was mainly due to an overall increase in head count and a rise in managerial remuneration.

The company's operating margins improved to 25.59 per cent, a near 300 basis point jump, while net margins went up by 188 basis points to 19.74 per cent.

It set up a state-of-the-art facility for manufacture of formulations at Baddi in Himachal Pradesh at a cost of Rs 80 crore.

The fact that Cipla has managed to grow its net profit during the year when pharma companies found the going tough should help the sentiment at the counter, say analysts.

The company's low-risk strategy of tying up with international companies - which has helped it improve its export income - also augurs well for the future.

The stock trades at a trailing 12-month P/E of 19.02x, which compares favourably with other big pharma companies.

RANBAXY
Competition in US generic markets hits net

Ranbaxy Laboratories, India's largest pharmaceutical company recorded a 54.42 per cent drop in net profit to Rs 67.71 crore. 

Ranbaxy
(In Rs Cr)	Q1CY05	Q1CY04	% change
Net sales	773.50	812.47	-4.80
Other income	68.14	67.91	0.34
Operating profit	115.96	193.00	-39.92
OPM (%)	14.99	23.75	-
Net profit	67.71	148.54	-54.42
NPM (%)	8.75	18.28	-
EPS (Rs)	3.64	8.01	-
Trailing 12-month P/E			31.18

The company also suffered a 4.80 per cent decline in net sales to Rs 773.50. Heightened competition in the US generic markets, rising R&D costs and weak domestic sales at home are cited as reasons for the poor performance.

Ranbaxy had to contend with a US court ruling which forced the discontinuation of the sale of its generic Quinapril (a generic form of Pfizer's Accupril) to Teva Pharmaceuticals, apart from absorbing the latter's unsold stock.

As a result, Ranbaxy's US sales fell to $80 million in the March quarter, from $110 million in the same quarter last year.

The company posted a decline in sales in India, too, due to large-scale destocking by chemists in preparation for the VAT regime and the removal of psychotropic drugs from the market.

Consequently, domestic sales dropped from Rs 253.5 crore in Q1CY04 to Rs 197.39 crore in the past quarter.

The company's European sales dropped to $44 million from $49 million.

Expenditure mounted, mainly due to a rise raw material and staff costs. R&D expenses also went up by 28 per cent to Rs 80.57 crore. This impacted margins significantly.

During Q1, Ranbaxy received approval for three more ANDA (abbreviated new drug application) approvals from the USFDA, taking the cumulative number of product approvals to 99.

The company has recommended a final dividend of Rs 12 per share, bringing the total dividend per share to Rs 17 (it had paid an interim dividend of Rs 5 per share in 2004).

The board also approved a split of the existing equity shares of a face value of Rs 10 each into shares with a face value of Rs 5 each.

Though the company hopes that strong pipeline of products (amounting to almost 100 in the USA) will give it enough momentum towards a stronger performance in the second half of 2005, analysts are not so sure.

Moreover, it is expected to be hit by the costs of launching a generic version of Pfizer's cholesterol-lowering drug Lipitor, whose patent it has challenged.

A US court is expected to pronounce its verdict on the Lipitor case in July. Though Ranbaxy has enjoyed premium valuations for long because of its strong business model, the increasing pressure in US markets is a cause of concern, say analysts.

At a trailing 12-month P/E of 31.18x, the stock is considered expensive.

PUNJAB NATIONAL BANK
High expenses drag operating profit

Punjab National Bank posted satisfactory results. However, its operating profit was hit as a result of high operating expenses (other than interest expended) due to depreciation on account of government securities being transferred to the 'held to maturity' category. 

Punjab National Bank
(In Rs Cr)	Q4FY05	Q4FY04	% change
Interest income	2184.60	2028.81	7.67
Interest expended	1112.50	1011.18	10.02
Net interest income	1072.10	1017.63	5.35
Operating profit	526.90	699.23	-24.65
OPM (%)	20.56	28.91	-
Net profit	360.63	297.37	21.27
NPM (%)	14.07	12.29	-
EPS	13.54	11.21	-
Trailing 12-month P/E			8.88

Besides, the previous year's numbers included income from a one-time buy-back of government securities. Operating expenses jumped 30.4 per cent.

As a result, operating profit dropped 25.65 per cent to Rs 526.9 crore. Consequently, operating margins shrank 800 basis points to 20.57 per cent.

Net interest income would have been higher than the current Rs 1,072.1 crore (up 5.35 per cent) if interest expended was curtailed. Interest expended rose 10 per cent to Rs 1,112.5 crore while interest earned grew 7.6 per cent to Rs 2,184.6 crore.

The bank's business posted an impressive growth - while deposits grew 17.35 per cent to Rs 103,167 crore, advances rose 28 per cent to Rs 60,413 crore.

Consequently, the credit-deposit ratio improved over 480 basis points to 58.56 per cent.

The bank had a secondary issue through the capital markets in the last quarter which helped the capital adequacy ratio (CAR) rise 168 basis points to 14.78 per cent.

Net non-performing assets (NPAs) declined 78 basis points to 0.2 per cent and analysts expect zero NPA levels in the coming fiscal.

The bank has always had a high proportion of its loans in the priority sector but has still managed to keep low NPA levels. It is also adept in keeping up its retail loans where margins are higher (forming 19 per cent of total assets).

Now that the bank has transferred all the government securities in its books to the 'hold to maturity' category, there will be no substantial losses due to the dip in the value of securities going forward.

An EPS of Rs 63-65 can be expected for FY06. Given this and the price of Rs 346, the stock currently trades at around 5.4 times its FY06 earnings and 8.88 times 12-month trailing earnings.

GLAXO SMITHKLINE PHARMA
Destocking by traders hits profit

Glaxo SmithKline Pharma posted a 23.13 per cent drop in net sales to Rs 276.24 crore. It recorded a decline of 26.68 per cent in net profit, too, at Rs 46.91 crore. 

Glaxo SmithKline Pharma
(In Rs Cr)	Q1CY05	Q1CY04	% change
Net sales	276.24	359.38	-23.13
Other income	8.23	4.33	90.07
Operating profit	70.97	101.15	-29.84
OPM (%)	25.69	28.15	-
Net profit	46.91	63.98	-26.68
NPM (%)