RIL`s margins see strong upswing

QUARTERLY RESULT ANALYSIS: September 2004

Net profit1752126338.72 NPM (%)10.849.95- EPS (Rs)12.509.00- Trailing 12-month P/E12.35
 Reliance looks to be on a firm footing with both refining and petrochemicals are seeing a strong upswing. Regional refining margins are set to sustain the higher levels for the next few quarters with the heightened demand in the absence of new supplies.  Petrochemical cycles are also likely to sustain for another two years. Analysts forecast earnings of Rs 50 for FY05 and Rs 60 for FY06. At current prices, analysts are bullish on the stock with a target price of Rs 625-675.  INDIAN OIL CORP
Lower marketing margins drag profits  IOC recorded a 31.40 per cent drop in net profit as higher refining margins and inventory gains were not good enough to counter the impact of lower marketing margins and under-recoveries on LPG and kerosene sales.  Sales were up 39.88 per cent, driven by robust volumes; but refining throughput was down sharply during the quarter.

Thanks to the rise in crude prices, inventory gains during the quarter were to the tune of Rs 600 crore, nearly double compared to the June quarter.

For the first half, refining margins were up sharply at $7.15 per barrel compared to $3.66 per barrel. But refining profits were unable to make good the losses elsewhere, partly because refining throughput was lower.

Refining throughput was down to 8.46 mmt from 9.15 mmt in the year-ago period due to the shutdown of Mathura refinery. Consequently, product purchases for resale were higher by 28 per cent.

LPG/kerosene losses were up 164 per cent at Rs 2,370 crore. After accounting for the contribution from upstream players, LPG losses were up 76 per cent y-o-y.

Since retail prices of petrol and diesel were not hiked in line with international crude prices, marketing margins suffered a setback. Marketing margins of diesel were lower by 72 per cent y-o-y and 51 per cent q-o-q as per analyst estimates. 

IOC
(In Rs crore)	Q2FY05	Q2FY04	% Change
Net sales	37164.00	26568.00	39.88
Other income	455.18	479.89	-5.15
Operating profit	37164.00	26568.00	39.88
OPM (%)	100.00	100.00	-
Net profit	1239.53	1806.77	-31.40
NPM (%)	3.34	6.80	-
EPS (Rs)	12.5	9.00	-
Trailing 12-month P/E			7.24

 IOC will see refining profits improve this quarter onwards with Mathura refinery up and running.  However, with crude prices showing no signs of abatement and government reluctant to increase retail prices of petro products, marketing margins will continue to suffer. Losses on account of LPG and kerosene subsidies will also eat into profits.  Analysts peg FY05 earnings at around Rs 45 and FY06 earnings at about Rs 66.  HLL
Topline refuses to grow  Hindustan Lever's profit before tax and exceptionals declined 31.7 per cent, better than the 42.6 per cent fall reported in the June quarter. Operating margin improved to 14.10 per cent, compared to 12.40 per cent in the preceding quarter.  However, the topline, which refuses to grow, remains a concern. Despite price cuts in key categories like detergents and shampoos, sales declined 3.30 per cent to Rs 2,401.14 crore.

The improvement in operating margin was largely due to a cut in adspend to 8.2 per cent of sales from 10 per cent in the June quarter.

Sales in the soaps and detergents segment were marginally higher by 3.8 per cent. Detergent volumes grew 9 per cent due to price cuts. But this hasn't translated to any significant growth in value.

EBIT margins of the soaps and detergents segment fell by 9 percentage points for the second successive quarter.

Sales of shampoo grew 40 per cent in volume terms because of price cuts; but in value terms the growth was just 3 per cent.

The processed foods business witnessed a 38 per cent drop in sales as the company reduced trade stock. The segment posted losses amounting to 21 per cent of sales, which was slightly better than the June quarter when losses were 33 per cent of sales.

EBIT margins of the beverages business, however, improved 370 basis points y-o-y because of a better product mix.

 

Hindustan Lever
(In Rs crore)	Q3FY05	Q3FY04	% Change
Revenues	2401.14	2482.97	-3.30
Other income	85.68	111.72	-23.31
Operating profit	338.66	476.13	-28.87
OPM (%)	14.10	19.18	-
Net profit	324.32	443.22	-26.83
NPM (%)	13.51	17.85	-
EPS	1.47	2.01	-
Trailing 12-month P/E			19.91

 HLL is struggling with its topline growth. Though price cuts helped volumes grow to some extent, they are not translating to value growth.  The y-o-y decline in net profit would cease after two quarters, but that's nothing to get excited about if topline growth doesn't trickle in, especially since HLL's stock enjoys a valuation of around 18 times estimated CY2005 earnings.  ITC
Agri business enhances sales  ITC's sales rose 13.12 per cent to Rs 1,737.85 crore. In the June quarter, sales had risen 24.2 per cent to Rs 1,775 crore.  Last quarter's sales were higher because the agri business grew by 39 per cent to Rs 459 crore. This business is seasonal and was flat in the September quarter. Net profit grew 13.51 per cent to Rs 485.69 crore.

The cigarettes business grew 11.25 per cent (following an 10.8 per cent growth in the June quarter). Margins of the segment were maintained at 22.9 per cent of gross sales.

ITC's other FMCG businesses grew at a fast pace of 76.2 per cent, while their losses stood at 35.6 per cent of sales, lower than the year ago level of 53.3 per cent.

The hotels business recorded a 21 per cent growth in revenues and a 11 percentage-point improvement in EBIT margins.

The paper business was the only segment to report a drop in profitability. Though its revenues grew 25 per cent, EBIT margins fell 220 basis points to 17.8 per cent.

Overall margins were maintained at over 40 per cent, indicating a much better performance compared to the 350 basis-point fall in the June quarter. 

ITC
(In Rs crore)	Q2FY05	Q2FY04	% Change
Net sales	1737.85	1536.25	13.12
Other income	69.89	69.83	0.09
Operating profit	697.94	618.10	12.92
OPM (%)	40.16	40.23	-
Net profit	485.69	427.87	13.51
NPM (%)	27.95	27.85	-
EPS	19.61	17.29	-
Trailing 12-month P/E			15.70

 Double-digit growth in cigarette sales for two consecutive quarters (the company has not been seen such a growth for the last five years) is an exceptionally good signal.  It's also encouraging that most of the company's other segments continue to grow at a healthy pace, while the overall margin structure has not been disturbed. With strong growth kicking in, ITC looks reasonably valued at 12.8 times and 14.5 times estimated FY05 and FY06 earnings respectively.  BHARTI TELE
Higher customer base improves profitability  In line with the robust growth trend in the domestic telecom segment, Bharti Tele-Ventures posted better Q2 results which beat analysts' expectations.  Though tariffs have been on a downtrend in the quarter, the company has managed to push up revenues with higher customer acquisitions.  Revenues were up 9.10 per cent at Rs 1859.80 crore on a sequential basis while net profit ascended 12.70 per cent to Rs 333.70 crore. Operating margins improved 131 basis points to 37.70 per cent and net margins expanded 57 basis points to 17.94 per cent.

Bharti's mobile customer base grew 14.4 per cent to 8.7 million while net additions were up 11 per cent at 1 million. The company's share in the total net mobile (wireless) customer additions in the country stood at 20 per cent against 22.8 per cent.

The company's marketshare stands at 20.5 per cent. Its fixed-line customer base increased 9 per cent to 7.64 lakhs.

ARPU (average revenue per user) declined 1.16 per cent to Rs 509. But analysts are not worried about this as new customers use their mobile phones less. Fixed-line ARPU, meanwhile, increased 6 per cent to Rs 1,256. AMPU (average minute per user) went up 3.8 per cent to 321 minutes.

Revenues from the mobile segment improved 12.8 per cent to Rs 1,239.7 crore while EBITDA of the segment increased 8 per cent to Rs 415.7 crore. The segment contributed 67 per cent to total revenues against 64 per cent. On the EBITDA front, the segment contributed 59 per cent against 62 per cent.

The company increased its capex 21.66 per cent to Rs 1,153.2 crore. This formed 86 per cent (against 62 per cent) of total capex. 

Bharti Tele-Ventures
(In Rs crore)	Q2FY05	Q1FY05	% Change
Revenues	1859.80	1704.70	9.10
Other income	1.50	-5.50	-127.27
Operating profit	701.10	620.20	13.04
OPM (%)	37.70	36.38	-
Net profit	333.70	296.10	12.70
NPM (%)	17.94	17.37	-
EPS	4.81	4.26	-
Trailing 12-month P/E			25.92

 Bharti is expected to perform well in a growing telecom market like ours. The play, however, will be a volume-based one since there is continuous pricing pressures.  Bharti has also started seeking out high-usage customers by providing value-added services like 'Edge' and 'Blackberry' (which mainly constitute of various high-end functions).  Nevertheless, incremental revenues will have to be derived by new customers. Analysts forecast an EPS of Rs 10-11 for FY05. Given the price of Rs 157.30, the stock trades at a P/E of 15.73 times its FY05 earnings (current P/E is 25.92).  MARUTI UDYOG
Higher productivity expands margins  Maruti Udyog's Q2 results beat analysts' expectations. Net profit grew 48.08 per cent to Rs 183.60 crore on the back of improved sales which rose 25.09 per cent to Rs 2,698.67 crore. Better realisations and higher productivity helped margins expand.

Operating margins expanded 172 basis points to 11.63 per cent while net margins grew 106 basis points to 6.80 per cent on the back of controlled expenditures.

Maruti managed to keep its raw material costs under control, even while steel prices saw an upswing. Though raw material costs grew 24.34 per cent to Rs 2,019.43 crore, as a percentage of sales they declined 50 basis points to 74.8 per cent.

The company's per unit realisations went up 4.5 per cent to Rs 2.08 lakh due to a better product mix. Vehicles of higher value like A2 (Zen, Wagon R and Alto) and A3 (Esteem and Baleno) segments registered faster growth of 77 per cent and 73 per cent respectively. Number of vehicles sold, too, recorded an increase of 19.7 per cent to 1.29 lakhs.

Other expenses jumped 27.65 per cent to Rs 325.42 crore, primarily due to royalties on the new Alto that the company had to pay to Suzuki (no royalty was required to pay on the earlier model of Alto). Besides increasing the adspend, the company also made a Rs 22 crore provision for product recalls from the export market.

 

Maruti Udyog
(In Rs crore)	Q2FY05	Q2FY04	% Change
Net sales	2698.67	2157.33	25.09
Other income	78.14	112.46	-30.52
Operating profit	313.83	213.74	46.83
OPM (%)	11.63	9.91	-
Net profit	183.60	123.99	48.08
NPM (%)	6.80	5.75	-
EPS	6.35	4.29	-
Trailing 12-month P/E			16.62

 While productivity gains are expected to continue, the immediate picture - especially the next quarter - looks good for the company as the festive season is set to begin. Some concerns may arise in terms of transfer pricing and marketing margins in the long term after the new joint venture plant (with Suzuki) becomes operational.  Nevertheless, the company is expected to cash on growing demand for commercial vehicles, especially in the A2 segment. It is going ahead with the joint venture with Suzuki Motor Corp (an equity ratio of 70:30) for a new assembly plat which will roll out 2.5 lakhs cars per annum.  It also plans to set up a diesel engine project in collaboration with Suzuki. Analysts expect an EPS of Rs 25 or above in FY05. Currently, the stock trades at a P/E multiple of 15.02 times its FY05 earnings (trailing P/E stands at 16.62).

 TATA MOTORS
Raw material costs squeeze margins

 Tata Motors' operating margins plunged 127 basis points to 12.54 per cent due to a 35.4 per cent rise in raw material costs to Rs 2,802.58 crore (mainly driven by an increase in steel prices). Raw material costs as a percentage of sales climbed 246 basis points to 67.5 per cent.

Sales increased 30.5 per cent to Rs 4,147.05 crore on the back of a good volumes growth of 22.33 per cent to 95576 units.

Other income rose sharply, chiefly due to the inclusion of Rs 28.53 crore towards profit from sale of long-term investments. Even after accounting for this, net profit rose 35.8 per cent to Rs 280.68.

Passenger vehicles (Indica, Indigo and Sumo) performed well, recording a 22.5 per cent growth to 45,167 units which helped Tata Motors maintain its position as the second-largest player (in passenger vehicles). Meanwhile, sales of commercial vehicles rose 17.7 per cent to 44,076 units and exports jumped 64.7 per cent to 6,333 units.

Realisations per unit, too, saw an increase of 6.6 per cent to Rs 4.3 lakh as sales of higher priced vehicles - especially Indigo, Indigo Marina and Sumo Victa - went up.

 

Tata Motors
(In Rs crore)	Q2FY05	Q2FY04	% Change
Net sales	4147.05	3177.73	30.50
Other income	70.59	22.78	209.88
Operating profit	519.96	438.87	18.48
OPM (%)	12.54	13.81	-
Net profit	309.21	206.68	49.61
NPM (%)	7.46	6.50	-
EPS	8.63	6.45	-
Trailing 12-month P/E			15.90

 In the short-term, analysts expect Tata Motors to cash on the festive season in the next quarter. Growing demand for passenger vehicles and easy financing options should aid results going forward. Margins are expected to improve once steel prices cool off.  Tata Motors's plan to introduce Tata Novus heavy vehicles in international markets is expected to augur well for the company. For FY05, analysts expect a growth of around 14 per cent which translates into an EPS of about Rs 28. Given a price of Rs 416.8, the stock trades at a P/E multiple of 14.8 times its FY05 earnings (current P/E stands at 15.9).  MAHINDRA & MAHINDRA
Expenses are kept under check  Mahindra & Mahindra posted an impressive performance on the back of a sound volume growth. Sales increased 36.46 per cent to Rs 1,554.41 crore with both automotive and farm equipment sectors posting strong performance.  Margins, too, expanded despite increasing raw material costs as the company managed to keep expenses under check which supported a net profit growth of 68.41 per cent to Rs 122.92 crore.

In the automotive segment, utility vehicles grew 25 per cent to 26,877 units on the back of improved sales of Bolero variants. The light commercial vehicle segment grew 36 per cent to 2,239 units while the large three-wheeler segment grew 34 per cent to 6,047 units.

The farm sector, too, grew 32 per cent to 9,656 tractors as against the previous quarter. This also aided the company to continue its status as the market leader.

Despite a 40 per cent rise in raw material costs to Rs 1,045.03 crore, operating margins rose 246 basis points to 12.04 per cent, signifying operational efficiencies. Net margins, too, expanded 150 basis points to 7.9 per cent.

The company curtailed its interest expenses to a large extent - they fell 88 per cent to Rs 1.6 crore.

 

M&M
(In Rs crore)	Q2FY05	Q2FY04	% Change
Net sales	1554.41	1139.09	36.46
Other income	37.33	20.94	78.27
Operating profit	187.21	109.21	71.42
OPM (%)	12.04	9.59	-
Net profit	122.92	72.99	68.41
NPM (%)	7.91	6.41	-
EPS	10.60	6.29	-
Trailing 12-month P/E			11.18

 The company is confident of better performance going forward as industrial activities are expected to pick up.  Analysts feel that Bolero helped the company garner good sales while continuing leadership in the farm sector is expected to continue.  Prospects for the company look bright according to analysts, as Mahindra has managed to outperform the market growth in each of the vehicle segment it is present in.  For FY05, an EPS of Rs 40 is expected. Given the price of Rs 444.65, the stock trades at a P/E multiple of 11.11 times its FY05 earnings (current P/E stands at 11.18 times).  DR REDDY'S LABS
Flat sales, higher expenditure mar performance  Dr Reddy's Labs turned in disappointing results. The company's net profit was down 47.20 per cent to Rs 46.91 crore compared to Rs 88.85 crore.  The decline was mainly attributed to higher operational expenditure and interest costs apart from sliding sales in active pharmaceutical ingredients (APIs) and intermediates, generics and drug discovery. Total revenue growth was flat at Rs 524.19 crore against Rs 523.58 crore.

Revenues of the API segment declined 9.9 per cent to Rs 182.10 crore. API sales as a percentage of total revenues also declined to 33.70 per cent from 37.69 per cent. The decline in API revenues was mainly due to a drop in revenues from the European market (down 58 per cent), as a result of lower sales of Ramipril due to competition and price declines.

The generics segment also suffered a 16.10 per cent decline in revenues to Rs 104.30 crore. Generics sales, as a percentage of total revenues, came down to 19.30 per cent from 23.10 per cent. Analysts attribute the drop in sales to competition in the US market.

Sales of Fluxotine and Tizinadine, which were the big revenue drivers of the company in the US market, saw a decline of 41 per cent, as new players launched generic versions of their own.

However, the company was able to record gains in the branded formulations segment, where sales grew 17.50 per cent to Rs 231.50 crore. The segment now accounts for 42.80 per cent of the total sales as against 36.70 per cent.

The company's bottomline was also impacted by higher R&D expenditure (up 25.40 crore to Rs 56 crore), while sales and distribution costs shot up 29.10 per cent to Rs 51.50 crore.

Interest outgo was higher at Rs 17.40 crore against Rs 4.10 crore. 

Dr Reddy