Sales okay

RESULTS REVIEW/ QUARTERLY RESULT ANALYSIS: December 2004

Most companies that declared quarterly financials last week recorded good topline growth though profit margins were a mixed bag.

MARUTI UDYOG
Alto, Wagon R, Zen buoy volumes

Maruti posted good results wherein vehicle sales for the December quarter grew 17.75 per cent y-o-y in volume terms to 1,36,069 units. 

Maruti
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	2888.96	2269.98	27.27
Other income	127.51	107.52	18.59
Operating profit	357.23	211.96	68.54
OPM (%)	12.37	9.34	-
Net profit	239.66	140.75	70.28
NPM (%)	8.30	6.20	-
EPS (Rs)	8.30	4.87	-
Trailing 12-month P/E			17.20

Revenues grew 27.27 per cent while net profit grew 6.13 per cent. Volume growth was buoyed by the bread and butter 'B segment', comprising models like Alto, Wagon R and Zen.

The company was able to increase operating margins by an impressive 303 basis points to 12.4 per cent. More importantly, it increased margins sequentially from 12.1 per cent to 12.4 per cent. Analysts say this could be attributed to factors like the full operation of the company's aluminium casting facility, import substitution and value engineering efforts.

Raw material consumption was 24 per cent higher in absolute terms while it grew 201 basis points as a percentage of sales. However, this was cushioned by an over 400-basis-point fall in staff costs as a percentage of sales. This was because last fiscal's December quarter results included an extraordinary VRS charge of Rs 85.08 crore. Other expenses also fell 63 basis points as a percentage of sales.

Contribution of income from services to total income increased by 40 basis points.

At Rs 448.7, Maruti is trading at P/E of 17.2. Analysts are enthused by the company's margin expansion. Maruti's margins are among the highest in the global passenger car segment but maintaining the same would be the acid test, they say. Costs associated with the company's plan to launch new models in FY05 could also weigh on margins going forward, they add. They peg an EPS target of Rs 42.2 for FY05.

M&M
Higher raw material costs hit operating profit growth

M&M posted robust numbers, with net profit growing at an impressive 36.09 per cent on a topline growth of 33.47 per cent. However, operating profit growth was at a more muted 25.79 per cent, primarily due to higher raw material expenditure which dragged operating margins 73 basis points y-o-y. 

M&M
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	1772.28	1327.83	33.47
Other income	22.24	19.84	12.08
Operating profit	211.65	168.26	25.79
OPM (%)	11.94	12.67	-
Net profit	134.64	98.94	36.09
NPM (%)	7.60	7.45	-
EPS (Rs)	11.48	7.54	-
Trailing 12-month P/E			12.26

The company increased prices in December to counter rising input costs (it raised prices in the auto segment by 5.5 per cent in the nine months ended December). However, it could not completely absorb the rise in costs in the quarter.

Total expenditure increased 34.6 per cent on an absolute basis, led by a 443-basis-point jump in raw material costs. However, staff costs and other expenses slipped 85 basis points and 280 basis points respectively.

Revenues from the auto segment rose 23.8 per cent while the segment's profitability slipped 183 basis points.

Revenues from the farm equipment segment rose 57.52 per cent while profitability from the segment increased 171 basis points.

The company sold 6,000 units of Scorpio under an anniversary offer with most of the discount impact being absorbed by the dealers and financing banks.

At Rs 534.55, M&M presently trades at a P/E of 12.26. Analysts say the company could be in for a rerating if it manages to succeed in its efforts to grow margins through design, sourcing and manufacturing of components. The company recently bought a string of auto ancillary companies in this regard. Its foray into the high potential Chinese market and the government's focus on agriculture lending would work in its favour.

L&T
Rise in costs drags margins

L&T posted its third-quarter results in line with analysts' expectations. However, the construction major suffered a drag on its margins, mainly due to an increase in raw material and sub-contracting charges. 

L&T
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	3230.49	2374.91	36.03
Other income	83.56	43.44	92.36
Operating profit	137.04	121.57	12.73
OPM (%)	4.24	5.12	-
Net profit	132.35	101.80	30.01
NPM (%)	4.10	4.29	-
EPS (Rs)	10.31	8.17	-
Trailing 12-month P/E			14.38

Sales rose at a handsome 36.03 per cent to Rs 3,230.49 crore but total order-booking was down 15 per cent due to the slowdown in order-booking in the engineering and construction division.

Operating margins slipped 88 basis points to 4.24 per cent while net margins were down 19 basis points to 4.1 per cent.

Raw materials, which form a major portion of costs, rose 70.5 per cent to Rs 1169.39 crore, mainly due to the rise in cement prices. As a percentage of sales they increased 732 basis points to 36 per cent. Similarly, sub-contracting charges were up 71.5 per cent to Rs 836.17 crore and formed 26 per cent of sales, up 535 basis points.

The company's earnings posted a healthy growth of 30.01 per cent to Rs 132.35 crore, mainly due to a rise in other income which grew 92.36 per cent to Rs 83.56 crore on the back of exchange gains and profit from sale of investments and fixed assets.

In terms of segmental EBIT (earnings before interest and tax), the engineering and construction division recorded an increase of 21.86 per cent to Rs 144.01 crore while the electricals and electronics division grew a nominal 4.15 per cent to Rs 34.65 crore.

Analysts are not worried about the fall in margins since construction activities in the domestic market as a whole are on the rise and L&T being the biggest company will be a direct beneficiary.

According to the company, order-booking in engineering and construction is expected to grow by 15 per cent and revenues from the segment 35 per cent. For FY05, analysts expect an EPS of Rs 59-60. Given the current price of Rs 963.45, the stock trades at a P/E multiple of 16.5 times its forward earnings (current P/E stands at 14.38).

HDFC
Growth in net interest income boosts profit

The housing finance major posted healthy third-quarter results in line with analysts' expectations, matching its previous performance record. 

HDFC
(In Rs crore)	Q3FY05	Q3FY04	% Change
Interest income	846.89	744.84	13.70
Interest expended	508.62	474.93	7.09
Net interest income	338.27	269.91	25.33
Other income	1.12	2.38	-52.94
Operating profit	289.63	226.71	27.75
OPM (%)	34.15	30.34	-
Net profit	236.05	182.81	29.12
NPM (%)	27.84	24.47	-
EPS (Rs)	9.41	7.32	-
Trailing 12-month P/E			18.91

Net profit grew 29.12 per cent to Rs 236.05 crore on the back of net interest income which rose 25.33 per cent to Rs 338.27 crore.

Net interest income grew due a higher growth in interest income - interest income rose 13.7 per cent to Rs 846.89 crore while interest expended fell 7.09 per cent to Rs 508.62 crore.

Interest expended as a percentage of interest income has been consistently falling - this time around it decreased 370 basis points to 60 per cent. Operating margins, too, expanded to 34.15 per cent from 30.34 per cent as income grew more than expenses.

The bank approved loans worth Rs 13,465 crore, up 29.5 per cent, and disbursed loans worth Rs 10,652 crore, up 27.63 per cent. Tax incentives and lower interest rates pushed up disbursements.

Capital adequacy ratio (CAR) rose 12 basis points to 14.6 per cent and is well above the 12 per cent level stipulated by the Reserve Bank.

Net non-performing assets (NPAs) do not exist since the institution provides wholly for doubtful loans. Gross non-performing assets remained stagnant at 1.26 per cent while provisions stood at Rs 359.51 crore (up 14.3 per cent).

Analysts do not see any cause for concern as HDFC has been consistently posting good numbers. Besides, an entry into real estate venture funds will fetch the institution additional revenues going forward. For FY05, analysts expect an EPS of Rs 43-44. Given the current price of Rs 754.05, the stock trades at a P/E multiple of 17.1 times its forward earnings (current P/E stands at 18.91).

TATA TEA
Lower costs enhance operating profit

Tata Tea's net jumped 76.24 per cent on a topline growth of 18.35 per cent. Although raw material costs rose sharply, the company managed to economise by way of lower staff costs and other expenses. 

Tata Tea
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	239.62	202.47	18.35
Other income	2.35	2.92	-19.52
Operating profit	41.33	27.07	52.68
OPM (%)	17.25	13.37	-
Net profit	27.44	15.57	76.24
NPM (%)	11.45	7.69	-
EPS (Rs)	4.88	2.77	-
Trailing 12-month P/E			22.39

As a result, operating profit grew 52.68 per cent and margins grew 388 basis points.

Revenues from the tea segment rose 20.5 per cent while profitability from the segment increased 86 per cent. Branded tea operations grew 16 per cent in volume terms while tea exports grew 40 per cent.

Although total expenditure increased 13.05 per cent on an absolute basis, it fell 388 basis points as a percentage of sales. Raw material consumption increased almost 800 basis points while staff costs and other expenses fell 276 basis points and 240 basis points respectively as a percentage of sales.

Tata Tea subsidiary, Tetley, saw a 4.22 per cent fall in revenues. However, its profitability increased 23 per cent. Tetley's advertising expenditure grew 15 per cent.

At Rs 484.35, the stock trades at a P/E of 22.39. Analysts say Tetley's sales had been flat in the Australian region. Though there are concerns that tea is becoming a 'low-involvement' category (in high-involvement categories, products - like food - are served in accordance with the customer's peculiar needs and taste), making Tata Tea's brand more of a commodity in the process, analysts are optimistic about Tata Tea's global marketing operations, especially since the company says revenues will start flowing from the new regions in the next few quarters. They say the company looks good from a long-term view and may derive incremental value from the valued-added tea segment. They peg an EPS target of Rs 55.7 for FY06.

ASHOK LEYLAND
Effective cost management boosts operating profit

Ashok Leyland posted upbeat results with revenues growing 15.66 per cent while vehicle volumes rose 3.5 per cent. The company managed costs effectively, helping operating profits grow 21.18 per cent. The bottomline growth of 41.24 per cent was mainly helped by higher other income.
 

Ashok Leyland
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	987.13	853.48	15.66
Other income	6.22	1.81	244.06
Operating profit	102.01	84.18	21.18
OPM (%)	10.33	9.86	-
Net profit	53.65	37.99	41.24
NPM (%)	5.43	4.45	-
EPS (Rs)	0.45	0.32	-
Trailing 12-month P/E			12.53

Operating margins rose almost 50 basis points, thanks to higher defence sales, price hike, and cost rationalisation measures. This is a contrast to the 450 basis points y-o-y decline in the September quarter due to the strike at the company's Hosur plant which had an impact on sales, especially since engines for its trucks and buses were manufactured at that plant.

Although total expenditure rose 15 per cent on an absolute basis, it dropped 47 basis points as a percentage of sales.

Operating margins were up 50 basis points despite raw material costs increasing by 252 basis points. Better margins were driven by savings on staff costs (263 basis points) and miscellaneous expenses (35 basis points).

Financial expenses fell 59 per cent to Rs 18.33 crore. Other income rose 244.06 per cent to Rs 6.22 crore.

The company had hiked prices in the range of 1.5-2 per cent during the quarter.

The company expects to sell around 18,000 vehicles in the fourth quarter (including 1,200 vehicles to be exported to Iraq). Analysts expect it to grow sales volume by 11 per cent y-o-y to around 54,000 units. At Rs 22.75, the stock trades at a P/E of 12.53. Analysts say though there is a positive sheen on the commercial vehicle (CV) segment due a surge in demand arising from preponement of implementation of emission norms, the company's main challenge would lie in its ability to regain lost market-share and consistency in operating margin growth. They peg an EPS target of Rs 2.2 for FY06.

NTPC
Lower tax provision lifts profit

NTPC's results beat analysts' expectations. Net profit was up 66.71 per cent to Rs 1,365.5 crore, mainly because of huge tax recoveries. The company recovered taxes (which are charged as part of the tariffs) of Rs 409.5 crore - up 260 per cent - from state electricity boards (SEBs). 

NTPC
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	5698.20	5362.60	6.26
Other income	572.40	434.70	31.68
Operating profit	1572.40	1427.90	10.12
OPM (%)	27.59	26.63	-
Net profit	1365.50	819.10	66.71
NPM (%)	23.96	15.27	-
EPS (Rs)	1.68	1.05	-
Trailing 12-month P/E			-

As a result net provision for taxes fell 85 per cent to Rs 41.1 crore. However, this may not be a consistent phenomenon.

Net sales increased 6.26 per cent to Rs 5,698.2 crore. Power generation was up 5.8 per cent to 39.8 billion units (despite one of the plants remaining shut throughout the quarter).

The company also managed to attain significant plant load factor (PLF) in its coal-based plants - up to 87.1 per cent from 84 per cent, mainly due to its efficiency.

The rebate for one-time settlement of dues with SEBs stands at Rs 174.7 crore, down 18 per cent. The rebate system will continue till March 2006.

Fuel costs went up 6.6 per cent and were down only a marginal 21 basis points as a percentage of sales. Despite the rise in coal prices, the company managed to keep fuel prices in check. It is also planning to get a better fuel mix by using liquid fuel.

Operating profit rose 10.12 per cent to Rs 1,572.4 crore as expenditure rose only 4 per cent against a 6 per cent rise in sales. Operating margins expanded 97 basis points to 27.59 per cent.

The company added 500 mw during the quarter through Talcher super thermal power plant. It plans to add 1,000 mw in the next 12 months and another 1,500 mw in 15 months. Analysts remain bullish on the company with the power sector expected to perform well as a result of the growth in economy. Concern about failure of payments from SEBs also subsided (SEBs could avail themselves of rebates in their payments to NTPC if they pay up dues as per the one-time settlement announced by the government recently). For FY05, analysts expect an EPS of Rs 6-6.5. Given the current price of Rs 82.25, the stock trades at a P/E multiple of 12.6 times its forward earnings.

HPCL
Inventory losses and low marketing margins keep profits low

Refining and marketing company Hindustan Petroleum (HPCL) recorded a miserable performance with its net profit plunging 69.59 per cent despite a 25.41 per cent growth in sales. 

HPCL
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	16227.00	12939.00	25.41
Other income	101.00	56.60	78.45
Operating profit	16227.00	12939.00	25.41
OPM (%)	100.00	100.00	-
Net profit	235.92	775.71	-69.59
NPM (%)	1.45	6.00	-
EPS (Rs)	6.96	22.89	-
Trailing 12-month P/E			9.06

Substantial losses on subsidy on kerosene and diesel, depressed marketing margins and some inventory losses conspired to keep profits low despite good refining margins. But the numbers were largely on expected lines.

Refining margin for the Mumbai refinery increased from $3.6 per barrel to $5.8 per barrel. Refining throughput for the quarter stood at 3.82 mmt, up from 3.30 mmt. The improvement in refining margins was a shade lower compared to that recorded by other refining companies like Reliance and Kochi Refineries.

Analysts expect marketing margins may have been squeezed as the rise in crude prices was not accompanied by commensurate changes in product prices. Combined margins for petrol and diesel were 66 paise per litre compared to Rs 1.2 a litre in the same quarter last year and 58 paise in the September quarter.

Subsidy losses on sale of kerosene and diesel amounted to Rs 1,250 crore, up 138 per cent from Rs 525 crore in the same quarter last year. In the September quarter, subsidy losses amounted to Rs 928 crore.

Analysts expect R&M companies to bounce back in FY06. The broad view is that crude prices will settle around $35 per barrel next year. Going by this assumption, marketing margins will improve substantially next year and subsidy losses will also be significantly lower. Regional refining margins, too, are expected to be strong for another year or so.

"I expect HPCL earnings to jump 35-40 per cent in FY06 and I recommend a buy on the stock," says S Varatharajan, oil analyst, Motilal Oswal Securities. At current price of Rs 342, HPCL trades at 6.1 times FY06 earnings.


ZEE TV
Write-back drags revenues

Zee Telefilms results were disappointing on all parameters. The company saw a 9.47 per cent drop in revenues, as it reversed sales, expenses and profits accruing from Padmalaya Enterprises and Padmalaya Telefilms recorded in the June quarter following Zee's disengagement with the company. 

Zee TV
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	339.01	374.57	-9.49
Other income	16.65	14.86	12.05
Operating profit	102.06	126.83	-19.53
OPM (%)	30.11	33.86	-
Net profit	82.37	90.19	-8.67
NPM (%)	24.30	24.08	-
EPS (Rs)	0.45	0.32	-
Trailing 12-month P/E			36.53

Excluding the numbers of Padmalaya, net operating revenues were up 1 per cent while operating income was down 9 per cent and net profit was flat.

Advertising revenues (accounting for 53 per cent of revenues) slipped 2.5 per cent. However, subscription revenues grew 8.17 per cent. Revenue from other sales (including Zee Interactive and ETC Networks) fell 49.57 per cent to Rs 13.01 crore.

Although the company managed to economise on transmission and programming expenditure (down 51 basis points as a percentage of sales), staff costs and other expenses rose 139 basis points and 287 basis points respectively as a percentage of sales, weighing down overall expenditure.

Barring content and broadcasting (C&B), all other segments saw a drop in revenues. However, profitability from the C&B segment fell 6.40 per cent. The film production and distribution business posted a loss of Rs 10.24 crore compared with a profit of Rs 4.85 crore.

Analysts say the decline in advertising revenues was surprising, especially at a time when the economy is growing. Analysts are also not impressed by the pace of growth in subscription revenues despite DTH (direct to home) being implemented. In fact, subscription revenues were just 1.13 per cent higher sequentially.

Though there may be an increase in domestic subscription and a hike in cable rates going forward, analysts say the company still has a lot of sprucing up to do to be competitive. At Rs 148.95, the stock trades at a P/E of 36.53. Analysts peg an EPS target of Rs 7.9 for FY06.

BHARTI TELE
Growth in mobile segment lifts profit

Bharti Tele-Ventures reported better results. Growth in the mobile segment enhanced the overall growth in profitability - the mobile business grew 19.5 per cent to Rs 1,482.6 crore sequentially. 

Bharti Tele
(In Rs crore)	Q3FY05	Q3FY04	% Change
Net sales	2152.95	1859.77	15.76
Other income	13.35	1.49	795.97
Operating profit	460.28	436.94	5.34
OPM (%)	21.38	23.49	-
Net profit	372.64	333.70	11.67
NPM (%)	17.31	17.94	-
EPS (Rs)	2.11	1.75	-
Trailing 12-month P/E			31.23

On the back of this, net profit was up 11.67 per cent to Rs 372.64 crore. The mobile segment formed 68.8 per cent as a percentage of total income, up 220 basis points.

Operating margin was under pressure due to the growth in business (high expenditure in the initial phases as Bharti added new circles). The operating margin was down 212 basis points to 21.38 per cent while net margin was down 63 basis points to 17.31 per cent.

Revenues from the infotel division (comprising broadband and telephone, long-distance and enterprise services) increased 9 per cent to Rs 925.6 crore while those from the long-distance segment - which forms over 50 per cent of infotel - rose 11.85 per cent to Rs 490.7 crore.

Bharti's subscriber base grew 13 per cent sequentially to 9.8 million customers. Its net additions grew 9 per cent to 1.