ACC: Cementing gains

ACC has been able to get better realisations owing to strong demand

ACC has been the first of the block in the cement sector to declare its March 2006 quarter results and it has demonstrated the visible upturn in the industry.

The company's standalone operating profit (excluding other income) has grown nearly 90.2 per cent y-o-y to Rs 315.06 crore in the March 2006 quarter.

The company, however, had merged Bargarh Cement and Damodhar Cement with itself, hence, the results of the last quarter are not strictly comparable with the corresponding period of the previous year.

Nevertheless, the merged entity saw its operating profit margin rise 885 basis points to 23.73 per cent in the March 2006 quarter.

Since cement prices were not so strong a year ago, the lower base has also helped improve operating profit. Despite the broad sell-off witnessed on Wednesday with the Sensex falling 2.5 per cent, but the ACC stock lost just 0.8 per cent to Rs 912.

ACC's cement sales grew about 11.5 per cent y-o-y to 50.6 lakh tonne in the March 2006 quarter. As anticipated, the recent Supreme Court decision banning the overloading of trucks, has led to the company's outward freight charges on cement rising 44.2 per cent y-o-y to Rs 201.06 crore in the last quarter.

ACC is estimated to transport 45 per cent of its cement despatches by road, say analysts, while 55 per cent goes by rail.

ACC, like other players in the industry, has also been able to get better realisations in the last quarter owing to strong demand. For instance, net realisations are estimated at Rs 2,470 a tonne in the March 2006 quarter compared with Rs 2,162 a tonne a year earlier, say analysts.

Going forward, the strong demand for cement owing to heightened activity in construction is expected to continue in the June quarter. Also, the company's additional grinding capacity of 6 lakh tonne at Gagal Unit-II in Himachal Pradesh has commenced commercial production.

However, the street has anticipated the improved performance with the stock gaining over 70 per cent compared with the Sensex rising 20.8 per cent. At its current price, the stock trades at a stiff 18.1 times CY06 earnings.

MphasiS BFL: Off target

A weak growth in top line and rising employee costs have meant that MphasiS BFL has not met up to expectations of even the most pessimistic analyst estimates for the March 2006 quarter. With revenues rising just 3.3 per cent q-o-q, operating profit has declined by 9.92 per cent. Operating profit margin fell 290 basis points to 19.86 per cent.

The BPO business grew at just 1.7 per cent during Q4 FY06, and utilisation rates dropped 300 basis points q-o-q to 53 per cent, as MphasiS has recruited over 1,300 employees in the past two quarters, many of who are not yet billable. For the full year too, the BPO business grew just under 5 per cent.

IT services did relatively better, growing at 4.1 per cent in the fourth quarter, and 33.5 per cent for the full year. The rupee appreciation of around 2 per cent during the quarter also muted the company's top line growth.

MphasiS has fallen way short of its FY06 guidance of a 25 per cent growth in revenues and 30 per cent growth in earnings. The company has had a history of throwing negative surprises every few quarters, which had improved in the past two quarters with improving margins.

But once again, it has failed to deliver the numbers last quarter. For FY07, the company has not provided any guidance for FY07, probably because things could change if EDS' offer goes through.

The MphasiS stock had run up to Rs 225 last week after EDS' conditional offer to acquire 51.72 per cent stake at Rs 204.50.

On Wednesday, the stock declined 5.74 per cent to Rs 202 due to its weak performance and the market fall. At its current price, the stock trades at about 16.5 times FY07 earnings, which is high considering the volatility in earnings.

But if EDS becomes the majority shareholder, the company will surely benefit. Without EDS too, the company should improve its utilisation levels in the BPO business both in exports and domestic markets. With the IT services industry growing at about 30 per cent, MphasiS should do better with its strong pipeline.