Adlabs: Picture perfect

Adlabs is a promising first acquisition for the Anil Ambani group

Adlabs Films seems all set for an explosive stage of growth ahead. The film processing and multiplex company, which had consolidated sales of Rs 100 crore in FY05 and capital employed worth Rs 135 crore, has approved a capital infusion of Rs 325 crore through a preferential allotment to Reliance Land Private and other investors.

Reliance will account for about Rs 250 crore of that inflow, which, in addition to its buyout of one of the promoters will fetch it a 51 per cent stake in the company.

With Reliance in control and with around Rs 400 crore in its kitty (Adlabs had raised Rs 52.5 crore through a preferential issue to FIIs in May this year), growth can be expected to pick up.

Currently, the bulk of its revenue and profit comes from the film processing business. But it's the multiplex business that's now driving growth for the company, since the film processing business seems to have stagnated at Rs 35-40 crore annually.

The multiplex business accounted for 65 per cent of incremental revenues and over 40 per cent of incremental segment profit last fiscal.

Needless to say, much of the capital raised by the company would be used to roll out new multiplexes""-it plans to set up four new multiplexes this year, and add another 30 over four to five years.

Another area the company wants to focus is home entertainment, with the company planning to acquire Hindi and English film titles. This part of the business could fit well with the broadband plans of Infocomm, as and when they take shape.

Reliance's entry into Adlabs has done wonders for its shareholders, what with the stock jumping by 50 per cent in just the past three days. With the stock already well ahead of the open offer price and since its valuations are also not inexpensive at 27 times FY05 earnings, a further increase in the near term seems unlikely.

What is also interesting is the reason behind the acquisition. Is it merely an entry into the entertainment space? Or is it indeed part of a planned strategy of infusing capital and providing management bandwidth to promising companies, as reported?

If the latter, then Reliance Capital appears to be positioning itself as a long-term strategic investor, albeit one that also has a say in management.

IndusInd Bank

IndusInd Bank's fourth quarter results show continuing improvement in its core business. Net interest income has been growing steadily, as has fee income, while net interest margin improved to 3.55 per cent from 2.05 per cent year-on-year.

To be sure, part of the improvement is because of the merger of Ashok Leyland Finance with the bank, but even on a quarter on quarter basis, there has been substantial progress.

For instance, net interest income went up 21.7 per cent from Rs 101.18 crore in third quarter (Q3) to Rs 123.15 crore in fourth quarter (Q4). NIM went up from 2.93 per cent in Q3 to 3.55 per cent in Q4.

Fee income for the full year FY05 was Rs 31.53 crore against Rs 21.36 crore in the first nine months. Earnings per share improved to Rs 2.17 in Q4 compared with Rs 1.47 in the third quarter.

But perhaps the most important expansion has been in its branch network, and the bank management has said deposits from these branches would be available to fund growth in the current year, at the same time lowering cost of funds.

The conversion of the Ashok Leyland Finance branches into bank branches has greatly helped the process. Capital adequacy is a satisfactory 11.6 per cent, with a scope to increase Tier-II capital.

At 2.71 per cent, the net NPA ratio, however, continues to be high, and there has been little improvement in the past year. The stock too has gone up 40 per cent in the last two months, and the improved performance has been already been priced in.

Aurobindo Pharma

Aurobindo Pharma (APL) has reported a steep 97.8 per cent dip in its profit before tax to Rs 1.13 crore in the March quarter, on the back of a 21.32 per cent dip in its net sales to Rs 285.6 crore. Sales and profit in the last quarter have been hit by a sharp decline in prices of cephalosporin (medication for meningitis) in most overseas markets.

To the company's credit it has kept a tight check on operating costs "" overhead consumption of raw materials has declined 9.41 per cent to Rs 172.29 crore in the March quarter and that was largely owing to the company sourcing 6- APA, the key intermediate for semi-synthetic penicillin (SSP) and cephalosporin, from its production facilities in China.

Also, staff costs have declined 3.52 per cent on a y-o-y basis to Rs 13.67 crore in the March quarter. The company has incurred large costs to get regulatory approvals in FY05.

Operating profit fell 82.47 per cent to Rs 10.33 crore in the March quarter and operating profit margin shrank 1262 basis points to 3.61 per cent.

Investor concerns, however, have already led this stock to underperform the Sensex over the past one month "" the stock has risen about 5.4 per cent compared with a 8.1 per cent gain in the broader market.

Going forward, with no signs of a pick up in prices of cephalosporin, it has considerably limited the company's ability to restore profits in the short term.

With contributions from Mobis Philipose and Amriteshwar Mathur