Ashok Leyland: A negative surprise

Ashok Leyland disappoints at the operating level

Ashok Leyland sprung a negative surprise when it announced a 19 per cent drop in net profit for the September quarter. Worse still, the fall in net profit wasn't because of any exceptional items in the company's accounts.

In fact, the decline in profit at the operating level was much worse at 29 per cent. Revenues grew 10.3 per cent year-on-year despite a flat trend in volumes, which grew 3.3 per cent.

This was because of a change in product mix and higher exports. Exports jumped 149 per cent last quarter and made up for the 5.2 per cent drop in domestic sales.

But what came as a real surprise was the 450 basis points fall in operating margin. Much of this was on account of higher raw material cost (up 270 basis points), but there was also the impact of a 160 basis points jump in "other" expenditure.

According to analysts, this was because of forex translation losses. Besides, profitability would also have been hit on account of the shutdown in the company's Hosur plant which started on August 23, 2004 and was on till the end of the quarter.

The decline in net profit (19 per cent) was lower than the 29 per cent fall in operating profit because of higher other income and a drastic drop in interest cost.

Other income accounted for 20 per cent of profit before exceptionals and tax, while interest cost fell thanks to the $100 million FCCB issue earlier in the year, on which the interest payable is just 0.5 per cent per annum.

The stock trades at around 9 times estimated FY05 earnings, but given that volume growth is expected to be sluggish even in the second half of the year, the upside seems very limited.

Jisco-JVSL

What impact did the recent reduction in steel prices by Rs 500 to Rs 2000 per tonne have on the quarterly results of steel companies? Not much, going by the results of the two Jindal group companies, Jindal Iron and Steel Company (Jisco) and Jindal Vijaynagar Steel Ltd (JVSL), which clearly demonstrate the continued momentum in steel companies' earnings.

For JVSL, net profit surged 252 per cent to Rs 81.11 crore last quarter and in the case of Jisco there has been a growth of 33 per cent to Rs 60.45 crore.

For Jisco, realisations for its galvanised products GP / GC have shown a year-on-year improvement of approximately 35 per cent due to strong demand from USA, China and from domestic end users. However, raw material cost jumped 42 per cent largely due to higher hot rolled coil (HRC) prices.

The company sources a significant portion of its HRC requirements from sister concern JVSL. No doubt improved prices for HRC have played an important role in driving up JVSL's profits. But it too has had to face higher raw material costs (up 47.4 per cent), as coke prices increased approximately 30-35 per cent year-on-year.

JVSL's operating profit grow 40 per cent last quarter to Rs 348.12 crore, with operating profit margin rising 40 basis points to 30.6 per cent.

Meanwhile, Jisco's operating profit rose 31.5 per cent per cent to Rs 121.4 crore in the last quarter but operating profit margins fell 180 basis points to 16.4 per cent.

The two companies are in the process of being merged and no doubt the merged entity would have global capacities and realise operational efficiencies in addition to providing customers a large repertoire of steel products.

HCL Technologies' tepid numbers

HCL Technologies' September quarter results were rather lacklustre, with revenues growing 5.9 per cent sequentially, much lower than industry growth rates and the 14 per cent growth it had managed in the June quarter.

The software services business grew 6 per cent sequentially, with the organic side of the business growing at a lower rate of 4.7 per cent.

The BPO business (now 12 per cent of total revenues) grew 10.2 per cent sequentially, compared to a 21 per cent growth in the June quarter. Revenues of the infrastructure services division fell 14 per cent last quarter in what is traditionally a weak quarter for the segment.

But even the software services and BPO businesses have not done too well. Apart from the drop in growth rate, gross margins were under pressure.

For software services they fell 60 basis points, and for BPO services they fell 20 basis points (adjusted for one-time cash grant). One reason for this could be that offshore utilisation rates fell from 75.6 per cent in the June quarter to 73.6 per cent last quarter.

However, savings on SG&A (selling, general and administration) expenses meant that operating margins were maintained for the software services business and higher for the BPO business.

Interestingly, HCL Tech's BPO business had an operating margin of 21 per cent last quarter (adjusted for one-time cash grant), not much lower than the margin of 24 per cent enjoyed by the software services business.

Notably, the company's top 20 clients grew 19 per cent sequentially, driving growth for the entire company.

Clients outside the top 20 reported a 8.3 per cent decline in sequential revenues, which could mean that these clients aren't ramping up.

On the positive side, HCL Tech paid an interim dividend of Rs 4 per share, which is expected to be maintained. With a dividend yield of 4.34 per cent, downside for the stock is rather limited.

With contributions by Mobis Philipose and Amriteshwar Mathur