Bharat Forge: Margin pinch

Operating margins have fallen as Bharat Forge has tried to streamline global operations

Bharat Forge has seen a 30.43 per cent rise in its operating profit along with a 28.5 per cent growth in its top line to Rs 399.4 crore.

The company was adversely affected by a 31.43 per cent increase in raw material costs and an 80.93 per cent increase in other operating expenses and, as a result, the operating profit went up by 12.67 per cent, adjusting for the other income.

Other income stood at Rs 16.06 crore against Rs 0.39 crore in Q3 FY05. The market was not impressed with the result and the stock declined by about 2.5 per cent from the day's high to Rs 392.

On a consolidated basis, its top line has increased by 80.9 per cent to Rs 956.7 crore. The huge jump in consolidated sales as well as other income is because of its expanding global presence.

Even in Q3 FY06, Bharat Forge entered into a JV with FAW Corporation, China to manufacture highly engineered forged auto components where Bharat Forge would hold a 52 per cent stake.

In Q2, it had bought Imatra Kilsta, Sweden and Scottish Stampings, Scotland, the largest manufacturer of front axle beams and the second largest crankshafts producer in Europe. The two companies had a combined turnover of about Rs 580 crore in 2004.

In June 2005, it had acquired Federal Forge in the US for about Rs 40 crore. In FY04, it had acquired CDP, a forging company in Germany. In Q3 FY06, 73 per cent of its business came from global markets.

For the nine months ended December 2005, its consolidated revenues grew by 58.1 per cent to Rs 2,304 crore. Operating margins have fallen 325 basis points to 18.68 per cent, as it tries to streamline global operations.

Even last year, margins at CDP were less than half of those in its Indian operations. The stock trades at about 18-19 times consolidated FY07 EPS.

Jubilant : Bleak outlook

Despite a sales growth of 46.5 per cent to Rs 423.4 crore in Q3 FY06, Jubilant Organosy's operating profit margin reduced by 195 basis points y-o-y to 15.35 per cent.

The decline in operating margin is owing to a 350 basis point decline in the segment profit margin of the key pharmaceutical and life sciences chemical division in Q3 FY06.

Weaker margin in this division to a fall in API realisations across several product categories such as anti-depressant Citalopram. The industrial chemical business saw its segment profit margin slip almost 90 basis points, owing to higher prices of inputs such as molasses.

Analysts also highlight that the company's expanded investment in areas such as custom and clinical research through Jubilant Biosys, Chemsys and Clinsys also contributed to the sluggishness in the company's operating margins.

Going forward, significant profit growth could come from an anti-epilepsy drug, which has gone off-patent recently. Jubilant has also put in place partnership agreements for supply of APIs to overseas generics players, and supplies should begin after regulatory approvals.

The street appears to have factored in the growth opportunities with the Jubilant stock trading at about 24 times estimated FY06 earnings.

UTI Bank: Improved asset quality

UTI Bank has posted a fine set of numbers, beating market expectations in Q3 FY06. Its net interest income increased by 54 per cent to Rs 287.44 crore over Q3 FY05 and a 12.52 per cent rise over Q2 FY06.

The improvement in net interest income has come about owing to a 49 per cent growth in net advances as well as a 4 basis point improvement in net interest margin to 2.94 per cent in Q3 FY06 over the previous corresponding period.

The cost of borrowing has been lower owing to a 62 per cent rise in current accounts and savings deposits, which make up 35 per cent of the bank's total deposits, compared with 28 per cent in Q3 FY05.

There was a 24 per cent growth in fees and other income to Rs 126.18 crore and a 16 per cent increase in its trading income to Rs 47.24 crore.

The percentage of trading profits to total income fell in Q3, which is a positive sign. Operating profit rose by 42.77 per cent to Rs 256.2 crore in Q3, due to a tighter control on operating expenses , which went up 36 per cent.

There was an improvement in the bank's asset quality, as net NPAs fell by 35 basis points to 0.95 per cent in Q3 FY06. Its bottom line improved by 30 per cent y-o-y to Rs 131.71 crore in Q3 FY06. At its current price of Rs 323, the stock trades at a reasonable price-book ratio of 2.6.

With contributions from Amriteshwar Mathur and Shobhana Subramanian