Concrete gains

Pent-up demand from flood-hit regions boosts cement despatches in September'

The top four cement players have seen their despatches grow by an impressive 17.8 per cent y-o-y to 48.77 lakh tonne in September 2006.

Analysts point out that several parts of the country in the western and northern regions were facing a flood-like situation in August and the pent-up demand from these regions was reflected in the September despatches.

Meanwhile, the last-month surge saw the total cement despatches of these four players rise 8.5 per cent y-o-y to 140.77 lakh tonne in the September 2006 quarter.

Although not strictly comparable, but in the June 2006 quarter the four had seen their despatches grow by 7.4 per cent y-o-y to 162.33 lakh tonne.

The cement industry appears to have once again also passed on higher transportation costs to end users. For instance, in the Mumbai market, prices at the end of September 2006 were pegged at Rs 225-230 a bag, a rise of 25 per cent on a y-o-y basis. For Delhi, they were at Rs 205-210 a bag at the end of September, a gain of 22 per cent.

The strong performance of the sector has not gone unnoticed by the street over the past three months. For instance, ACC has gained 21.5 per cent over the past three months compared with 13.5 per cent rise in the Sensex. Meanwhile, Grasim had gained 28.4 per cent during this period.

Going forward, construction activity is set to pick up as monsoon ends. However, with ACC trading at 14.5 times estimated CY 06 earnings and Grasim at 16 times estimated FY07 earnings, the street appears to have factored in the growth opportunities for this sector.

Saksoft: The big leap

Though software companies have been on an acquisition spree in recent times, the targets have usually been much smaller than the acquiring companies.

Saksoft's acquisition of the UK-based $20-million Acuma stands out as the latter has twice the revenues compared with the company's revenues, and the company said its combined revenue would be Rs 200 crore after the acquisition.

This, perhaps, is the reason why the stock has hit the upper circuit filter two days in a row after the announcement. Even the financing mode is unlike other acquisitions: company officials say it will pay 20 per cent through internal accruals and the rest by way of debt.

As a result, the company's current debt-equity ratio will also go up to around 2:1, which is unheard of in the software industry.

Both Saksoft and Acuma provide business intelligence, testing and software solutions. With clients such as Citibank and Morgan Stanley in the US, and ICICI Bank and HDFC Bank in India, Saksoft is concentrated on the financial services sector.

Acuma will bring expertise in sectors such as utilities, telecom and retail sectors. Saksoft had revenues of about Rs 50 crore and cash profit of Rs 10.56 crore in FY06, though its performance in the last quarter was subdued owing to a wage hike and expansion of its facilities, which had led to higher costs.

This acquisition appears aggressive in terms of Saksoft's current size and financials, but the Saksoft management seems to be betting that Acuma's costs will reduce substantially owing to offshoring, and so the interest outgo will not be a burden.

The stock trades at 11 times FY06 earnings, which is in line with the valuation of similar software companies.

CCL Products: Brewing a fresh cuppa

A sharp drop in raw material costs as a percentage of sales, thanks to a big difference in the inventory position of stocks, has resulted in a sharp increase in the operating profit margin of CCL Products for the September quarter.

The company, a 100 per cent exporter of instant and granulated coffee, has seen its operating profit margin rise by about 400 basis points y-o-y to 18.22 per cent, while the operating profit has gone up by 52 per cent to Rs 15.76 crore. The OPM for FY06 was 15.16 per cent.

As a result, net profit for the September quarter too has seen a jump of around 45 per cent to Rs 12.65 crore. Revenues, however, were up just 18 per cent y-o-y to Rs 86.5 crore.

With volumes sold in the current year, likely to increase substantially given the capacity addition""from 8,000 tonne a year to 14,000 tonne a year""-the top line is expected to see an increase, though the full impact may not be felt this year.

The percentage of value-added products, however, is not likely to go up significantly from the current levels of 75 per cent despite the company attempting to enter new markets such as Japan, Korea and Taiwan.

Realisations are around Rs 210 per kg, which is what they are likely to be going forward. If the ratio of value added products goes up, there is a chance that margins will improve. At current levels of Rs 487, the stock trades at around 16 times trailing 12-month earnings, and the upside seems priced in.

With contributions from Amriteshwar Mathur and Shobhana Subramanian