Concrete gains

Pick-up in demand and the ongoing construction boom boosted cement despatches

The top four cement players have reported buoyant despatch figures for November 2006. Despatches grew 9.7 per cent y-o-y to 53 lakh tonne in the last month, given the traditional pick-up in demand of construction activity after the monsoon season, and the ongoing boom in both commercial and residential construction.

For Gujarat Ambuja, the despatch figures for November 2006 include those of Ambuja Cement Eastern (ACEL), as the company is understood to have received regulatory approval for the merger of ACEL with itself.

In October 2006, the top four players had seen their despatches improve by 8.2 per cent y-o-y to 54.26 lakh tonne. No doubt, cement prices have been strong on a y-o-y basis in November, but cement companies are also expected to benefit from lower operational costs.

For instance, transportation costs will reduce owing to the recent reduction in retail diesel prices, coupled with the softness in international coal prices.

As a result, cement stocks have shown strong growth over the past three months""ACC has gained approximately 25 per cent, as compared to a 17.5 per cent rise in the Sensex. Grasim too has gained 20.6 per cent during this period.

With demand expected to remain strong in the medium term, it has led players to announce expansion plans. Grasim plans to set up a 3.5 million tonne plant in Orissa at an investment Rs 1,200 crore.

However, the current run-up in stock prices has the sector look expensive - ACC trades at a discounting of 19.5 times estimated CY07 earnings, while Grasim trades at 13.5 times estimated FY08 earnings.

Thomas Cook: Synergy matters

Thomas Cook's two recent acquisitions are clearly aimed to derive greater synergies with its existing business. The company bought Travel Corporation of India (TCI) in an all-cash deal for Rs 182.5 crore.

Thomas Cook derived 75 per cent of its total revenues of Rs 168.9 crore for the 12-month ended October 2006 from the travel business. Clearly, with TCI in its fold, Thomas Cook will be looking at leveraging TCI's marketing network, and also lower its operational costs.

Thomas Cook has also bought a 76 per cent stake in the visa services company TT Enterprises for Rs 16.9 crore. Thomas Cook, prior to this acquisition, already provided visa assistance services for those availing its travel packages and this acquisition would help to further consolidate its niche in this business segment.

Both these acquisitions are being financed via internal accruals and some borrowings. Thomas Cook's cash flow (net profit plus depreciation) for the 12-months ended October 2006 was Rs 28.9 crore. However, with the stock trading at 29 times trailing earnings, it is expensive.

Hexaware: Taking acquisition route

On Tuesday, Hexaware announced that it completed the acquisition of US-based FocusFrame, a testing services company in an all-cash deal of $34.4 million. The company has paid $25 million upfront and the balance $9.3 million will be paid over the next two years as earn-outs.

Other software companies such as TCS, Wipro and even smaller companies such as 3i Infotech are pursuing the acquisition route aggressively to gain scale, and Hexaware too is following a similar path.

FocusFrame is expected to earn revenues of $24 million this year, so in terms of valuation the deal at 1.43 times sales seems in line with similar deals in the tech industry for a high-growth business. According to the company, testing is one the two fastest growing opportunities in the offshoring business.

Hexaware's testing business has doubled to $12 million at present, and FocusFrame will bring consolidated testing revenues of $36 million.

Hexaware targets $100 million in three years from testing-a 40 per cent growth every year. Besides its client roster, FocusFrame will also bring automated testing services to Hexaware's manual testing services.

While FocusFrame's PBT (profit before tax) margin are lower at 14.5 per cent compared with Hexaware's 17 per cent, the management believes that it is the high selling, general and administrative expenses, which will reduce over time and better synergies.

In March, Hexaware had raised Rs 300 crore from General Atlantic Partners for organic and inorganic growth, and Focus Frame is the first acquisition since then.

In the September quarter, Hexaware's revenues improved by 8.7 per cent q-o-q and operating profit went up 16.1 per cent. The Hexaware stock has appreciated 54 per cent in the past six months against the Sensex gaining 36.5 per cent. Hexaware trades at about 20 times CY06 and 16 times CY07 earnings, and looks expensive.