Dialling up valuations

The higher FDI limit is salutary for telecom companies

The much-awaited increase in the FDI limit for the telecom sector has come through. But apart from a stray 13 per cent jump in the share price of Tata Teleservices (Maharashtra) Ltd, the markets were lukewarm to the announcement.

Bharti, which on the face of it, would benefit because of a foreign holding of 48 per cent, saw a two per cent decline in its share price. It's not that the company won't benefit "" the sponsored ADR it had planned should come through easily now.

But in terms of opening up avenues for raising funds, there is no dramatic change. Not only Bharti, but most major Indian players including Reliance, Tata Teleservices and BSNL have scaled up operations rapidly and funding has not been a problem despite the 49 per cent FDI cap. Nevertheless, the prospect of getting a majority stake may lure more global telecom players to India.

One of the main beneficiaries of the move would be Idea Cellular, which was recently bought by the Singapore Technologies Telemedia and Telekom Malaysia.

The STT-TM combine has a 47.7 per cent stake in the company currently. It can now get in additional funds, which will give Idea the much-needed money to increase their footprint in the country.

In the case of Hutch, the FDI limit hike would help more in terms of removing the need to have a complicated holding structure. One advantage is that when these companies come out with IPOs, foreign investors would be eligible to invest.

Finally, the jump in the TTML scrip is surprising, given that it currently has a foreign holding of only 0.38 per cent.

The stock has been doing well lately because of a rumour of a foreign investment, but even if that happens the investment would be in the unlisted company, Tata Teleservices Ltd (TTSL). TTSL itself doesn't have any foreign shareholders, which means it also does not benefit much from the hike in FDI limit.

Andhra Bank

Andhra Bank has been one of the few banks that have been able to show better performance in the third quarter of FY 05.

It has been able to improve its net interest income by 10.7 per cent in Q3, its operating profit by 10 per cent and its earnings per share have gone up by 30.3 per cent. (The figures given earlier in an op-ed on Monday, which said that Andhra Bank's performance had worsened on a y-o-y basis, were based on wrong data).

The bank has benefited by the fact that, unlike many other banks, its level of "other income" was higher in Q3 than during the same period of the previous year.

Interest expended as a percentage of interest earned was 53.2 per cent in Q3, FY 05, compared to 57.2 per cent a year earlier.

The bank's extremely low level of non-performing assets and the fact that it had already transferred its investment portfolio to the "Held to Maturity" category helped it to post a substantial jump in net profit.

Nevertheless, there are some warning signals. Net interest income, for instance was higher in Q2 than in Q3. So was the level of "other income" and consequently the operating profit.

Interest expended as a percentage of interest earned was as low as 51.8 per cent in Q2. Going forward, the bank will gain from the fact that its need for making further provision is very low""-its NPA coverage ratio is 96.13 per cent.

Patni Computer Systems

Patni reported lacklustre numbers for the December quarter, with the sequential growth in the organic business being just 2.9 per cent.

Total revenues grew 13 per cent sequentially in dollar terms, but much of that was on account of the consolidation of Cymbal Corporation's revenues with Patni's from November 3, 2004. Rupee appreciation resulted in a three per cent fall in revenues from the organic business.

Even after including Cymbal's numbers, the sequential growth in revenues was just 6.5 per cent in rupee terms.

Worse still, margins fell by about 200 basis points at both the gross and operating profit levels. While the rupee appreciation accounted for 100 basis points of that fall,, the balance was mainly on account of cost escalation.

Besides, the profitability of Cymbal, which added about 10 per cent to Patni's sales last quarter, is relatively lower. The net result of this was a three per cent sequential drop in operating profit last quarter.

Yet, there were a few positives. First, the proportion of revenues coming from GE fell to 27.2 per cent, compared to 37.8 per cent a year ago.

Similarly, fixed price contracts accounted for 39.9 per cent of revenues last quarter, much lower than the year-ago 46.4 per cent. There was a slight shift to offshore work as well.

But all this does not really reflect in Patni's numbers - in CY04 its revenues grew 23.6 per cent and profit before tax grew 27.9 per cent, much lower than top tier companies.

The outlook for the near future isn't bright either. The company expects revenues to grow 6-7 per cent next quarter, but after adjusting for Cymbal's contribution, that means the organic business would grow at 2-3 per cent for another quarter. The CY05 valuation of less than 15 times assumes that future growth won't be exciting.

With contributions from Mobis Philipose