Grasim: Staying buoyant

Higher realisations across businesses offset rising input costs.

Grasim's standalone operating profit margin improved by 525 basis points y-o-y to 32.4 per cent in the June 2007 quarter, aided by a major improvement in its fibre and pulp division and buoyant conditions in the cement business. Higher realisations across its businesses helped the company tackle rising input costs.

Realisations in viscose staple fibre improved by 20 per cent, and sales volumes were 34 per cent higher as the plant operated at 102 per cent capacity.

The standalone segment (profit before interest and tax) margin improved by over 1100 basis points y-o-y despite rising raw material costs but was aided by a lower base in Q1 FY07 when the VSF plant had faced water shortage.

Both realisations and volumes improved in Grasim's cement division, leading to a 25 per cent increase in net sales. Cement segment margin was up 280 basis points y-o-y.

Nearly 75 per cent of Grasim's profits come from the cement business, while the VSF division contributes 19 per cent. Cement contributed 61 per cent of the profit before interest and tax, while VSF accounted for over 32 per cent.

Sponge iron realisations went up 22 per cent though volumes were flat. Though sponge iron margins improved considerably, its contribution to overall profits is small. Grasim's consolidated operating margin went up 246 basis points y-o-y in the June 2007 quarter.

Both cement and VSF are strong businesses going forward. However, VSF prices are unlikely to sustain at the current levels, and the margins could also be impacted due to higher raw material costs.

The outlook on cement prices is strong at present, but prices are likely to come down from mid-FY09 once the new capacities come up. However, Grasim's capacity expansion in both cement and VSF will ensure profit growth. The stock trades at around 11 times estimated FY08 earnings, and should be an outperformer.

Hindustan Zinc: Heavy metal

Hindustan Zinc leveraged higher zinc prices in the June 2007 quarter on a y-o-y basis, but rising operational costs put pressure on margins. As a result, operating profit grew 15.4 per cent y-o-y in the last quarter, while its net sales grew 22.2 per cent.

Its operating profit margin fell 430 basis points y-o-y to 72.9 per cent in the last quarter. Pressure on its operating margins was due to its total expenditure as a percentage of net sales rising 430 basis points y-o-y to 27.1 per cent in the last quarter.

The company's zinc production (mined metal content) was up 2 per cent y-o-y to nearly 134,339 tonne in Q1 FY08, while its refined metal output was higher by 13 per cent in the last quarter.

Of crucial importance, is that average LME prices of zinc were at $3,670 a tonne in the June 2007 quarter as compared to $3,301 per tonne a year earlier. Going forward, the direction of zinc prices will play a crucial role in the company's profitability.

Meanwhile, its 170,000-tonne zinc smelter project is expected to be completed by December 2007. At Rs 708, the stock trades at a reasonable 6 times estimated FY08 earnings.

Jet Airways: Faring well

For the June 2007 quarter, the management of Jet Airways appears to have focused on maintaining yields rather than increasing the load factor.

In other words it did not resort to heavy discounting of fares despite the keen competition. That's why revenues from domestic operations fell 3 per cent y-o-y resulting in a top line growth for the airline as a whole of just 10 per cent to 1800 crore.

The decision not to undercut fares has seen a rise in the gross yields which were up 6.3 per cent, though the loads fell 3.7 per cent to 71.2 per cent.

While the ratio of discounted to normal fares remained at 75:25, the management claims that within this the extent of discounting was less in the quarter compared with previous quarters.

The strategy seems to have paid off: at the operational level, Jet managed a 32 per cent increase in the earnings before interest, tax, depreciation and rentals (EBITDAR), partly helped by a 9 per cent fall in fuel expenses.

However, at the net level the airline posted a loss of Rs 49.3 crore for the quarter after adjusting for one time forex gains, mainly because of a 50 per cent rise in depreciation.

Interestingly, international operations, which are going to drive future growth, now account for almost a fourth of total sales.

Moreover, the airline has not been pricing fares at discounts to incumbent carriers in line with its premium positioning and the current revenue per passenger at $416 compares favourably with those of other airlines.

The September quarter will be a challenging one given that fuel prices are rising. While the third and fourth quarters could see some pick-up in load factors and yields, the benefits of domestic consolidation will be limited.

While unit costs at JetLite have fallen and the yields are up by 10 per cent, losses have yet to be factored in. At the current price of Rs 711, analysts estimate a fair value for the stock of Rs 550-Rs 600.

With contributions from Amriteshwar Mathur and Shobhana Subramanian