Holcim: Concrete gains

Holcim's entry is positive for Gujarat Ambuja, at least in the near term.

Holcim, which has a global production capacity of more than 140 million tonnes, has pumped in $800 million (Rs 3500 crore) to acquire roughly 7.5 million tonnes in the Indian cement market.

That works out to a valuation of about $107 per tonne, about 25 per cent higher than Grasim's valuation of UltraTech Cemco and much higher replacement cost.

But the acquisition seems to be cheap when compared with Holcim's valuation of $277 per tonne for Cemento de El Salvador, whose minority shareholders it sought to buy out in December 2004. Whatever the price paid, foreigners have now entered the Indian cement market in a big way.

Of the $800 million Holcim is bringing in, $200 million will be used to buy out the private investors who hold 40 per cent in ACIL, the vehicle through which Gujarat Ambuja holds stakes in ACC and Ambuja Cement Eastern Limited (ACEL).

The balance will mainly be used to pick up further equity and preference shares in Ambuja Cement India Ltd (ACIL), which will raise its stake to 67 per cent in ACIL (Gujarat Ambuja will hold the balance 33 per cent).

The additional $600 million being infused in ACIL is being used for the open offers. Assuming they are fully accepted, ACIL will hold 50.01 per cent in ACC and 100 per cent in ACEL. And through its 67 per cent stake in ACIL, Holcim will hold a 33.51 per cent stake in ACC and a 67 per cent stake in ACEL.

From Gujarat Ambuja's point of view, the deal works out well since its effective stake in ACC would rise to 16.5 per cent, from the current holding of 13.8 per cent.

What's more, keeping its stake at 13.8 per cent would have meant that Gujarat Ambuja would have had to shell out around $170 million (about 2.5 times its free cash flow in FY04) to buy out the private investors who hold 40 per cent in ACIL.

Thanks to the Holcim deal, not only has the need for this payment been averted, but it has actually ended up with a higher stake in ACC. But, of course, it has ceded control of ACC to Holcim.

Tata Steel

Tata Steel has reported a healthy 99 per cent growth in its net profit for the last quarter despite surging raw material costs and its commitment to hold prices till March 2005 for OEMs.

Strong demand ( from both overseas and home markets) coupled with the fact that steel prices in the December quarter were still about 30 per cent higher y-o-y, helped TISCO grow its turnover by 41.7 per cent to Rs 3731.29 crore.

No doubt raw material costs have grown 33.5 per cent in the last quarter due to higher coke and freight rates but, as a percentage of net sales they have dropped 78 basis points to 13.04 per cent. That implies the productivity enhancement measures at TISCO have shown signs of paying off.

A larger turnover base helped operating profit grow 78.5 per cent to Rs 1571.55 crore in the December quarter and operating profit margins rose 867 basis points to 42.1 per cent.

Going forward, Tata Steel will be a much larger company in 2005 with approximately 1 million tonnes of steel making capacity coming on stream.

This will raise sales as well as profits. And while raw material costs are set to increase, Tisco's track record shows that it is able to manage such increases.

Satyam Computer: In line with guidance

Satyam's results were largely in line with the guidance it had given at the end of the September quarter. Even analysts had predicted that earnings would drop on a sequential basis.

But what's surprising is that the main reason for the drop in earnings wasn't an increase in employee costs - the company had pointed out last quarter that the 18-20 per cent offshore salary hike effective October 1 would dent December quarter margins by 200-250 basis points. Margins, in fact, fell just 65 basis points.

The higher salaries did impact margins to the extent of 300 basis points of sales, and the rupee appreciation made things worse. But these were offset by an increase in employee utilisation, a slight shift to offshore work and a drop in SG&A costs.

The fact that margins fell just 65 basis points, therefore, was a positive surprise. At the same time, the 89 per cent drop in other income owing to a Rs 22.6 crore net loss on forex transactions was a negative surprise.

The drop in other income led to the 7.4 per cent drop in net profit. Satyam's forward cover of $100 million at the end of the September quarter was the lowest among top tier IT players, and it's no wonder that it has been the worst affected by the appreciation of the rupee.

By end-December, it raised its forward cover position to $170 million, which is still much lower than Infy's cover of over $300 million and TCS's $600 million.

But what's more important is the lower than expected drop in margins and the fact that the company expects margins to remain stable in the March quarter.

With contributions from Mobis Philipose and Amriteshwar Mathur