However, in the September quarter, the operating profit margin improved by 280 basis points sequentially to 9.9 per cent, and in the December quarter, the margin improved a further 275 basis points to 12.66 per cent. The top line growth in rupee terms was small at 4 per cent q-o-q, as the appreciating rupee ate way 3.6 per cent of the revenue growth. However, the 7.6 per cent dollar revenue growth was reasonably decent. Most of the growth has come from clients acquired between 2004 and 2006, which provide better pricing to IGS. It services revenues improved by 4.7 per cent, largely driven by the 8.9 per cent increase in volumes and about 1.6 per cent rise in offshore billing rates and 1 per cent increase in onsite billing rates. Onsite volume growth was 4.7 per cent, while offshore growth was better at 10.5 per cent. The company managed costs better. Direct costs went up just 1.2 per cent q-o-q, while selling, general and administrative costs declined 0.6 per cent. |
| Along with the higher value-added contracts added in the past two years, the overall operating profit went up 32.9 per cent q-o-q in the December 2006 quarter. |
| During the quarter, the company added five new clients. It signed a technology agreement with Radian Group, a credit solutions provider. |
| It is not that all the concerns are over. In its guidance, the company has indicated a 5 per cent q-o-q revenue growth till such time that its number of clients increases. |
| IGS believes that it will achieve its targeted 15 per cent EBITDA margin in the March 2006 quarter, which is much lower than the 25-28 per cent at the top-tier companies, and even the 20 per cent for mid-tier companies. |
| In order to improve top line growth, the company needs to ramp up more Fortune 1000 customers, which is the key challenge for the management. |
| Also, it will need to attract talent to execute the growth-it hired 301 people in Q3, and will add another 400-500 employees in Q4. |
| It appears that IGS has a stronger grip on its business and the numbers are looking better. The stock has gained over 60 per cent in the past month and trades at about 13 times estimated FY08 earnings. |
| BASF: Rising costs |
| BASF India has once again been hit by rising operational costs, which led to a lacklustre performance in the December 2006 quarter. |
| As a result, operating profit declined by 33.2 per cent y-o-y to Rs 15.9 crore in Q3 FY07 compared with 2.2 per cent growth in net sales to Rs 182.5 crore. Operating profit margin also fell 460 basis points y-o-y to 8.7 per cent in the last quarter. |
| The pressure on margins was owing to higher raw material costs "" the adjusted raw material costs as a percentage of net sales rose 400 basis points y-o-y to 55.5 per cent in the last quarter. |
| Analysts highlight that the company uses a range of inputs derived from petroleum products which led to higher raw costs in the last quarter. It was no surprise that the stock fell 7.8 per cent to Rs 231.5 on Wednesday. |
| In contrast, a month prior to the declaration of quarterly results, the stock had gained 10 per cent compared with 1.7 per cent decline in the Sensex on investor expectations of an improved performance. |
| In the September 2006 quarter too, higher raw material costs led to operating profit margins declining by 100 basis points y-o-y to 15.5 per cent. |
| Meanwhile, in its key performance products division, which comprises tanning agents and textile chemicals, BASF's segment profit grew only marginally to Rs 11.06 crore in the last quarter. In its plastics division, segment profit declined 29.1 per cent y-o-y in the December 2006 quarter. |
| Going forward, with global crude oil prices easing substantially in the past few weeks, it should help to lower the raw material cost structure over the next few quarters. The stock is reasonably priced at 9.5 times estimated FY08 earnings. |
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