In overdrive

BS Compass

Tata Engineering continues to impress with high revenue growth and steady profitability margins. Last quarter, its sales grew 43.1 per cent to Rs 2500.9 crore, on the back of a 48.7 per cent volume growth.

The reasons for the high growth in sales continue to be the same-the improvement in road infrastructure, greater housing demand, lower interest rates and hence lower finance costs, the shift to higher tonnage vehicles (replacement demand), and heavy grain movement on account of the drought in certain parts of the country.

Growth in passenger vehicle sales was 73 per cent last quarter, helped by the addition of 'Indigo' to its fold earlier in the year. Commercial vehicle sales grew at a lower rate (relative to overall growth) of 26 per cent, accounting for 47 per cent of domestic volumes.

Same time last year, commercial vehicles accounted for 55 per cent of domestic volumes. It's evident, therefore, why revenue growth has lagged volume growth.

The reported operating margin of 12.8 per cent is marginally lower than what the company had managed in the March quarter. But there was a change in accounting policy last quarter, based on which product development expenditure below a certain value is charged as expenditure when incurred (against the earlier practice of amortising all such expenditure).

Adjusting for this change, the company has maintained its operating margin at the March quarter level of 13 per cent. This, despite the fact that prices of steel, the main raw material for the company, have been on the rise.

These gigantic leaps in earnings would soon come to an end as the base catches up. But the impressive trend in sales growth coupled with steady operating margin would still result in earnings growth well in excess of its discounting of around 13 times.

Welspun Gujarat Stahl Rohren

Welspun Gujarat Stahl Rohren's pipeline is finally delivering profits. This has been expected for some time, with the result that the company's stock price has appreciated 250 per cent from its 52-week lows in end-March.

The order book is full, with pipelines being set up in both the domestic as well as export market. The end of the Iraq war has led to previously suspended pipeline projects coming back onstream.

In addition, there are domestic orders on hand, prominent among which is the order from GAIL for its pipeline. While the order from GAIL is worth Rs 393 crore, the two orders from Iran are worth $102 million. The company now has an order backlog of around Rs 650 crore.

The improvement in order backlog was witnessed in the 306 per cent jump in topline and a return to profit in the first quarter ended June compared to the corresponding period. Operating margins however, were impacted by 350 basis points to 13.3 per cent.

According to the company, this was due to the high expenditure on marketing. Other expenditure increased 168 per cent in the quarter. That is likely to change in the current year. First, expenditure on marketing will be lower in the current year since the order backlog is now robust.

Therefore, the funds can now be effectively deployed in other areas. Secondly, higher capacity utilisation will lead to an improvement in the margins as fixed costs will be spread over a larger production base.

Adding to profit growth will be lower interest costs since the company has reduced its high cost debt by Rs 100 crore in the quarter.

A couple of concerns persist for the company ,one of which is the impact of an increase in price of steel. According to Mr B K. Mishra, CEO, Welspun, the impact is mitigated as Welspun's arrangement with its steel suppliers makes the supplier in effect a joint bidder in a project.

Further, the order book for the company generally has a gestation period of around 6-8 months.

Thus, compared with other engineering companies with a gestation period of 12-18 months, Welspun requires new business inflow much faster. This increases the variability in earnings every year.

Nevertheless, the current year is extremely bullish for Welspun and topline is likely to be around the Rs 1000 crore mark.

With contributions from Mobis Philipose and Sameer Ranade