Indiabulls: Bullish indeed

How does one value a stock that's grown net profit by a compounded annual growth rate of 140 per cent in the three years between FY02 and FY05, and looks all set to post an even higher growth rate this fiscal? The company reported a 639 per cent jump in consolidated net profit for the quarter ended June 2005.

The profit growth of 639 per cent came on the back of a 342 per cent jump in operating revenues. Brokerage fees have fallen to 60 per cent of consolidated income currently (from around 70 per cent last fiscal), in line with the company's plan to reduce it to about 50 per cent of revenues in two years' time.

Growth, therefore, was largely driven by other revenue steams. Standalone revenues, which reflect the financing business (including the personal loans business), grew by 584 per cent, accounting for 44 per cent of consolidated revenues compared to just 28 per cent in the year ago period. Growth was aided by an expansion in the company's network.

The company's non-brokerage sources of income have a higher operating margin, which led to a 625 per cent jump in operating profit.

Operating margin rose by 27 percentage points. Even on a sequential basis, growth was impressive at 40 per cent on the revenue front and 71 per cent at the net profit level.

Indiabulls' growth direction has been much higher than the increase in volumes in the capital markets. For instance, NSE's total turnover (cash and derivatives) rose just 11 per cent year-on-year in the June quarter, and fell 15 per cent on a sequential basis.

While Indiabulls' growth rates look impressive, investors need to exercise caution given the company's burgeoning retail loan portfolio and its valuation of around 18 times forward earnings.

Bajaj Hindusthan

Bajaj Hindusthan has reported a 219 per cent growth in its profit before tax and extraordinary items to Rs 68.35 crore in the June quarter, on the back of a 241 per cent increase in net sales to Rs 362.3 crore.

As anticipated, the buoyant operating environment in the sugar industry has contributed largely to the company's improved performance. Sugar production is absent in the June quarter owing to the cyclical production cycle of the industry. In the first six months of the company's financial year ended September 05, however, sugar production was up about 60 per cent.

In addition, senior company management pointed out that realisations were up about 10 per cent on a y-o-y basis to Rs 17 per kg ( net of excise) in the June quarter. As a result, revenues of the sugar business expanded 277.5 per cent to Rs 354.09 crore.

The company had to contend with higher input costs such as material cost jumping 289 per cent to Rs 29.25 crore in the June quarter, largely owing to enhanced administered sugarcane canes prices. Also, staff costs jumped 35 per cent. These cost increases were partially offset by the company's conversion costs, which are one of the lowest in the industry.

As a result, segment profit of the sugar business expanded 200 per cent to Rs 65.46 crore in the June quarter. Senior management also highlighted that their inventory has grown in the June quarter on a year-on-year basis.

The distillery division's profit has also grown 88.5 per cent to Rs 7.58 crore, thanks to better realisations for ethanol (sold to oil companies) and alcohol (sold to distillers).

As a result, overall operating profit was up sharply. However, enhanced input costs resulted in operating profit margins shrinking to 22 per cent. Going forward, the company is planning to enhance its capacity to 95,000 TCD over 15 months.

Tea plantations

The strike by tea garden workers in North Bengal underlines the risks faced by tea plantation business, and the reasons why companies such as Tata Tea and HLL are exiting it.

But if the plantation business is so bad, why did Brij Mohan Khaitan's tea company, McLeod Russel India, snap up 20 million kg of tea by acquiring Williamson Tea Assam in one of the largest deals in the tea industry in recent times?

With this deal, McLeod Russel's production has gone up to 62 million kg and the company has appetite for more. More importantly, the deal has given an entirely different perspective to the plantations business, with tea companies once more evaluating the prospects in tea gardens. And what better time to prospect than in a downturn?

The downturn currently faced by the industry was one of the key factors for the acquisition, and some more acquisitions are likely to materialise in the near future. Tea prices are down by around Rs 15 per kg on an average over last year's prices.

Had the acquisition happened at the time of Khaitan-Magor split, when good quality Assam tea prices were around Rs 250 per kg, the valuation of the tea gardens would have been Rs 500 crore instead of Rs 350 crore, which was the price McLeod Russel paid.

In fact, the contrast between some companies exiting the plantation business and others getting into it probably has to do with their core competencies.

Khaitan's forte, for instance, has been running plantations, and the gardens acquired were managed by them for the past 50 years. On the other hand, managing plantations was clearly not HLL or Tata Tea's core businesses.

Khaitans also believes that down the road, quality gardens would be in short supply. Across the industry, it is believed that Williamson Tea Assam has the best gardens in Assam. Quality teas have always fetched good prices even in a downturn.

With contributions from Mobis Philipose, Amriteshwar Mathur & Ishita Ayan Dutt