Maruti: Racing ahead

A favourable product mix pushed up net sales.

Maruti had an eventful FY07 with the commissioning of its new plant at Manesar and an entry into the diesel segment via the Swift.

The net sales for the current year rose 21.5 per cent at Rs 14,592 crore compared with the corresponding period last year. But the operating profit has remained flat at 13.6 per cent due to higher input costs and losses of Rs 58.5 crore at the Manesar plant.

The numbers for the fourth quarter were reasonably good. The higher other income resulted in an increase in the net profit by 24.3 per cent to Rs 449 crore.

A favourable product mix and better realisations drove up the net sales to Rs 4413 crore, up 35 per cent on y-o-y basis. However, the operating profit margin was down by 240 basis points to 12.4 per cent.

The petrol version of the Swift has been a success and the company's entry into the diesel segment has been promising. Going ahead, the volumes in FY08 are expected to moderate at around 16-17 per cent, due to the rising interest rates.

The management has indicated that the rise in commodity prices could put pressure on profitability. Moreover, the upgradation of vehicles to meet stricter emission norms is likely to push up the production costs.

Maruti has a good portfolio of products. The SX4, a replacement for the Baleno, is due for launch next month. The earnings growth should be in the region of 14-15 per cent over the next couple of years, if the new plant breaks even sometimes in the second half of FY08.

At the current price of Rs 789, the stock of Maruti trades at around 13 times estimated FY08 earnings and should perform in line with the market.

Jubilant Organosys: Injecting growth

With the acquisition of US based Hollister-Stier Laboratories, Jubilant Organosys will gain an entry into the high-growth contract injectables manufacturing business and the business of allergy extracts and products. Jubilant will pay 2.2 times Hollister's 2006 revenues and 11.2 times operating profits.

The amount paid is in line with what other pharma companies have paid in the past. For example, Ranbaxy paid about 4 times sales for Terapia, which had an operating margin of over 35 per cent.

Hollister's margin is low at 20 per cent, but that's because the allergy business is low-margin. As the contribution of the injectable business increases (it had 58 per cent as in 2006), the margins will improve.

The Jubilant management said the contract injectable business has grown at over 40 per cent in the last four years, and provides a good opportunity, especially in the US. Also, Hollister is expanding its capacity from 48 million vials to 120 million vials, at a cost of $40 million and this will be completed in the first quarter of 2008.

According to the management, Jubilant was lacking a presence in the injectable segment of the contract manufacturing products and services space and this is now taken care of. Jubilant will not have a problem in funding this $122.5 million acquisition and the ongoing capex plans.

It has $190 million cash from its FCCB issue in May 2006 and it may also look at raising debt in an SPV which will be serviced by Hollister's cash flows. The stock of Jubilant trades at about 14 times FY08 earnings and should be an outperformer.

Grasim: Sturdy numbers

Grasim reported an improved performance in the March 2007 quarter, thanks to strong growth in its cement, sponge iron, and fibre and pulp divisions.

The company's consolidated operating profits in the quarter ended March 2007 grew 76.4 per cent y-o-y to Rs 1161.6 crore and the net sales grew 40.4 per cent to Rs 4107.05 crore.

Its operating profit margin also improved 580 basis points y-o-y to 28.3 per cent in Q4 FY07. In the December 2006 quarter, Grasim's operating profit margins had increased by 1139 basis points y-o-y to 30.23 per cent.

The company's cement division contributed 70 per cent of the net sales in Q4 FY07. The segment's realisations grew 35 per cent y-o-y to Rs 2,979 a tonne and the profit grew 101.8 per cent y-o-y to Rs 811.48 crore in the quarter.

Also, in its sponge iron division, the company was able to leverage a 79 per cent y-o-y growth in sales volumes, coupled with realisations improving 24 per cent to Rs 13,518 a tonne. The profit of this division was Rs 28.28 crore in Q4 FY07 compared with a loss of Rs 12.35 crore a year earlier.

Grasim is currently expanding its cement capacity by 9.5 million tonne, while an expansion of 63,875 tonne is being planned in its Viscose Staple Fibre (VSF) business to leverage the strong demand conditions.

The results were declared after the close of trade on Wednesday. But the stock had already gained 2.6 per cent to Rs 2,442 during the day. The stock trades at a reasonable 11 times estimated FY08 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur