Momentum maintained

TCS revenues are stronger but operating profit margin is flat

Tata Consultancy Services (TCS) has posted fairly good numbers for the September quarter with revenues having grown nearly 9 per cent sequentially and the operating profit up 6.77 per cent.

Infosys' revenues and operating profit growth for the quarter, incidentally, have both been in double digits. On a year-on-year basis, revenues grew at around 21 per cent, while for Infosys the increase was closer to 31 per cent.

The rise in TCS' revenues has been primarily on account of stronger volumes with better billing rates "" up by about 2.25 per cent, also contributing to the growth.

Despite stronger revenues and higher offshore revenues, the operating profit margin has been flat. While there has been an increase in salary bill owing to a pay hike for overseas employees, sales and administration expenses, as a percentage of revenues, are down by about 150 basis points.

The management says operating margins will be maintained and while it is trying to bring down costs, any improvement would come through a better onsite-offshore mix. In the September quarter, the offshore component saw an increase of 30 basis points.

The company saw higher attrition at 8.7 per cent during the quarter, especially from the middle-level and the management has indicated that the attrition for FY06 could be 9 per cent.

Both Infosys and TCS say the growth momentum remains intact and that pricing remains stable with an upward bias. Both firms have been able to get better billing rates for new contracts as also for existing contracts that are being renewed.

TCS, in fact, has added a large number of clients this quarter, at 74 compared with Infosys' 34. It has also managed to ramp up business from existing clients "" the number of one million clients, for instance, went up from 219 in the June quarter to 233 in the last quarter.

At the current price of Rs 1,468, TCS trades at 24 times the estimated FY06 earnings, while Infosys trades at 29 times forward. Both companies are capable of winning and executing big deals as seen with the recent ABN Amro Bank contract.

Some of the difference seen in the valuations is possibly owing to Infosys being more transparent""the company gives guidance on its numbers and generally does better. It has rarely disappointed the Street and so the market has always been willing to give Infosys a premium for predictability.

GIPCL

Gujarat Industries Power Company (GIPC) is tapping the market with a public issue, priced in the band of Rs 63-75. The company hopes to mop up Rs 275 crore and assuming the issue goes through at the lower end of the price band, 4, 36, 50,793 shares would be issued, diluting its equity by about 39.3 per cent.

The stock is being issued at about a 25.6 per cent discount (assuming the lower end of the price band) to Tuesday's market price of Rs 84.65.

At the end of the June quarter, the stake of promoters (Gujarat Urja Vikas, GSFC, GACL and Petrofils Co-operatives ) amounted to 68.18 per cent, while institutional investors held 14.45 per cent.

The company operates three lignite-fired plants in Gujarat with a total installed capacity of 555 mw. To take advantage of the peak deficit in that state, which is estimated at 2662 mw and set to grow further in the medium term, the company plans to use the resources raised for setting up a 250 mw lignite-fired plant in Surat.

The company sells all the power generated to its promoter Gujarat Urja Vikas Nigam (formerly Gujarat Electricity Board) as per a power purchase agreement. No doubt, state electricity boards have been attempting to improve their balance sheets over the past 15 to 18 months, but their financial health is still viewed with caution "" GEB reported a loss of Rs 47.58 crore in FY03.

The prospectus does not give numbers for GEB for subsequent years and states that the annual report for FY04 is yet to be finalised and published. GIPCL's sales of electricity remained flat at Rs 744.7 crore in FY 05.

The company's net realisations had dropped about 15.95 per cent to Rs 1.95 per unit and that was owing to it passing on the benefits of lower costs to customers as per the PPA.

Also, the company's return on equity has been brought down to 13 per cent from 16 per cent earlier, for certain projects.

As a result, EBITDA margins dipped 931 basis points to 45.34 per cent in FY05. At the current price of Rs 85, the stock trades at a trailing earnings of 9.3 times FY05, while Neyveli Lignite trades at 10.4 times FY05 earnings.