MphasiS: Cash & carry

MphasiS has announced it will acquire Eldorado Computing Inc, a US-based healthcare benefits management solutions firm, for $16.5 million in an all-cash deal.

Earlier, in February 2005, the company had announced the acquisition of Princeton Consulting, a London-based specialist consulting company, for a net value of £4.5 million, again in an all-cash deal.

Together, the two deals will deplete MphasiS's cash balance by roughly Rs 110 crore. It's important to note that the company's cash balance stood at Rs 116.6 crore at the end of the previous quarter.

The company has pointed out that both acquisitions would be EPS accretive immediately, but analysts said the drop in the company's cash balance would lead to a drop in other income, which would largely neutralise the increase in profit owing to the acquisitions.

Eldorado provides technology administration services for healthcare players, and has 128 clients representing 2.5 million members. With a revenue run rate of $10 million, its average client size works out to a meagre $80,000 per annum.

Nevertheless, MphasiS expects strong business flow from Eldorado's clients, who are now likely to engage MphasiS for BPO.

The markets, for now, have not been very enthused with MphasiS's acquisition strategy. The company's share price, which has underperformed peers by a large extent lately, rose by less than a per cent after news of Eldorado's acquisition. At Rs 244, it trades at around 13.5 times estimated FY06 earnings, nearly at the top end of the valuation band for most Tier-II IT companies.

It hardly helps MphasiS's case that much of its cash, a saving grace for investors lately given the relatively poor financial performance, has already been deployed.

Alfa Laval

Alfa Laval (India) Ltd has reported a 20.8 per cent growth its net profit after tax to Rs 78.51 crore in CY 04. However, Skansen Engineering & Consultancy Co Ltd was merged with Alfa Laval with effect from April 1, 2004, so Alfa Laval's results are not comparable with the previous year.

As with all project businesses, steel remains a cause for worry, since a significant part of the cost of the project is accounted for by raw materials.

As a result, the ratio of materials consumption to net sales has grown 124 basis points to 63.4 per cent in CY04. Meanwhile, this stock has risen about 9.5 per cent over the last two months. The domestic market has seen an increase in investments in the power, distilleries, chemical and biotech sectors.

While the company's equipment division provides the machines, its process technology division executes turnkey projects. Prominent orders won by Alfa Laval in CY 04 include a Rs 76 crore order from Vedanta Aluminium for its 1.4 million tonnes per annum project at Lanjigarh, Orissa.

Despite rising input costs, the company's operating profit margins have been more or less steady at 20.37 per cent in CY04, as the company has moved up the value chain and its emphasis is on larger project sizes.

However, rising input costs have led to the company's December quarter's operating profit margins falling 45 basis points to 17.25 per cent.

Alfa Laval (India), like other engineering MNC subsidiaries, has also seen increased participation in the parent's global operations for machinery as well as project businesses. Going forward, apart from exports, a pick up in the domestic capex cycle should help Alfa Laval grow profits.

However, with steel prices set to rise further, it could put some pressure on the company's margins. The Alfa Laval stock trades with a PE of about 18 times trailing earnings, lower than other engineering stocks which get valuations of about 22-23 times.

Jet Airways

Jet Airways listed at Rs 1150 on the NSE, putting fears in the minds of investors that the IPO boom could be over. Especially so for the kind of investors who use the IPO financing route to buy the shares, and exit on listing. At Rs 1150, the gain would have not even been enough to pay for the financing.

Nevertheless, Jet's stock price improved to the Rs 1,300 levels, giving investors a gain of around 18 per cent over the issue price. This should give further confidence to those who invest for listing gains.

At current levels, the stock trades at an FY05 PE of around 28 times and based on estimated FY06 earnings, it gets a valuation of over 23 times.

That's steep for a company that is estimated to grow earnings at a CAGR of slightly less than 20 per cent in the next couple of years, especially so when a high-growth company like Infosys gets a similar valuation. Even on an EV/EBITDA basis, the valuation is rich at around 10 times estimated FY06 earnings.

Although Jet seems best placed to tap the boom in the aviation sector, the high growth recorded this fiscal may be difficult to repeat given the foray into international markets, which is expected to lower yields.

Besides, the increase in competition in the domestic segment from low-cost carriers will also hurt to some extent, notwithstanding the fact that Jet is less vulnerable to such competition given its preference among business travellers.

Needless to say, the almost insatiable appetite of FIIs for Indian stocks would have helped Jet's listing price, apart from a premium for the scarcity of stocks in the aviation space.

With contributions from Amriteshwar Mathur and Mobis Philipos