MTNL: Realty bites

Analysts are averse to betting on the company's move to monetise real estate.

State-run Mahanagar Telephone Nigam Limited is said to have identified more than 40 plots for redevelopment and has already invited bids for developing an information technology park at its Noida property.

But analysts point out that monetising these assets may take considerable time. Until then, the focus will be on its core business, which is not doing too well.

In Q4 FY07, revenues declined 17 per cent y-o-y and 4.8 per cent q-o-q despite strong growth in its GSM business. The company's GSM mobile services grew 13 per cent q-o-q to 2.74 million in Q4 FY07.

However, cellular business contributed only 13.8 per cent to the company's operating revenues in the last quarter. Its mobile ARPU (average revenue per user) is 30 per cent lower than leading private players.

The problem is even bigger in the fixed line business, where the subscriber base was more or less flat q-o-q in Q4 FY07, while ARPU that declined 9.9 per cent q-o-q. As a result, the overall operating profit margin declined 30 basis points q-o-q to 18 per cent in the last quarter.

Analysts are not ready to bet on MTNL's real estate value unlocking story, with many of them not even factoring it in their estimates. JP Morgan has assigned Rs 11 a share in its sum of parts valuation on account of real estate.

The company plans to invest nearly Rs 2,300 crore in FY08 to expand its capacity across segments such as GSM and broadband.

However, MTNL's cellular subscriber base currently accounts for only about 2.5 per of the total cellular base in the country, limiting its ability to take on players in the private sector. The fixed line growth rates in Mumbai and Delhi are also tapering off.

An improvement in MTNL's cash flows is also expected from possible wins in its legal cases. At Rs 156, the stock trades at 16 times estimated FY08 earnings and is expensive.

Divis Laboratories: Growth momentum

The Divis Laboratories stock has been among the top performing pharmaceutical stocks over the past year, having quadrupled in price in the period.

The company's performance has backed the steep rise. Its consolidated fully diluted earnings per share has increased from Rs 53 in FY06 to Rs 143 in FY07. Its performance in the fourth quarter was especially impressive, as it posted a quarterly EPS of Rs 78.

Divis, which develops compounds under custom synthesis for its international partners, besides generics exports, saw its consolidated sales rise 90 per cent in FY07, as its expansion kicked in. It set up an SEZ and an EOU during the year, both of which were successfully inspected by the US FDA.  The operating profit went up by 107 per cent for the full year. The operating profit margin went up 265 basis points to nearly 33 per cent, though staff costs nearly tripled on account of stock options.  The proportion of contract research and manufacturing services income has increased as a percentage of total income, which partly responsible for the increase in margins.  Going forward, analysts say that the growth momentum will continue, though it will not be as strong as FY07.  The company has invested Rs 35 crore in a neutraceuticals plant, which will begin contributing to revenues from this year. However, the rising rupee could become a challenge, as the company derives most of its income from exports.  The stock trades at 27 times estimated FY08 earnings, given the March 2007 quarter results and the strong outlook on the contract research business.