Ranbaxy: Growth after five quarters

Robust domestic sales help Ranbaxy improve performance

Ranbaxy Laboratories has been able to grow its consolidated operating profit and operating margin on a y-o-y basis in the March 2006 quarter, after a gap of five quarters,.

For the last quarter, the company has reported a growth of 16.2 per cent y-o-y in its consolidated operating profit (including other operating income) to Rs 148.2 crore, while operating margin has improved by 64 basis points to 11.41 per cent.

This improvement has come about due to a sharp revival in domestic sales, coupled with an uptick in Western markets revenues. In addition, Ranbaxy has also been better able to manage R&D costs and they declined about 9.6 per cent y-o-y to Rs 72.9 crore. However, analysts add that improvement in margins during the March 2006 quarter was helped by the low base in the previous corresponding period.

Meanwhile, in the key US generics markets, analysts say that while pricing pressures have not shown signs of waning, the company has been successful in expanding its market share.

As a result, sales grew 10 per cent y-o-y to $88 million (approximately Rs 390 crore) in the last quarter. In the domestic market, its sales grew 49 per cent to $58 million (approximately Rs 258 crore) helped by a low base in the corresponding previous period, coupled with improved demand in product segments like cardiovascular and diabetes.

In Europe, the company reported an improvement in Germany and it helped sales expand 8 per cent to $ 47 million (approximately Rs 209 crore).

Going forward, sales growth in Europe is expected to be ramped up given the company's recent acquisitions like, Romania-based Terapia, Allen (GSK's generic unit in Italy) and Ethimed in Belgium. Nevertheless, at about 38 times estimated CY06 earnings, the Ranbaxy stock does appear expensive.

JSW Steel

JSW Steel has been the first of the block in the steel sector to report its March 2006 quarter results. The company has seen its operating profit drop by 51.7 per cent y-o-y to Rs 416.75 crore in the March 2006 quarter.

However, the results of the last quarter are not strictly comparable with the corresponding previous period as JSW Steel had merged three companies with itself on April 1, 2005.

Nevertheless, the operating profit margin for the merged entity has fallen 1322 basis points to 26.32 per cent in the March 2006 quarter.

JSW's sales of pellet fell 57 per cent y-o-y to 0.12 million tonne in the last quarter, despite production volumes remaining more or less flat at 0.99 million tonne.

Analysts say that was largely due to increased captive consumption requirements for pellets. Also, its sales of hot rolled coils fell 9 per cent y-o-y to 0.31 million tonnes despite production rising two per cent, as the company is understood to be holding inventory to ensure supply during its planned shutdown of its hot strip mill for 30 days in Q1 FY07.

In addition, average realisations for HRC too are also estimated to have fallen by 12-14 per cent on a y-o-y basis in the last quarter. The company is currently ramping up its steel making capacity to 3.8 million tonnes from the existing capacity of 2.5 million tonnes. The stock appears reasonably valued at about 6.5 times trailing earnings.

HCL Tech: Ambitious guidance

For HCL Technologies, it was yet another disappointing quarter. Revenue growth in dollar terms at 7.4 per cent fell short of the 10 per cent plus growth that the company had provided in its guidance for the quarter. So, the company's guidance of $1 billion in revenues for year ended June 2006, will require a 41 per cent growth in the next quarter, which is unlikely to happen.

HCL Tech's earnings before depreciation, interest and tax (EBITDA) went up by 5.1 per cent to Rs 196.8 crore in the March 2006 quarter. EBITDA margins deteriorated by 28 basis points over the December quarter. Though BPO revenues increased by 16.9 per cent sequentially, the segment EBITDA declined by 6.9 per cent.

In software services, operating margins improved by 56 basis points q-o-q but in that segment, the top line growth was low at 4.3 per cent. The improvement in software services margin came due to a tight control on direct costs. An 8.9 per cent increase in SG&A for the company has also impacted margins.

HCL Tech has focused on large orders and has also won a Rs 1,500-crore deal from DSG International, a European electrical retailer during the quarter. But going forward, analysts are concerned about the company's ability to improve profitability, as large deals typically earn lower margins. The HCL Tech stock has fallen about 5.7 per cent after the result, and the stock trades at about 21 times FY07 estimated EPS.

With contributions from Shobhana Subramanian