REL: Skewed numbers

Reliance Energy reported a 52.1 per cent growth in its profit before tax to Rs 171.21 crore in the June quarter, despite a mere 0.74 per cent growth in its top line.

Profit growth was mainly owing to a 76.3 per cent jump in other income (treasury gains) to Rs 134.7 crore, accounting for nearly 80 per cent of the total profit before tax. The stock fell about 1 per cent as results came below expectations.

Revenues of electrical energy segment declined 2.2 per cent to Rs 790.9 crore last quarter, because of a drop in volumes and realisation.

Aggregate sales of electrical energy declined 1.32 per cent on a y-o-y basis to 2,161 million units in the June quarter. In addition, average realisations fell marginally to Rs 3.65 per unit compared with Rs 3.68 in the same period last year.

Although the company's cost of electrical energy purchase declined, cost of fuel rose 10.86 per cent to Rs 204.69 crore, largely owing to higher prices of coal.

In addition, tax on electricity increased 56 per cent. As a result, segment profit of the electrical energy division declined 29.6 per cent to Rs 75.9 crore.

Like earlier quarters, the company's EPC and contracts divisions benefited from the upturn in the capex cycle in the power industry.

This segment's profit grew 332 per cent to Rs 14 crore. Although this division contributes only 15.5 per cent to total segment profit, it had a part to play in the 9.61 per cent increase in overall operating profit.

The company is planning a preferential issue to fund its growth plan. In the immediate term, however, the company's ability to manage input costs is being viewed as key to improving operating margin, which in turn will drive stock performance.

Hexaware Tech

Since Hexaware Technologies had already warned that its growth for the rest of the year wouldn't be in line with its historic growth trend, the markets were not surprised when the company announced a 16.3 per cent drop in net profit.

The stock closed 0.5 per cent higher, having already corrected in the past week after the company's guidance revision last week.

Hexaware said its new order wins weren't as strong as it expected earlier and, more importantly, that a few of its existing clients delayed ramp-ups.

As a result, revenues grew just 0.6 per cent in the June quarter. Even in the September and December quarters, growth was not expected to be much better.

In fact, the revised guidance assumes a 1.5 per cent sequential growth in revenues for the next two quarters.

With revenues being stagnant, and with the company already having hired people to meet expected demand, margins took a severe hit.

Operating margin fell almost 200 basis points last quarter, owing to a 150 basis points increase in salary cost.

Utilisation fell by more than 500 basis points to 66.8 per cent. Of course, salary costs were higher also because of a 15 per cent increase in offshore salaries and a 4 per cent rise in onsite salaries effective April 2005.

Although the revised guidance seems achievable, it needs to be noted that revenues from the PeopleSoft development centre (ISC) would stop from late October this year.

Considering that this centre accounts for 13 per cent of revenues currently, the rest of the business would have to grow by more than 10 per cent in the December quarter.

Also, the ISC business is expected to account for 12 per cent of revenues in CY05, which means that growth in CY06 would also be hit, unless other segments of the business ramp up smartly.

It's for this reason that the stock has corrected sharply and now trades at 14 times CY05 earnings.

NDTV: sorry for the interruption

Coming on the back of a stellar performance in FY05, NDTV's numbers for Q1FY06 were disappointing. The stock corrected by over 10 per cent on Tuesday, as the company's operating profit fell both on a q-o-q as well as on a y-o-y basis.

Since NDTV enjoyed a forward valuation of over 31 times, prior to the results announcement, there was ample room for disappointment.

The company reported a 17 per cent sequential drop in revenues last quarter. The June quarter is typically a lean period for television channels, with advertisement flow picking up with the beginning of the festive season.

On a y-o-y basis, revenues grew marginally by 1.5 per cent. Last year's June quarter represented a high base, since it had the benefit of the coverage of the general elections, which fetched its flagship channel more advertisement revenues.

Expenses, however, continued to rise - operating expenses rose 10 per cent. This led to a 78 per cent drop in operating profit on a sequential basis.

The drop in operating profit on a y-o-y basis was almost similar at 73 per cent. The biggest culprit for the rise in expenses was higher salaries.

Salary cost jumped to nearly 44 per cent of revenues, compared to less than 30 per cent earlier. The high increase would have been necessary to retain employees, given the increased churn in the industry.

Moreover, with the firm having launched NDTV Profit in the March quarter, costs such as marketing, distribution and promotional expenses have also increased.

In fact, these costs are believed to have gone up across channels. With the operations of NDTV profit stabilising, the company could see better operating leverage in the coming quarters.

Also subscription revenues are expected to increase going forward with improved regulation. Even after Tuesday's correction, the NDTV stock gets a high valuation of 28 times estimated FY06 earnings.

Media stocks have been re-rated lately thanks to the approval of FII investment in media stocks. But in order to sustain the current valuations, NDTV would have to revert to last year's growth rates.

With contributions from Amriteshwar Mathur, Mobis Philipose and Shobhana Subramanian