Sterlite Industries: Firm grip

The company's consolidated operating profit grew 19.4 per cent y-o-y to Rs 2,271.6 crore in Q4 FY 07.

Sterlite Industries leveraged improved non-ferrous metal prices in the March 2007 quarter, but higher operating costs put pressure on its overall operating profit margins.

As a result, the company's consolidated operating profit grew 19.4 per cent y-o-y to Rs 2,271.6 crore in Q4 FY 07, as compared to 22.6 per cent growth in net sales to Rs 6,251.55 crore. Its operating profit margin also fell 100 basis points y-o-y to 36.3 per cent in the last quarter.

This pressure on margins was due to other expenses as a percentage of net sales rising 140 basis points y-o-y to 14.9 per cent in the last quarter. Other non-ferrous players like Nalco saw their operating profit margin decline 655 basis points y-o-y to 56.15 per cent in Q4 FY07.

Meanwhile, Sterlite's production in aluminium division grew 48.3 per cent y-o-y in Q4 FY07, while the average aluminium price was up 12 per cent to $2,746 per tonne on the LME. Segment profit grew 155.6 per cent y-o-y in the last quarter.

However, in its copper division, the company's treatment and refining charges (TC/RC) fell 31 per cent y-o-y to 22 cents per pound in the last quarter, say analysts. No doubt, the production of copper cathodes was higher at 89,000 tonne in Q4 FY07 as compared to 75,000 tonne a year earlier, but segment profit of this division declined 16.4 per cent y-o-y in the last quarter.

In its zinc and lead division, refined zinc production was up 4 per cent y-o-y, while product prices were 50 per cent higher y-o-y. In FY07, Sterlite's operating profit margin grew 1,080 basis points y-o-y to 38.8 per cent.

However, the results of FY07 are not strictly comparable with the previous year, given the sale of its power transmission line division with effect from July 2006.

The Sterlite stock has outperformed the broader market over the past three months "" it has gained nearly 10 per cent as compared to 4 per cent fall in the Sensex.

Going forward, pressure on Sterlite's TC/RC margins are likely to intensify, given global shortages of copper concentrate supplies. However, prices of other non-ferrous products are expected to remain strong in the medium term. At Rs 533, the stock trades at a reasonable six times estimated FY08 earnings.

Colgate: Bumper bonanza

A day after Colgate announced a special dividend of Rs 122.4 crore along with the capital restructuring, the market valued the bounty much higher, taking up the company's market capitalisation by over Rs 600 crore or 12.7 per cent.

The reason for the capital restructuring, which will repay shareholders Rs 9 per share, and reduce the paid-up capital to Rs 13.6 crore from the current Rs 136 crore, as the face value will be reduced from Rs 10 to Re 1.

Colgate generated Rs 209 crore cash from operations and had a treasury portfolio of Rs 313 crore at the end of FY07, which was invested in government securities and deposits with banks and corporates.

Now that its capex at Baddi is over, the decision to return surplus cash is great news for shareholders. The reduction in capital will keep the earnings per share unchanged, but ratios like return on capital employed and return on net worth will improve.

Along with the special dividend, it has also posted a stunning performance for Q4 FY07 as the net profit improved 36.7 per cent y-o-y in Q4 FY07.

Revenues grew by 13.6 per cent y-o-y on the back of an 8 per cent volume growth in toothpaste over March 2006 quarter and 20 per cent growth in toothbrushes. Operating profit grew 38.8 per cent y-o-y in Q4 FY07 and operating margin was up 287 basis points to 15.8 per cent.

In toothpaste, its market share improved by 80 basis points in Q4 FY07, while its toothbrush market share was up 180 basis points.

Colgate reduced its advertising and sales promotion expenditure as a percentage of revenues by 111 basis points y-o-y to 18.6 per cent in the March 2007 quarter, which helped in the improvement in profitability. For the full year, its operating profit margin (adjusted for VRS) was up 67 basis points to 16.1 per cent.

The Colgate stock has underperformed the Sensex in the past year. However, the outlook has improved after the capital restructuring and the fourth quarter performance.

Going forward, new product launches will help in top line growth and tax benefits from Baddi will improve profitability. The stock trades at 22 times estimated FY08 earnings and should do well.