Swifter Sales

Maruti's operating margins could be under some pressure

September was a fairly good month for Maruti, with domestic sales of passenger cars and multi-utility vehicles up 15 per cent year on year. Overall sales in the first half of the year have risen just 6.1 per cent, so the September numbers are a definite improvement.

The shortage of power, and floods in some parts of the country earlier in the year had slowed down sales, but that appears to be changing. The growth has been driven to a large extent by the A2 segment, which saw an increase of 35 per cent y-o-y.

Within the category, the Swift, which was launched four months ago, is believed to be doing well, clocking an estimated 4,800-5,000 unit sales per month.

However, the Maruti 800 sales continue to fall, though the drop in September has been considerably less compared with the decline in growth for the first half at around 33 per cent.

Models such as the Baleno and the Esteem, which are in the A3 category, too have not done very well, growing just 7.7 per cent. And exports growth has decelerated by 20 per cent, pulling down the overall growth for the month to 12 per cent.

The company has hiked prices of all its models except the Swift by 0.2-1 per cent and the management says this is the first round of increases and could be followed up with another hike at the year-end.

Given the keen competition, Maruti has held back from passing on the entire increase in the freight and other input costs. This implies that its operating margins could be under some pressure. Much would depend on how well the Swift does because that is the model that is driving growth.

Jubilant Organosys

The key takeaway from Jubilant Organosys' acquisition of Target Research Associates (a US-based clinical research organisation) is its attempt to expand its research capabilities and also ensure economies of scale for its relatively small subsidiary Jubilant Chemsys.

This subsidiary focuses on pharmacokinetic studies, Phase I clinical studies with new chemical entities and had reported a loss after taxation of Rs 31.5 lakh in FY05.

Target provides research services in fast growing segments such as cardiovascular and oncology, and a key focus of Jubilant's management would be on leveraging Target's existing client base and grab a larger share of the booming global clinical research market.

At first look, the acquisition does not seem to be cheap at about 1.4 times estimated CY05 revenues. But Target is estimated to have EBITDA margins as high as 28 per cent, which makes the acquisition price look reasonable at five times CY05 EBITDA.

Analysts point out that the Jubilant would have to grow its clinical research business rapidly so that these valuations make sense. The markets were lukewarm to the announcement, with the stock declining marginally to Rs 1,003 on Wednesday.

In July this year it had also acquired Trinity Laboratories, a US-based formulations player, for $24.7 million. The $100 million FCCB issue the company had completed in May this year is being put to good use.

Jubilant Organosys' pharmaceutical and life science businesses are present virtually across the entire value chain. The backward integration benefits gained through this acquisition should enhance the efficiency of existing businesses such as API and generics. But with the stock already trading at about 15 times estimated FY06 earnings, growth prospects seem to be priced in.

SpiceJet: In for a long haul

SpiceJet, the low cost airline which started operations in May this year, has announced results for the June to August quarter. (The company's financial year ends in May). Being its first operating quarter as a low-cost airline, it's not surprising that it has posted an operating loss.

SpiceJet posted net sales of Rs 57.26 crore on the nine routes it has operations in. Operating expenses, including staff cost, rent, and other expenses, stood at Rs 75.37 crore.

This led to an operating loss of Rs 18.1 crore, which is about 32 per cent of the company's sales. Net loss was lower at Rs 10.8 crore mainly because of other income of Rs 9 crore.

Other income was mainly made up of an amount of Rs 8.7 crore that was not payable under the Scheme of Settlement approved by the Delhi High Court, which was written back and included in other income.

The SpiceJet stock jumped nearly 5 per cent on Monday on talk that the company had achieved a break-even in its first operating quarter. The only way SpiceJet could have achieved a breakeven was if costs such as staff, rent, and legal and consultation charges were excluded from the calculation. But that would give an incorrect picture.

Not surprisingly, the stock has corrected sharply since then and now trades even below its pre-results levels. In fact, the stock is now about 34 per cent lower than the highs it had reached a month ago. That's not to say that the company's business has been unsuccessful. On the contrary, its low fares have been received well, what with its load factors being in excess of 90 per cent in the first two weeks of operations.

Besides, with the completion of an FCCB this month, the company would have raised Rs 400 crore in a short period of time, putting at its disposal reasonably large funds for a start-up, low cost airline. It's just that the markets had become overtly bullish, taking the company's valuation to nearly Rs 2,000 crore last month.

Things look much more reasonable now - at close to Rs 1,300 crore, the company is now valued at about one time estimated sales for FY07.

Contributions from Amrittshwar Mathur and Mobis Philipose