TCS: Bullish on future

With a large high-end clientele, TCS has set a revenue target of $4 bn for FY07

With a sequential revenue growth of 8.2 per cent to Rs 4,482 crore and a huge expansion in the operating profit margin of 300 basis points to 27.4 per cent q-o-q, TCS' numbers (US GAAP) for the September quarter have been better than the Street's expectations.

While the revenue growth may seem slower than that of peer Infosys, which posted a sequential revenue growth of 14 per cent, it is evident that TCS has been able to mine its clients better during the quarter: the number of clients billing $10 million has gone up to 70 from 65 in the June quarter, while the number of $50 clients has risen to 15 from 10.

Moreover, taking advantage of a better operating environment, it has been able to ramp up its clients across verticals and business lines. For instance, one of the company's large telecom clients saw a ramp-up both in application development as well as in systems integration.

The much-improved operating margin at 27.4 per cent has been the result of better pricing, cost efficiencies (115 basis points), greater offshoring (67 bps) and the benefit of the rupee depreciation (50 bps). The increased offshore proportion at 41 per cent, up significantly from 37 per cent in the June quarter, is encouraging.

While cost efficiencies may not be sustained in the future, particularly since wage inflation shows no signs of abating, continuous offshoring and good pricing should be possible. The utilisation rate, excluding trainees, was a reasonably good 79.4 per cent.

With the management talking of revenues of $4 billion for FY07, it is obviously confident of generating business. At the current price of Rs 1,130, the stock trades at just under 27 times estimated FY07 earnings of Rs 42 and at 20 times FY08 earnings and is attractively valued.

Praj Industries: Ethanol push

Though Praj's equity capital has doubled y-o-y in Q2 FY07, its net profit growth of 375 per cent has more than compensated. Praj has seen a phenomenal growth in the September quarter with its topline rising over 150 per cent and operating profit rising 205 per cent.

As a result, operating profit margin went up 244 basis points to 15.34 per cent. The Praj stock price gained 1.4 per cent on Monday.

With high oil prices, Praj's ethanol plants are in demand. The growth in its turnover is due to the addition of two manufacturing shops, which has resulted in trebling its capacity.

The company is setting up another unit in Kandla SEZ with a capital outlay of Rs 15 crore, from where it will be able to ship large machines.

The demand outlook is bright. Praj's growth in the first half is due to strong demand for ethanol plants in India and the US. In its brewery plant segment too, it is executing orders for UB and SAB Miller.

It has a pending order book of Rs 600 crore, and the management has indicated that it will have a turnover of Rs 450 crore this financial year.

Assuming net profit margin is maintained at the same levels over the next two quarters, the estimated FY07 P/E for Praj works out to 32 times, which appears high in spite of the growth rates.

Crompton Greaves: Costly inputs

Despite the upturn in the power capex cycle, Crompton Greaves faced pressure on raw material costs in the September quarter.

Its operating profit grew by 39.1 per cent y-o-y to Rs 73.5 crore in Q2 FY07, compared with a 48.2 per cent growth in its income from operations to Rs 897.9 crore. As a result, operating profit margin declined by 50 basis points y-o-y to 8.2 per cent last quarter.

The margin pressure in Q2 FY07 has been due to adjusted raw material costs as a percentage of operating income rising 569 basis points y-o-y to 69.33 per cent.

Senior Crompton Greaves officials pointed out that a majority of the company's orders are on a fixed-cost basis and given the surging prices of copper in Q2 FY07 on a y-o-y basis, it led to pressure on margins.

In contrast, operating profit margin had increased by 100 basis points y-o-y to 9 per cent in Q1. The market was not happy with the company's performance and the stock declined 5 per cent on Monday.

In its key power system division, which supplies transformers and switchgears, synergies with its earlier acquisition of Belgium-based Pauwel, helped Crompton's segment profit expand 58.5 per cent y-o-y.

Demand conditions are strong in the Middle East and East Asia. In its industrial systems division, which comprises DC machines and LT motors, segment profit grew 38.8 per cent. Its outstanding order book stood at Rs 1,800 crore at the end of Q2, compared with Rs 1,500 crore a year ago.

During the quarter, Crompton Greaves acquired the transformers, gas-insulated switchgears, rotating machines and contracting businesses of Hungary-based Ganz Transelektro Villamossagi (GTV) together with the business of Transverticum (TV), at an enterprise value of euro 35 million. The stock trades at 21 times estimated FY07 earnings, given the strong growth prospects in the medium term.

With contributions from Shobhana Subramanian and Amriteshwar Mathur