Underperformer

BS Compass

Mastek's performance throughout this calendar year has been extraordinarily different from the rest of the industry.

In the September quarter, Hughes Software, MphasiS BFL and Infosys all reported a significant improvement in performance in their IT services business.

Mastek, on the other hand, has reported a meagre 1.3 per cent sequential increase in sales, and its profit before taxes have fallen around 22 per cent. Come to think of it, the June quarter represented a very low base.

Besides, if one were to exclude the company's share in the profit of its joint venture with Deloitte Consulting, there would be a loss of Rs 1.28 crore at the net profit level.

Needless to say, it'll be a long while before Mastek's performance comes back in line with the rest of the industry.

To be fair to the company, it had warned in its guidance for this fiscal that performance would be subdued till December.

The reason given then was that a drop in billing rates was leading to a hit at the gross margin level, and since the company had decided not to compromise on its sales and marketing spend, the bottomline would take a bigger hit.

But most of the company's competitors have said that pressure on pricing has eased. Mastek seems to be having problems of its own.

Much of the company's revenues come from fresh development projects, and it constantly needs to sign up new, large projects in order to compensate for the loss of revenues when a large project comes to an end.

It's no surprise that one of the reasons Mastek has given for the lacklustre performance is, "We did have some slips in closing deals this quarter."

Also, since the share of revenues from UK (the most profitable region for the company) have been coming down consistently, even margins have taken a hit. Not surprisingly, Mastek continues to be among the worst performing stocks in the IT sector.

HDFC

Nobody has any difficulty forecasting a 30 per cent growth in HDFC's sanctions and disbursements, considering that that rate of growth has been rock steady for many quarters now.

Disbursement of individual housing loans has also been on target at 33 per cent growth, compared to 34 per cent in Q1. Net profit growth is 21.6 per cent, compared to 22 per cent in Q2.

For the first half of the year, net interest income has more than doubled compared to H1 last year, a pattern observed during the first quarter.

Although the growth in interest income on loans has improved, it is lower interest costs that have buoyed the bottomline. Gross margins have expanded.

The case against HDFC has for long been that it can no longer sustain premium valuations while other housing finance companies grow faster and offer cheaper loans.

But the rapid growth of the market has enabled HDFC to continue to grow disbursements at 30 per cent, while access to low cost funds (including ECBs) have cushioned profits.

In spite of the analysts, valuations have so far improved. It's only if HDFC fails to meet the 30 per cent disbursement growth level that the stock will crumble.

IPCL

The 20 per cent growth in IPCL's bottomline for the second quarter ended September 2003 appears consistent with the firm petrochemical prices.

But what needs to be remembered is that Reliance Industries took over IPCL during the same time last year.

Therefore, compared to expectations of a bottomline of between Rs 72-75 crore, IPCL has under-performed substantially.

The 138 per cent jump in net profits for the first half ended September 2003 also give a distorted view of IPCL's performance, since IPCL reported a loss of Rs 6 crore in the June 2002 quarter.

For the September quarter, while operating margins improved 100 basis points to 22 per cent, that was on the back of a top line growth of 7.5 per cent.

However, with petrochemical prices firming up, it appears that IPCL may yet report better growth in the coming periods.

Polyethylene and polypropylene demand has been growing at 12-15 per cent for the last few years and is expected to maintain the growth rate over the next few years too.

Hence, even though there may be a limited domestic demand, the higher production will result in greater exports.

Similarly, the other contributor to growth is mono-ethylene glycol (MEG), production volumes for which increased 23 per cent in the first half.

Even though the capacity for MEG may be the lowest compared to its other products like PP, PE and PVC, the comparable margins and higher growth rates will drive its profits. Also, IPCL is the only ethylene-based integrated player in the PVC market.

As a result, while other manufacturers are exposed to fluctuations in prices of ethylene di-chloride (EDC), the main raw material for PVC which has to be imported, IPCL will have higher margins in PVC. That is the other reason for the markets not being satisfied with the lower bottomline growth.

The unhappiness with the results was apparent in IPCL's stock price, which fell 4.2 per cent yesterday.

With contributions from Mobis Philipose and Sameer Ranade