VSNL: Network jammed

While both NLD and ILD volumes were up, total voice traffic at 2.1 billion minutes rose 9 per cent q-o-q.

Acute pricing pressure, resulting from the re-pricing of long-term bandwidth contracts after the price cuts announced in late 2005, have strained VSNL's topline growth.

Besides, revenues have also been hit by lower carriage charges for domestic long distance and voice traffic. Thus, standalone revenues at Rs 924 crore, have remained flat y-o-y and dipped 4 per cent q-o-q.

In addition, higher network and staff costs have dented the operating profit margin, which has fallen nearly 400 basis points y-o-y and 120 basis points q-o-q to 23 per cent. Also higher taxes and lower other income have hurt the net profit which has dropped 31 per cent y-o-y to Rs 88 crore.

The revenue mix remained largely unaltered. While both NLD and ILD volumes were up "" total voice traffic at 2.1 billion minutes was up 9 per cent q-o-q, revenues from the wholesale voice segment remained flat.

Moreover, revenues from the enterprise and carrier segment fell 8 per cent. Internationally, Teleglobe has reported positive operating profit this quarter, though Tyco Global is yet to turn in good numbers.

Thus the benefits of owning a global network will take some time to get reflected in VSNL's financial performance even as there are integration risks in the interim.

As such, at the current price, the stock, which trades at 22.5 times FY08 estimated earnings, is expensive given that there could be further pricing pressures by the end of the year, when Reliance Communications' Falcon undersea cable is expected to be commissioned.

If one takes into account the embedded value of VSNL's surplus real estate at about Rs 120 per share, the valuation is not so demanding. However, when this value will be unlocked is not clear.

Trent: Shrinking margins

Trent has turned in disappointing numbers for the June quarter. While the topline grew 42 per cent y-o-y to Rs 105 crore, the operating profit margin dipped by 170 basis points to 7.7 per cent.

That was due to a fall in the gross margin by 100 basis points to 50 per cent and large increases in staff, advertisement and selling costs. The net profit at Rs 6.5 crore was boosted by higher other income.

A part of the fall in the operating profit margin is due the company writing off ESOPs announced in Q3 FY06.

However, with no new stores launched during the quarter, the retail space remains at 0.6 mn sq ft, which is 64 per cent higher compared with Q1 FY06.

Since revenues were up only 42 per cent, margins in the business have clearly contracted. This is despite the fact that Trent has a very high share of store labels""around 80 per cent. It appears that Trent is not able to get adequate economies of scale, given the small number of stores.

While Trent has lined up properties to open 12 stores across formats in malls in FY07, the pace of expansion will nonetheless be slow compared to that of its peers. Till date, Trent has rolled out just one hypermarket though it is planning three more this year.

Given that the competition in the retail space is only going to intensify with the entry of bigger players, Trent will need to quickly add retail space.

The company has grown inorganically""it acquired Landmark, the books and music chain last year ""but the pace needs to be accelerated. At the current price, the stock trades at 24 times estimated FY07 earnings and around 16 times FY08 earnings and appears expensive.

Sun Pharma: Improved performance

Improved performance in export markets, coupled with a tight check on material costs has helped Sun Pharma report an improved performance in the June quarter.

The company saw its consolidated operating profit grow by 41.4 per cent y-o-y to Rs 181.1 crore in Q1, as compared to a 31.1 per cent growth in its net sales to Rs 511.6 crore.

Its operating profit margin expanded by 257 basis points y-o-y to 35.4 per cent in Q1 FY07. Generic player Ranbaxy also saw its consolidated operating profit improve by 571 basis points y-o-y to 18.2 per cent in the June quarter.

Sun Pharma's total exports in the last quarter were Rs 220.9 crore in the last quarter, a growth of 59.4 per cent y-o-y. Of crucial importance, is the fact that formulation exports, which have much higher margins than bulk exports, grew 59.3 per cent y-o-y to Rs 160.1 crore.

Improved formulation exports in Q1 FY07 is being attributed to a 40 per cent y-o-y growth in Caraco's sales in the last quarter, coupled with growing exports of its medications for segments like gastroenterology, psychiatry and diabetology to unregulated markets. In the domestic market, the company's total sales grew 13.9 per cent y-o-y to Rs 313.9 crore in Q1 FY07.

Sun Pharma was also able to bring down its key material costs""adjusted material costs as a percentage of net sales declined 420 basis points y-o-y to 27.8 per cent in Q1 FY07. Raw material cost savings are attributed to higher in-house sourcing of inputs by the company.

It had earlier announced its strategy of hiving off its high-end research into a separate company. This move is expected to bring down Sun Pharma's R&D costs and the company is expected to complete all necessary formalities shortly.

The stock trades at about 27 times estimated FY07 earnings, given investor's expectations that the company might utilise the proceeds of its earlier FCCB issue to pursue another acquisition.

With contributions from Shobhana Subramanian and Amriteshwar Mathur