Weak current

Rising input costs still a bother for Reliance Energy

Reliance Energy's results for the September quarter show that while its EPC and contracts division continue to show spectacular growth, the core electrical energy business is still grappling with increasing costs.

Higher cost of purchasing energy from external sources led to a 103 basis points decline in operating profit margin last quarter, which was not entirely surprising since Tata Power had also reported a 75 basis points dip in margin.

Sales of electrical energy amounted to 2017 million units in the last quarter about 3.35 per cent lower on a y-o-y basis. Lower unit sales of electricity in Q2FY06 is attributed to the plant load factor (PLF) at its Samalkot power station, Andhra Pradesh, which fell to 51 per cent last quarter from 70 per cent in the previous year.

The lower PLF was owing to reduced availability of gas. To compensate for the reduced generation of electricity, the company's purchase of electrical energy from external sources rose almost 15 per cent to 1,067 million units. In value terms, the cost of electrical energy purchased rose 26.6 per cent to Rs 295.35 crore.

Meanwhile, the company's average realisation was estimated at Rs 4 a unit in the previous quarter, about 15.75 per cent higher on a y-o-y basis. The improvement was largely in relation to higher cost of power purchased from external sources, which was partially passed on to customers, point out analysts.

Revenues of the electrical energy division, therefore, rose 15.2 per cent to Rs 820.33 crore last quarter, despite the drop in volumes. The EPC and contracts division grew revenues by 169 per cent to Rs 240.75 crore. This pushed overall revenue growth to 31.72 per cent, but higher input costs led to a lower 25.13 per cent growth in operating profit.

Godrej Consumer Products

With net profit up 60 per cent for the September quarter, it was not surprising that the Godrej Consumer Products stock was up 4 per cent in Friday's trading. It was not just the growth in bottom line that was impressive, operating profit margin too expanded to 21 per cent, sharply up from 16.7 per cent achieved in Q2FY05.

The company posted a 23 per cent top line growth for the quarter driven by strong numbers from the personal care segment, which rose a smart 30.4 per cent.

Within the personal care division, hair colour did exceptionally well growing at over 30 per cent y-o-y. The growth in soaps division was a little more muted at 11 per cent y-o-y. The management believes that consumers have more or less stopped downtrading and that pricing power is coming back in select categories.

Earnings before interest depreciation and tax was up 46 per cent y-o-y. One of the main reasons for the improvement in margins has been the company's ability to keep costs in check.

Raw materials as a percentage of sales at 49.4 per cent is down from 51.5 per cent in Q1FY05 mainly because vegetable oil prices have been benign. Besides, the adspend at 6.5 per cent of net sales has remained more or less flat y-o-y.

At the current price of Rs 451, the stock trades at 25 times estimated FY06 earnings and around 21 times estimated FY07 earnings. Given the pace of growth the company might, however, well beat the street's FY06 expectations.

Exide Industries

The key takeway from Exide Industries' September quarter numbers is that with raw material costs relatively unchanged, operating costs have been brought under control. The company has also been able to leverage the current upturn in the auto sector to increase sales of its batteries.

As a result, operating profit margin has grown almost 230 basis points to 18.19 per cent y-o-y. So, it was no surprise that the stock rose almost 3.4 per cent on Friday to Rs 213.

The cost of key input, lead, has remained benign. As a result, raw material cost has grown a mere 2.68 per cent y-o-y to Rs 179.5 crore and as a percentage of net sales it has declined 312 basis points to 53.35 per cent.

This reduction in input cost is also visible sequentially in the September quarter and with this key expenditure falling 5.27 per cent. As a result, operating margins expanded sequentially by 217 basis points in Q2 FY06.

Exide's net sales have grown 8.7 per cent y-o-y to Rs 336.4 crore in the September quarter. Meanwhile, savings in input costs helped operating profit grow almost 24.3 per cent y-o-y to Rs 61.2 crore in the previous quarter, which was more or less in tune with its growth in its PBT. Profit before tax grew 26.3 per cent to Rs 43.79 crore y-o-y in Q2FY06.

The street appears to have factored an improvement in the company's operating environment, with the stock trading at about 14.7 times estimated FY06 earnings.