Earnings growth remains robust

QUARTERLY RESULTS ANALYSIS: DECEMBER 2003

RELIANCE INDUSTRIES
Rise in product selling prices enhances sales growth

Reliance Industries posted an earnings growth of 26.87 per cent for the quarter. Sales grew at 13.92 per cent to Rs 12,500 crore.

The higher rate of growth in profits was induced by a less-than-proportionate increase in operating expenses, primarily raw material costs apart from lower interest charges.

Provision for deferred tax was also down significantly. Sales growth for the three quarters of this fiscal was also up 14 per cent compared to the previous period and net profit was up 24.57 per cent.

• For the nine-month perod, sales growth of 14 per cent was driven by a 9 per cent increase in product selling prices and a 5 per cent increase in product sales volumes as compared to the corresponding previous nine months.
• Exports increased 28 per cent during the quarter despite the significant appreciation in the rupee, demonstrating the company's global competitiveness.
• Operating margins improved 50 basis points while net margins were up 112 basis points on lower raw material consumption and interest charges.
• Production of oil and gas and petrochemicals increased 4 per cent to 9.2 million tonnes during the nine months, and company's refinery operated at 107 per cent capacity utilisation.
• According to the company, due to its focus on specialty products, 61 per cent of PSF sales and 33 per cent of PFY sales (which represented niche products) commanded a premium of 5-25 per cent over commodity prices. Similarly, 19 per cent of polymers, which were of specialty grade, generated a premium of 5-15 per cent over commodity prices.
• Dispelling concerns about the lowering of tariffs in the mini budget, the company has said imports were unable to make any inroads in the polymer business with domestic selling prices generally remaining pegged below the landed cost of imports.

The outlook for the company is pretty bright. Firstly, its staple business - petrochemicals which accounts for 50 per cent of operating profits and 45 per cent of gross sales - is set to perform well on the back of the cyclical upturn.

According to oil analysts at ICICI Securities, Reliance's profits are highly sensitive to the petrochemical cycle and the petrochem crescendo could double its profits in fiscal 2005.

Interestingly, Reliance has been able to show a secular rise in exports despite the appreciating rupee. Another trigger is Reliance's telecom business which has finally kicked off and gained market share rapidly.

With the company expected to break even in fiscal 2004, all eyes are set on the Reliance Infocomm IPO.

This again will give a boost to the Reliance counter. The consensus analysts' earnings estimate for fiscal 2005 is Rs 40. At current price 0f Rs 560.55, the stock trades at 14.01 times FY05 earnings.

ACC
Fall in interest costs, rise in other income lift earnings

The Associated Cement Companies (ACC) has posted a 10.40 per cent jump in net profit at Rs 22.32 crore for the third quarter, against Rs 20.21 crore in the same period last year. The earnings were positively impacted by a decline in interest costs and a rise in other income.

• Interest costs during the quarter declined 16.53 per cent to Rs 22.86 crore (Rs 27.39 crore), mainly due to debt restructuring.
• The company's other income was boosted by a credit of Rs 12.18 crore, based on the Supreme Court judgment in favour of the company with respect to the cess on power generation.
• Operating profit stood at Rs 71.96 crore, down from the December 2002 quarter's Rs 75.47 crore.
• Operating margins were flat at 8.33 per cent, while net margins stood at 2.46.
• Sales volume increased 11 per cent during the quarter to 37.37 lakh tonnes. Lower cement prices led to lower realisations. However, the increase in volumes neutralised the adverse impact of lower realisations and higher input costs.
• The company's cement division registered net sales of Rs 816.40 crore (Rs 731.27 crore), while net sales from the ready-mix concrete division stood at Rs 32.15 crore. Net sales from the refractory segment were at Rs 48.51 crore.
• According to the company, heavy and lengthy monsoon last year and poor availability of railway wagons and trucks for transport in some states during the quarter led to flat numbers.
• ACC acquired a 86.80 per cent stake in Idcol, owned by the Orissa government, for about Rs 180 crore.

The scrip trades at a P/E of 28x on a 12-month trailing EPS. According to analysts, even though current valuations are rich, improvement in demand-supply balance is expected to result in price recovery.

ACC, being a pure cement company, is expected to be a major beneficiary of the uptrend in the cement cycle.

ICICI BANK
Increase in low-cost deposits boosts profits

ICICI Bank posted impressive results for the third quarter, mainly due to an increase in its low-cost deposits. Net profit of the bank posted a growth of 33.24 per cent to Rs 440.10 crore in the quarter compared to the corresponding previous quarter.

There was a dip in interest earned (due to lower interest rates) which was offset by a greater decline in interest expended.

Interest earned decreased by 2.97 per cent to Rs 2191.68 crore whereas interest expended declined by 10.93 per cent to Rs 1706.67 crore. Results were in line with market expectations.

• The bank's proportion of low-cost deposits to total deposits has increased. They constituted 60 per cent of the bank's funding in the current quarter compared to 48 per cent in the previous corresponding period.
• Retail assets increased 85 per cent to Rs 28,265 crore this quarter compared to the previous third quarter.
• Net interest income increased 41.59 per cent to Rs 485.01 crore in the quarter under review due to lower interest expenses.
• Fee-based income is another major contributor to the growth in net interest income. It recorded an increase of 41 per cent to Rs 305 crore in the current quarter.
• Other income increased 43.18 per cent to Rs 813.03 crore as the bank booked commendable treasury gains.
• Quality of assets seems to be an issue for the bank (especially assets related to the Dabhol Power Plant). On December 31, 2003, the bank's non-performing assets stood at 4.7 per cent.

Going forward analysts remain optimistic about the bank's performance. Focus on securitisation of its customer assets will enable the bank to optimise resource and capital utilisation as well as diversify its asset portfolio.

Analysts expect an earnings per share of Rs 25 for FY04 and Rs 29 for FY05. Currently, the stock trades at a P/E multiple of 12.48 for a price of Rs 307.

MARUTI UDYOG
Strong volume growth pushes earnings up

Maruti Udyog's results came in well above analysts' expectations. The company posted a 26.64 per cent growth in net sales to Rs 2269.98 crore on a y-o-y basis.

This was driven by strong volume growth - total number of vehicles sold in the quarter rose 26.73 per cent y-o-y to 1.15 lakh.

The company's success in expanding margins and operational efficiencies combined with higher volumes helped it post a 183.31 per cent increase in net profit to Rs 140.75 crore.

• The company's bread and butter offering - Maruti 800 - witnessed a 17 per cent growth while the compact segment (including Alto, Zen and Wagon R) witnessed a huge 46 per cent growth.
• A recent price cut in its compact offering Alto enabled Maruti to grow its share in the segment to 45 per cent from 40 per cent last year.
• The company improved operating margins substantially to 9.34 per cent from 5.69 per cent last year by reducing costs and improving productivity, despite an increase in raw material cost. Net margins also improved from 2.77 per cent to 6.20 per cent.
• Other income saw a 40 per cent jump over the last year on account of write-backs of about Rs 28 crore.
• About 50 per cent of the workforce have opted for VRS. This, combined with further indigenisation of inputs, should reflect favourably on margins over the next 12-15 months.

Analysts expect the government to cut excise on passenger cars from 24 per cent to at least 20 per cent, if not to 16 per cent.

They expect another price cut in Alto in the next 12 months, which will further expand volumes and increase MUL's market share.

Analysts are upbeat of the company's future growth potential and peg an EPS target of Rs 23 for FY05. Maruti presently trades at Rs 431.75 on the BSE at a P/E of 18.7x FY05 earnings.

ZEE TELEFILMS
Advertising revenues grow 7.7 per cent

Zee Telefilms' consolidated revenues witnessed an impressive y-o-y growth of 21.81 per cent in the December quarter.

However, revenues in the last quarter were propped up by sales of set-top boxes worth Rs 14.8 crore, adjusting for which the growth is lower at 17 per cent. Net profit showed better growth at 27 per cent, despite a sharp increase in programming costs.

• Last quarter, advertising revenues grew 7.7 per cent y-o-y, after having fallen 5.5 per cent in the first six months.
• Subscription revenues grew 3 per cent sequentially, although domestic subscription revenue was flat at Rs 54 crore.
• Margins fell almost 120 basis points because of higher transmission and programming costs. But despite the higher spend, programming continues to be an issue for the company.
• Programming costs went up by 36 per cent to Rs 152.1 crore over the same quarter last year. Analysts attribute this to the cost of acquiring rights of movies, which account for a sizeable portion of its viewership.
• Interest expenses fell significantly by 46.38 per cent from Rs 22.68 crore last year.

Analysts say apart from a handful of programmes, Zee TV does not figure among the top 100 watched shows in the country.

Besides, most of Zee's rated programmes are Hindi movies, which do not have repeat value. On the other hand, the company's nearest competitor, Sony, has been doing much better since the launch of Jassi Jaisi Koi Nahin in September 2003.

Given the uncertainty surrounding CAS and the relatively low viewership, analysts feel that the stock is not cheap at Rs 151.45 as it now trades at 21 times expected FY04 earnings.

ITC
Pick-up in volumes enhances earnings

ITC's results for the December quarter were in line with expectations - with sales growing 10.62 per cent in the quarter.

Gross revenues of the cigarettes business increased 6.8 per cent, higher than the 3.7 per cent growth in the first half.

In the absence of price increases after April, this points out to a strong pick up in volumes. EBIT margins of the division improved 50 basis points, thanks to the price increases made earlier in the year.

• The company's other businesses - branded garments, greeting cards, stationery and gifts and packaged food - together grew revenues by 139 per cent last quarter and accounted for a fourth of incremental revenues.
• Revenues of ITC's hotels were boosted by the upturn in tourist arrivals. Business grew 31 per cent and EBIT margins jumped 540 basis points, leading to a 98.4 per cent jump in the segment's earnings.

Analysts feel that the picking up of rural incomes post-monsoons may see many potential consumers (currently bidi users) turn into actual consumers; this should help the company maintain the growth in cigarette sales.

They do not see much threat from the recent entry of Marlboro in the Indian market since the 'king size' segment accounts for only 6-7 per cent of its cigarette sales. The ITC stock now trades at 16 times FY04 earnings, still at a discount to peers in the FMCG sector.

A favourable hearing in the dispute relating to luxury taxes, for which the company has made a provision of Rs 1,260 crore, would trigger a rerating in the stock as it would not only result in a huge write-back, but also cause the company to increase its dividend payout considerably, they say.