Market indifferent to quarterly numbers

QUARTERLY RESULTS ANALYSIS: DECEMBER 2003

INDIAN HOTELS
Higher expenditure drags operating margin

Indian Hotels Company, owners of the Taj group of hotels, reported a 48.61 per cent increase in net profit to Rs 16.60 crore for the quarter on the back of increased other income (Rs 4.44 crore), and a substantial reduction in interest cost.

Reduction in interest expense was due to swaps, lower interest rates and interest on tax refund pertaining to earlier years. The improved sentiment in the tourism sector helped the company post a 13 per cent rise in total income to Rs 192.20 crore.

However, the company's operating margin was down to 11.11 per cent from 12.12 per cent, largely due to higher salary expenditure part of which is one-time in nature.

• The average room rate (ARR) rose 11 per cent to Rs 4,712 for the December quarter of FY04 compared to Rs 4,236 for the December quarter of FY03.
• Occupancy rates during the third quarter moved up to 72 per cent from 67 per cent.
• Total expenditure went up by 19.27 per cent to Rs 153.80 crore (Rs 128.95 crore), largely due to higher payroll costs which were up by Rs 12.40 crore. Of this, Rs 5.70 crore was a one-time performance bonus issued for the fiscal.
• Interest cost was down to Rs 5.42 crore (Rs 9.43 crore).
• The third-quarter occupancy rose to 59 per cent (48 per cent) in leisure division, to 73 per cent (71 per cent) in business division and to 75 per cent (71 per cent) in luxury hotels.
• Business unit-wise, the revenue split for the December quarter was luxury hotels - 80 per cent (77 per cent), business - 6 per cent (12 per cent), leisure - 11 per cent (9 per cent) and corporate - 3 per cent (2 per cent).

According to the company, future growth would be driven by a rise in ARR. At Rs 449.50, the Indian Hotels scrip trades a P/E of 42x on trailing 12-month EPS. With boom times expected for Indian tourism industry, the scrip is considered a good long-term prospect by analysts.

BHARTI TELE
Mobile business lifts operating profit

Bharti Tele-Ventures pulled an impressive act with excellent third-quarter results on the back of its mobile business. The company posted a net profit growth of 72.88 per cent sequentially at Rs 161.30 crore in the third quarter.

The company's operating profits grew 25.57 per cent as margins saw a substantial improvement to 37.26 per cent from 32.90 per cent.

The mobile business was the key driver for growth with customer base growing 19 per cent and the division contributing 67 per cent to operating profit (63 per cent in the last quarter).

• Revenue growth has been lower at 10.85 per cent on account of a decline in average monthly revenue per user (ARPU) by 5 per cent to Rs 519.
• The company has, however, leveraged its operational efficiencies with margins improving by 4.37 per cent to 37.26 per cent from 32.9 per cent.
• The company's mobile customer base is expanding at a commendable pace - the number of mobile subscribers grew 19 per cent in the third quarter to 5.5 million.
• Bharti's share in net additions to all-India mobile subscriber base reduced to 23.9 per cent in the current quarter from 27.5 per cent. This, however, is not of much concern since the growth in the all-India subscriber base is expected to rise at a faster pace.
• The company's other operations recorded the following growth rates sequentially - infotel operations grew 19 per cent to Rs 163 crore, fixed-line operations remained flat at Rs 44.6 crore and long distance, group data and enterprise service operations grew 28 per cent to Rs 118.4 crore.

The stage seems to be set for Bharti to surge ahead, with the unified licensing regime coming in. Also, price cuts in handsets and availability of lower-priced pre-paid cards will provide enough boost for the company to flourish.

One major concern is Reliance Infocomm offering pre-paid connections. Analysts expect earnings per share of Rs 2 for FY04 and Rs 4 for FY05. The stock is currently at levels of Rs 126 with a trailing 12-month P/E multiple of 56.9.

TATA POWER
Reduction in fuel costs, interest charges enhance net

Net profits of Tata Power recorded an increase of 26.39 per cent to Rs 184.49 crore in the third quarter, powered by a reduction in fuel costs and interest charges.

Sales realisations, however, dropped 10.49 per cent to Rs 1027.45 crore as a result of a change in fuel mix (which is a pass-through) combined with a lower offtake from the Mumbai region.

• Sales to BSES (Reliance Energy) were higher by 11 per cent at 861 million units in the quarter, while sales to Maharashtra State Electricity Board (MSEB) were lower by 58.75 per cent at 165 million units.
• Tata Power has increased its customer base by commencing sales to the Madhya Pradesh Electricity Board (MPEB) in December, 2003 (MPEB bought power worth Rs 10 crore in December).
• By changing its fuel mix in favour of coal, the company has been able to cut down a considerable amount of its fuel cost. Cost of fuel in the quarter decreased by 25.6 per cent to Rs 445.79 crore.
• Interest and finance charges also declined during the quarter by 32.5 per cent to Rs 57.02 crore, thanks to the company's debt restructuring. Loans to the extent of Rs 319 crore were pre-paid in the quarter.
• Operating margins improved significantly by 7.13 per cent in the third quarter (34.65 per cent from 27.52 per cent).

Analysts are concerned about the company's performance going forward since it faces stiff competition from BSES. BSES is also more likely to get the Delhi area which will impact Tata Power.

"We expect earnings per share of Rs 27 for FY04 and Rs 29 for FY05," says a power analyst with a domestic research house. The stock currently trades at a 12-month P/E multiple of 12.45 and the stock price stands at levels of Rs 384.

GRASIM INDUSTRIES
Surge in sponge iron business boosts results

Grasim Industries posted a 23.14 per cent jump in net profit at Rs 163.72 crore for the quarter. Net sales grew 14.47 per cent to Rs 1,335.40 crore for the quarter. A surge in the company's sponge iron business was mainly responsible for the impressive performance.

• The company's sponge iron division posted an increase in revenue of 43.56 per cent to Rs 157.59 crore compared to Rs 109.77 during the same period in the previous year.
• The fibre and pulp segment recorded a revenue of Rs 486.41 crore, a rise of 17.7 per cent, compared with Rs 413.12 crore in the corresponding period last year.
• Revenue from the company's cement division increased 7.47 per cent to Rs 586.23 crore, against Rs 545.46 crore in the corresponding quarter last year.
• The chemicals and textile divisions reported increases in revenues of 23.12 per cent (to Rs 83.76 crore) and 3 per cent (to Rs 57.08 per cent) respectively.
• Grasim's operating margin was down marginally to 23.88 per cent but net margin improved slightly to 12.26 per cent due to a 3 per cent dip in interest cost.

Grasim's ongoing business restructuring and cost reduction processes are expected to lead to better operational efficiency in the future, say analysts. At Rs 1,126.95, the scrip trades at a P/E of 21.48 on a trailing 12-month EPS.

TATA STEEL
Rise in prices enhances performance

Tata Steel reported a 60.64 per cent increase in net profit to Rs 447.17 crore. Net sales moved up by 18.95 per cent to Rs 2,632.03 crore. The good performance comes on the back of a sharp rise in steel prices in 2003, an increase in other income and a drop in interest cost.

• Domestic steel sales rose 21.36 per cent to Rs 2,611.33 crore, while the company's export turnover for the third quarter rose to Rs 356 crore from Rs 339 crore.
• Other income rose 117.76 per cent to Rs 26.24 crore (Rs 12.05 crore) in the third quarter. It earned a profit of Rs 8.33 crore by way of sale of Tata Infomedia shares. Interest dropped by 25.72 per cent to Rs 59.71 crore (Rs 80.39 crore).
• Tata Steel's operating profit went upto 39.57 per cent to Rs 880.45 crore. Operating margin was up from 28.51 last year to 33.45 in December 2003, while net margin improved to 16.99 from 12.58.
• Higher steel prices led to the improved results despite a marginal fall in steel production to 1.03 million tonnes from 1.04 million tonnes.
• The employee separation compensation during the quarter was lower at Rs 19.91 crore as compared to Rs 67.04 crore in December quarter, 2002, because of a change in accounting methods.

According to analysts, improved realisations, a better product mix and continued cost controls have been primarily responsible for the good performance of the company.

With demand expected to pick up on the back of a boom in construction activity as well as an upturn in the auto, consumer durables and auto ancillary sectors, the company is likely to benefit from the strong volume growth and higher prices. The scrip, which trades at Rs 425.75 - a P/E of 10x on a trailing 12-month EPS - is attractive at current levels, say analysts.

SATYAM COMPUTERS
Lower forex gains, salary hikes hit operating margin

Satyam Computers reported a double-digit sequential growth in revenues for the first time in 11 quarters, beating analysts' expectations that its revenue growth would be below Infosys and Wipro.

In the quarter, revenues grew 10.7 per cent sequentially to Rs 662.7 crore, thanks to a 12.1 per cent jump in volumes.

However, the company's net profit declined marginally to Rs 145.9 crore on a sequential basis on the twin impact of lower forex gains and salary hikes, which impacted operating margins.

• Satyam's largest client, GE, billed 15.7 per cent lower revenues in the quarter, but the company more than made up for this as business from the rest of its clients grew by over 16 per cent sequentially.
• Other income fell by 24.31 per cent sequentially to Rs 28.45 crore, mainly due to a sharp drop in forex gains.
• The company's revenues from package implementation jumped 25 per cent sequentially and accounted for 57 per cent of incremental revenues.
• Operating margin dropped 160 basis points in the quarter. The company attributed the drop to salary hikes (which covered 70 per cent of the workforce).
• Satyam added 29 new clients and 1,087 employees during the quarter.

The company raised its full-year earnings per share (EPS) forecast to Rs 17.77- 17.84. It expects its income from software services this fiscal at Rs 2511-2521 crore.

Meanwhile, for the fourth quarter, the company expects an EPS of Rs 4.58-4.65 and income from software operations at Rs 690-700 crore. Satyam trades at Rs 341.30 on the BSE at around 15 times FY05 estimates.

"Going forward, the improved performance is expected to continue and I would put an EPS target of 22.2 for FY05," says R Ravi, analyst at IDBI Capital.

RANBAXY
Fall in Cefuroxim axetil sales hits profits

Ranbaxy Laboratories, India's largest drug company, reported a 52.06 per cent drop in fourth-quarter net profit to Rs 102 crore in 2003 from Rs 212.70 crore in 2002.

Fourth-quarter sales fell 3.93 per cent to Rs 745.90 crore from Rs 776.40 crore. The fall in profit was mainly attributed to the decline in sales of top-selling Cefuroxim axetil.

However, a 52.98 per cent rise in other income (mainly by way of a share of the $6-million payment received in the fourth quarter of 2003 from Bayer for ciprofloxacin) limited the fall in net profits.

• The fall in sales and profit was mainly due to the decline in cefuroxim axetil sales in the US and the $20 million extra spending on research during the year.
• Cefuroxim axetil sales have declined to just $5 million in Q4 FY03 from $42 million in Q4 FY02. The company was forced to cut prices due to increased competition as a result of the expiry of Glaxo's patent.
• Ranbaxy's operating margin was down to 14.69 from 25.64 in 2002 while net margin came down to 13.67 against 27.40.
• During the December quarter, Ranbaxy registered a growth of 9.6 per cent compared to an industry growth of 7.9 per cent.
• For the whole year, the company posted sales of Rs 3,620.60 crore, up 25 per cent from Rs 2,889.4 crore in 2002.
• Ranbaxy's profit after tax for the year stood at Rs 7,83.70 crore, an increase of 26 per cent from Rs 623.60 crore in 2002.
• In 2003, Ranbaxy increased its R&D expenditure from Rs 197.70 crore to Rs 283 crore.
• Among developed markets, US and Europe accounted for 52 per cent of the company's global sales in 2003.

The company is planning to confront the fall in revenues by introducing new products in 2004, with the sales growth expected to be in the region of 17-20 per cent. At Rs 1030 levels, the scrip trades at a P/E of 21x on a 12-month trailing EPS. It is still worth a look, say analysts.

TATA MOTORS
Impressive sales growth

The automobile major posted impressive third-quarter results on the back of superb sales growth. Sales of vehicles (excluding exports and net of excise) increased by 54.88 per cent to Rs 3398.26 crore in the third quarter.

Exports as a percentage of sales increased from 3.5 per cent to 9.4 per cent and revenues from the same grew to Rs 320.10 crore ($70.65 million). Net profits, too, rose 178.54 per cent to Rs 210.88 crore in the third quarter.

• The company is increasing its focus on exports. Targeting markets like China and South-East Asian nations helped the company clock volumes growth of 392.6 per cent (7,651 in passenger and commercial vehicles).
• Operating margins grew from 13.08 per cent to 14.42 per cent, owing to benefits accruing from economies of scale.
• Net interest outgo reduced by 29.4 per cent to Rs 47.4 crore in the quarter due to the debt-restructuring undertaken by the company.
• Other income increased this quarter by 7833.33 per cent to Rs 16.66 crore with profit from sale of Tata Infomedia shares.

The company has completed its due-diligence of Daewoo Motors in Korea and the acquisition is expected to happen in the next few months.

This will increase the capacity of Tata Motors by an additional 20,000 (current capacity - 200,000). Analysts expect further volume growth in vehicles with economic conditions getting better (40 per cent in FY04).

The stock currently trades at a P/E ratio of 20.34 at price levels of Rs 416. "We expect an EPS of Rs 22 for FY04 and Rs 30.5 for FY05," says an auto analyst with a domestic brokerage.

WIPRO
IT services, BPO buoy revenues

Wipro reported impressive results wherein revenues grew 15.7 per cent sequentially to Rs 1562.14 crore, buoyed by a 11 per cent sequential rise in the IT services business and a 29 per cent jump in the BPO business. The company's net profit witnessed a sequential gain of 16.10 per cent to Rs 266.33 crore.

• Offshore pricing increased 2 per cent which was partly offset by a 2 per cent drop in average onsite billing rates.
• Wipro's forex gains slipped by 72 per cent to Rs 3.5 crore from Rs 12.32 crore in Q2.
• The company's technology infrastructure services grew by 17 per cent while its package implementation services grew by 14 per cent.
• A tight control on selling, general and administrative expenses saw it show a marginal growth of 1.5 per cent sequentially to Rs 149.8 crore.
• Gross margins declined by 30 basis points due to the impact of salary hikes taken earlier in the year.

Analysts expect Wipro's margins to improve in the fourth quarter. "Acquisition losses will go down and manpower utilisation will reach 73 per cent level," says an analyst with a leading brokerage. The stock trades at Rs 1719.95 on the BSE at 57x FY05 estimates.

"The outlook for Wipro seems to be positive on the back of a strong order book and rising client list and the EPS target for FY05 would be around 56. As far as the stock price is concerned, it does look a bit expensive, but the improving fundamentals in the Indian and US economy would work in its favour," he adds.