Tata Motors, BHEL, Grasim result analysis

QUARTERLY RESULT ANALYSIS: June 2004

TATA MOTORS
Other income enhances PAT

Tata Motors' PAT grew 122.67 per cent to Rs 223.36 crore, on the back of a 42.82 per cent growth in net sales in the June quarter. The company outperformed industry growth rates in both the commercial and passenger vehicles segments, thanks to attractive interest rates and continued availability of freight.

PAT was buoyed by a 293.14 per cent growth in other income and a 22.7 per cent saving in interest outgo. However, operating margins slipped 123 basis points, mainly due to higher raw material prices and other expenses. 

Tata Motors
(Rs crore)	Q1 FY05	Q1 FY04	% change
Net sales	3574.08	2502.44	42.82
Other income	41.24	10.49	293.14
Operating profit	429.44	331.57	29.52
OPM (%)	12.02	13.25	-
Net profit	223.36	100.31	122.67
Net margin (%)	6.25	4.01	-
EPS (Rs)	4.44	8.19	-
Trailing 12-month EPS			26.08
Price-earnings ratio			16.23

• CV sales volumes grew 49.67 per cent to 39877 units while the company's marketshare in the segment climbed to 59.6 per cent from 57.1 per cent. CV exports more than doubled to 3,275 units in the quarter.
• The combined sales of passenger vehicles and UVs reported robust growth, climbing 35.4 per cent to 4,0781 units. Sales of passenger vehicle alone spurted 30 per cent with the company's marketshare in the segment rising to 17.4 per cent from 15.5 per cent.
• Total expenses increased 44.8 per cent to Rs 3,144.64 crore, led by a 69 per cent increase in raw material costs which rose to 72.2 per cent as a percentage of sales from 61 per cent.
• Product development expenses rose 132.6 per cent to Rs 26.6 crore as the company has been developing new product platforms.

The stock is currently trading at Rs 423.30 at a P/E of 16.23. Analysts say the acquisition of Daewoo's CV division and aggressive capacity expansion plans in the passenger-car segment point to the robust long-term prospects of the company. However, they warn of certain near-term concerns such as interest rate hikes and inadequate monsoons.

Besides, an expected rise in exports may not be good news for margins as exports are believed to be a low-margin game. Analysts peg an EPS of Rs 41.7 for FY05.

BHEL
Sales growth lifts operating profits

Bhel reported its first-quarter results in line with analysts' expectations. Operating profits increased 87.40 per cent to Rs 118.36 crore, driven by a 13.18 per cent growth in net sales to Rs 1,275.58 crore. Margins, however, posted a minuscule rise to 0.09 per cent from 0.05 per cent.

• The company's power segment registered a 10.07 per cent growth in revenues to Rs 91.42 crore. However, the segment's contribution to total income fell almost 250 basis points to 67.3 per cent.
• Revenues from the industrial segment rose 22.65 per cent to Rs 426.82 crore while the segment's share in total revenues increased around 220 basis points to 31.5 per cent.
• While other income displayed an impressive increase of 32.01 per cent to Rs 78.6 crore, its share in total revenues remained constant at about 5 per cent.
• Bhel's order-book position improved to 70.7 per cent. The outstanding order-book position at the quarter stood at Rs 28,000 crore compared with Rs 16,400 crore.

With the opening up of the power sector, the company has gained in terms of an increase in demand for equipment. Going forward, analysts expect an EPS of about Rs 30 for FY05. Currently, given a price of Rs 544.65, the stock trades at a P/E multiple of 18.1 times its FY05 earnings.

BHARAT FORGE
Rise in raw material costs squeezes margins

Bharat Forge's first-quarter results were in line with analysts' expectations. Though operating profits recorded an increase of 26.21 per cent to Rs 73.20 crore, operating margins were under pressure, owing to a significant rise in raw material costs. Margins shrank over 250 basis points to 28.05 per cent. Net profits registered a 29.23 per cent increase to Rs 34 crore while net margins remained flat at 13 per cent.

• Total income (net sales plus other income) recorded an increase of 37.6 per cent to Rs 260.95 crore while expenses registered an even greater rise of 42.7 per cent to Rs 187.75 crore. Raw material costs as a percentage of total income went up to 44 per cent from 36.3 per cent.
• Export revenues jumped 20 per cent to Rs 95.4 crore. However, the share of exports in total income fell 550 basis points to 36.5 per cent due to the sluggish US CV market. Of total exports, US customers accounted for 48 per cent, Europe 30 per cent and Asia (excluding India) 22 per cent.
• Owing to buoyant demand within the country, especially for commercial vehicles, domestic sales vaulted 52 per cent to Rs 161.35 crore. The share of domestic sales in total income consequently went up to 62 per cent from 56 per cent.

For the year ahead, the outlook for the domestic market remains healthy since most of the company's clients (including Tata Motors, Eicher Motors and M&M) have indicated enduring growth numbers. Margins may stabilise due to price hikes and economies of scale which will compensate for rising raw material costs.

Going forward, analysts expect an EPS of Rs 45. Given the price of Rs 681.25, the stock currently trades at a P/E multiple of 15.13 times its FY05 earnings.

RANBAXY
Rupee appreciation hits net

Ranbaxy Laboratories posted a 6.04 per cent decline in net profit at Rs 184.95 crore compared with Rs 196.78 crore. However, net sales went up 9.65 per cent to Rs 881.67 crore from Rs 804.07 crore. Analysts attributed the drop in net profit to the declining sales of antibiotic Cefuroxime Axetil in the US market as well as the appreciation of the rupee vis-à-vis the US dollar in the past quarter.

• Sales from overseas markets grew 19 per cent and accounted for 76 per cent of total sales. Sales of higher-value-added dosage forms in overseas markets, which constitute 68 per cent of global sales, spurted 20 per cent.
• For the second quarter, Ranbaxy's US operations generated sales of $92 million - a decline of 9 per cent - mainly due to lower sales of Cefuroxime Axetil. Excluding the effect of Cefuroxime Axetil, US sales rose 34 per cent.
• Ranbaxy's operations in Europe grew 77 per cent to $43 million. This was driven by markets like Germany, France and Poland which accounted for 81 per cent of the company's European sales.
• Operating and net margins were down to 24 per cent (26.38 per cent) and 20.97 per cent (24.47 per cent) respectively.

Ranbaxy, with its broad portfolio of markets, business segments and products, is well positioned to post an earnings growth of 20 per cent over the next five years, say analysts. It is expected to have additional earning upsides if it wins any of its patent challenges in the US.

Analysts say Ranbaxy is well positioned to gain from likely patent expirations over the next three years, particularly in the US and Europe. However, there are risks from competition in generics and a delay in product approvals. The scrip is trading at Rs 952 levels at a P/E of 27x and is considered one of the best picks from the pharma sector.

ITC
Cigarette business leads topline growth

ITC posted robust topline growth in the June quarter, led by its core cigarette business. Revenues grew 24.22 per cent to Rs 1,774.96 crore while PAT grew 16.31 per cent to Rs 461.99 crore. However, a huge rise in expenditure saw operating margins slip over 350 basis points.

• Cigarette sales grew 10.79 per cent to Rs 2,538.28 crore while revenues from the company's agri business were up a strong 38.62 per cent. However, EBIT margins in the agri business segment witnessed a 160 basis point dip as a percentage of revenues.
• The company's FMCG sales saw a 103.68 per cent jump while its hotels and paper businesses grew 24.7 per cent and 27.6 per cent respectively. EBIT margins of the hotels business as a percentage of revenues witnessed a strong improvement to 12.15 per cent from 1.72 per cent, thanks to the upturn in the industry's occupancy rate.
• The contribution of the tobacco business to overall revenues came down to 77.06 per cent from 81.45 per cent.
• Raw material costs rose 41.29 per cent (an increase of 432 basis points as a percentage of sales). Other expenses rose 25 per cent.

The stock trades at Rs 1034.60 at a P/E of 16.09. Analysts say not too much should be read into the buoyancy in the agri business as it could fluctuate with the vagaries of the monsoon. However, the growth in the company's other businesses is a strong positive. This, along with the lessening proportion of revenues from the tobacco business, augurs well for the company, say analysts. They peg an EPS of Rs 64.3 for FY05.

PNB
Rise in other income hoists profit

Punjab National Bank's operating profit was up 34.68 per cent to Rs 800.99 crore on the back of a 59.2 per cent rise in other income to Rs 449.85 crore in Q1 FY05, even as most banks declared lower other incomes. Operating margins rose 475 basis points to 32.11 per cent. Analysts point out that the bank has been aggressive in churning its portfolio which has resulted in timely gains.

• Net interest income surged 13.12 per cent to Rs 935.60 crore.
• Net NPAs plummeted over 350 basis points to 0.55 per cent. Provision for NPAs declined 18 per cent to Rs 167.64 crore.
• Advances grew 24.3 per cent to Rs 47,324 crore while deposits rose 25.3 per cent to Rs 91,203 crore.
• Net profit surged only 28.17 per cent, mainly due to a 39.4 per cent rise in provisions to Rs 478.32 crore.

Analysts are positive about the bank's performance going forward though they say there may be a dip in treasury gains due to a possible hike in interest rates. The bank has been able to provide for its NPAs due to profit growth. Analysts expect an EPS of Rs 50-52 for FY05. Given the price of Rs 267.4, the stock trades at a P/E multiple of 5.2 times its FY05 earnings.

GUJARAT AMBUJA CEMENT
Cost efficiencies lead to higher profitability

Gujarat Ambuja Cements reported a 49.55 per cent increase in net profit for Q4 FY04 to Rs 117.20 crore against Rs 78.37 crore for the corresponding quarter of the previous fiscal. Net sales rose 26.47 per cent to Rs 595.14 crore compared with Rs 470.58 crore. The higher profitability has come on the back of improved price realisations and cost efficiencies.

• Total expenditure increased 19.30 per cent to Rs 404.35 crore.
• Operating margins improved to 32.05 per cent from 28 per cent, while net margins rose to 19.69 per cent from 16.65 per cent.
• Cement prices remained low in the first half of FY04, primarily on account of the prolonged monsoon, which affected construction work. However, post-December 2003, there was a clear recovery in industry demand. This was accompanied by the improvement in price realisation as well. Overall price realisations for the year improved 6 per cent.
• Cement sales registered an increase of 6 per cent to 10.44 mt against 9.81 mt last year. Domestic sales rose 9 per cent to 8.72 mt from 7.98 mt last year while exports declined 6 per cent to 1.72 mt from 1.83 mt.
• The company's board has recommended an increased dividend of 80 per cent (including an interim dividend 50 per cent) against 70 per cent in the previous year.

The cement industry is expected to face better times going forward, in terms of both volumes and prices. It is expected that due to the increased impetus to the development of rural and urban infrastructure and the robust growth in the housing sector, demand for cement may rise about 6 per cent during the year.

Considering the company's leadership in western and northern regions, it is likely to benefit from higher demand, say analysts. The pricing situation is also expected to remain favourable for the company.

The stock, which is currently trading at Rs 266 levels (at a P/E of 16x), is considered a good medium-term buy. However, analysts point out that a poor monsoon and the company's lack of a pan-India presence are risks to watch out for.

GRASIM
Sponge iron division drives profit growth

Grasim Industries beat market expectations when it reported a 67.96 per cent increase in net profit for Q1 FY05 to Rs 219.17 crore, up from Rs 130.49 crore in Q1 FY04. Net sales rose 30.40 per cent to Rs 1,517.08 crore from Rs 1,163.42 crore. The better performance came on the back of a doubling of sales (97 per cent) of sponge iron and the robust growth in VSF and cement division sales.

• The firm trend in global steel prices helped Grasim double revenues from the sponge iron division. Despite higher input costs, profit margins in the segment increased to 44.60 per cent from 38.20 per cent.
• VSF production grew 52 per cent despite shutdown at the Harihar plant, while sales volume rose 24 per cent. The volume of cement sales grew 5 per cent, in line with industry growth.
• Operating margins improved to 28.35 per cent from 22.82 per cent.
• Interest costs declined 15.80 per cent to Rs 32.90 crore from Rs 39.10 crore.
• Grasim raised its stake in Ultra Tech Cem Co to 51 per cent following the successful completion of its open offer. The company funded the outflow of Rs 2,220 crore for acquiring the stake out of internal sources only.

According to analysts, the long-term outlook for margins in the cement and VSF divisions is positive, while the sponge iron division is expected to maintain its performance. Since this division has accounted for a large share of profits in the past few quarters, the company's overall margins are likely to remain at the current levels.

A favourable pricing environment and better demand are likely to elicit improved performance from the cement division, say analysts. Synergies from the L&T acquisition are likely to result in cost savings of Rs 100 crore. The stock, which currently trades at Rs 964 levels at a P/E of 11x, is considered to be a good long-term bet.

GLAXO SMITHKLINE
Adjustment for non-recurring income drags net

Glaxo SmithKline reported an 8.68 per cent drop in net profit to Rs 59.14 crore for the second quarter of 2004 compared with Rs 64.76 crore in the previous corresponding quarter. However, the company managed to post a marginal 3.80 per cent rise in net sales to Rs 311.29 crore, up from Rs 299.88 crore.

• Net profit dropped because of an adjustment for Rs 12.30 crore of non-recurring income due to the sale of the company's Bangalore factory in Q2 CY03. Otherwise, net profit would have risen by 13.10 per cent.
• Pharmaceutical sales grew 5.60 per cent to Rs 267.60 crore. The company's 'power brands', including augmentin, vaccines and the dermatology range, grew 25 per cent in Q2 CY04 in comparison with an 8 per cent growth witnessed in retail formulations market.
• Raw material costs as a percentage of sales decreased to 48.80 per cent, falling below the 50 per cent level for the first time in last six quarters. However, other expenses rose 1.40 per cent as more promotional spend was allocated for product launches.
• Operating margins were at 25.17 per cent, up from Q2 CY03 levels of 23.66 per cent. Net margins, however, dropped to 19 per cent from 21.60 per cent.

Analysts are confident that the company's ability to undertake initiatives to usher in topline growth through a combination of in-licensing, co-marketing tie-ups and sales will drive productivity.

The company is also taking steps to improve working capital requirements for businesses like veterinary formulations, feed supplements and laboratory equipment. At Rs 608 levels, the stock quotes 20x CY04E combined earnings and is considered to be a good pick.

ORIENTAL BANK OF COMMERCE
Fall in other income hits margins

Oriental Bank of Commerce (OBC) reported its first-quarter earnings with a fall in other income due to declining treasury gains.

• OBC's other income fell 42.78 per cent to Rs 99.82 crore, impacting operating profits which fell 9.46 per cent to Rs 313.91 crore. Consequently, operating margins fell around 250 basis points.
• Net interest income recorded an impressive growth of 17.15 per cent to Rs 377.22 crore. Interest income rose 6.31 per cent while interest expended fell a marginal 0.78 per cent to Rs 488.07 crore.
• The bank maintained zero per cent NPA levels in the quarter (NPAs for the previous corresponding quarter were 1.1 per cent). Gross NPAs registered a decline of 130 basis points to 6 per cent.
• Net profit stood higher at Rs 180.52 crore, an increase of 26.82 per cent, as there were no provisions for doubtful assets. Accordingly, net margins improved 430 basis points to 18.7 per cent.

The possible acquisition of Global Trust Bank (GTB) is expected to benefit OBC in terms of access to technology, customer base and reach. However, the bank may have to write off some of GTB's NPAs which may impact its results in the short-term.

But given OBC's zero NPA status, the impact wouldn't be significant. Analysts expect an EPS of Rs 40-42 for FY05. Given a price of Rs 239.30, the stock currently trades at a P/E multiple of 5.8 times its FY05 earnings.

NESTLE
Margins plummet as expenses mount

Nestle witnessed a marginal 0.31 per cent dip in revenue to Rs 544.39 crore. A sharp increase in expenditure without a corresponding uptick in sales saw operating margins plummet by over 600 basis points and result in a 36.12 per cent fall in the bottomline to Rs 42.78 crore.

Net margins fell 320 basis points over the year-ago period. Other income dropped 53.48 per cent to Rs 3.01 crore, adding to the company's woes. Lower availability of milk fat and a steep increase in milk solid prices also hit the company at the operating level.

• Nestle reported just over 3 per cent growth in domestic sales during the June quarter. According to the company, domestic sales have been impacted by a selective rationalisation of pipeline stocks.
• Almost all expenditure heads saw huge increases. Consumption of raw and packing material grew to 44.76 per cent of sales compared with 38.52 per cent. Similarly staff costs and other expenditure grew to 7.08 per cent and 32.21 per cent of sales respectively, compared with 6.72 per cent and 31.23 per cent of sales.
• Export business slumped significantly during the quarter. While export sales in volume terms increased 6.5 per cent, they declined by over 20 per cent in value terms, mainly due to the shift towards low realisation bulk coffee packs exported to Russia.

The results came in much below analysts' expectations (Nestle had remained largely immune to the slowdown that had hit the overall FMCG sector and had grown its domestic business by 12 per cent in a slow year like 2003). The stock trades at Rs 521.75, at a P/E of 22x.

Analysts say the decline in profitability may continue for the next few quarters at least. Nestle's good showing in the past had earned it premium valuations over its peers which may come under pressure if the recent trend continues.

However, analysts say the company's long-term prospects are buttressed by its strong product pipeline and urban-centric brands. They peg an EPS of Rs 28.6 for FY05.