ACC: On firm ground

Better price realisations add sheen to ACC March numbers

ACC has once again reported impressive quarterly results thanks to buoyant price realisations on a y-o-y basis. As a result, standalone operating profit grew 55.3 per cent y-o-y to Rs 507.1 crore in the March 2007 quarter compared with 24.8 per cent growth in net sales to Rs 1674.8 crore.

Operating profit margin also improved 600 basis points y-o-y to 30.3 per cent in the last quarter. The stock, however, fell 3.5 per cent to Rs 788 on Thursday, and that was attributed largely to profit booking on the Street.

In the December 2006 quarter too, operating profit margin surged 1410 basis points y-o-y to 29.4 per cent. The company's cement despatches were 4.88 million tonne in the March 2007 quarter compared with 4.93 million tonne in the year-ago period.

The company's realisations were estimated at Rs 3,317 a tonne in Q1 CY07 compared with Rs 2,616 a year earlier. Earlier, mid-sized cement player Prism Cement reported 14.8 per cent y-o-y growth in realisations to Rs 3,365 a tonne in the last quarter.

The underlying concern for cement stocks is the industry's earlier decision to hold prices for a year. As a result, in the past three months the stock has declined 28.7 per cent compared with the 4 per cent fall in the Sensex.

Meanwhile, ACC's expansion of capacity at Lakheri, along with a new 25 MW captive power plant commenced trial production. Also, the projects for augmentation of grinding capacities at Kymore, Sindri and Wadi are in progress. The stock is fairly valued at 13 times estimated CY07 earnings.

MRF: Hike factor

MRF was able to report an improved performance in the March 2007 quarter, despite higher prices of rubber on a y-o-y basis.

The company's operating profit grew 84.2 per cent y-o-y to Rs 101.3 crore in the last quarter compared with 23.2 per cent growth in net sales to Rs 1083.5 crore. Operating profit margins also improved 300 basis points y-o-y to 9.3 per cent in the last quarter.

Spot rubber prices in the last quarter averaged Rs 95 a kg levels compared with an average price of Rs 78.4 a kg in Q4 FY06, say analysts. To the company's credit, its adjusted raw material costs as a percentage of net sales remained more or less flat on a y-o-y basis points at 70 per cent in the last quarter.

Also, analysts highlight that tyre companies have hiked prices twice over the last three to four months, which helped offset higher input costs. The stock gained 6.1 per cent to Rs 3626 on Thursday and it discounts the year ended September 2006 earnings by 19 times.

Biocon: Research, licensing fee boost

Biocon's consolidated top line improved by 25 per cent in FY07, owing to 63 per cent growth in its contract research and licensing fees.

However, operating profit grew slightly slower at 23.6 per cent, owing to 50 per cent increase in staff costs and other expenses. Operating profit margin declined by 36 basis points to 28.7 per cent.

But the market was not pleased with the results-analysts were expecting an improvement in margins""and the stock declined 2.6 per cent to Rs 509 on Thursday.

Biopharmaceuticals sales grew by 21 per cent helped by statin sales in the US. Low-margin enzymes now contribute less than 10 per cent of revenues.

Of the Rs 163 crore that Biocon made by way of contract research and licensing fees, about Rs 140 crore came from its Syngene and Clinigene businesses, while the rest came from licensing.

In March 2007, Syngene also signed a deal with Bristol-Myers Squibb to set up a dedicated research centre, which will staff 400 scientists over two years.

The company also has a presence in branded formulations in diabetes and oncology with Insugen (insulin) and Biomab (treatment for tumour), and has now entered the nephrology segment recently.

In the diabetes segment, its licensing partner, Bentley, has government approval to start Phase II clinical evaluation of intra-nasal insulin, which Biocon will develop and market in India.

Its success in branded formulations space, performance in regulated markets and the ability to improve revenues from the contract research segment will be key, as there is no pricing power in statins.

All these businesses will take a couple of years to start yielding significant results. Also, R&D costs are going to be at 6-8 per cent of sales (3.9 per cent in FY07), which would dent margins to an extent. With the stock trading at 20 times FY08 earnings, the upside is limited.