Alfa Laval: In a bind

Cost overuns in some long-term projects cost Alfa Laval dear

Alfa Laval India has reported disappointing results for the December 2005 quarter with operating profit falling 47 per cent y-o-y to Rs 14.1 crore, which is surprising as other engineering stocks have performed rather well.

Operating profit has fallen despite net sales expanding 8.95 per cent y-o-y to Rs 167.9 crore. Obviously, operating profit margin slipped 885 basis points y-o-y to 8.39 per cent in the December quarter.

The company attributes this drop in operating profit to cost overruns it faced in some long-term projects that are being implemented.

Also, pressure on operating margins was owing to higher raw material costs, which went up 1,125 basis points y-o-y to 73.49 per cent as a percentage of net sales in the December quarter.

The rise in raw material costs is owing to higher cost incurred on non-ferrous metals and for inputs utilising stainless steel, say analysts.

The Alfa Laval stock has lagged the broader markets over the past three months "" it has gained about 12 per cent compared with 18.1 per cent rise in the Sensex.

Although, not strictly comparable, the company saw its operating profit margin slip 370 basis points y-o-y to 16.67 per cent in CY05.

The company's key process technology division, whose clients are in the distillery, brewery and chemical business, reported a fall in segment profit for the December 2005 quarter.

However, the current upturn in the domestic capex cycle was evident, with this division reporting an improved segment profit on a y-o-y basis.

The company is planning to expand its capacities over two to three years. The stock fell 6 per cent after the result was announced. With this performance, the stock does appear stiff at a trailing P/E of 28.

Thomas Cook: Travel woes

Thomas Cook India has reported lacklustre results for the quarter ended January 31, 2006. Consolidated operating profit margin fell almost 165 basis points y-o-y to 32.46 per cent in the last quarter, despite operating profit growing 4.6 per cent to Rs 12.23 crore.

The pressure on margins has been owing to a rise in staff costs, which seems inevitable given the current travel boom. Also, the company's travel packages in the rest-of-the-world segment have reported a decline in profits.

The demand for company's packages for East Asia were affected in the latter half of January 2005 quarter owing to the Tsunami effect.

Nevertheless, a revival in profitability in this segment was elusive in the January 2006 quarter, given the strong competition in this segment. Segment profit of the rest-of-the-world segment fell 35.4 per cent y-o-y to Rs 1.46 crore in the quarter.

But the company's domestic travel business has shown yet another strong quarterly performance. As a result, its travel and related services business, could report a 4.3 per cent growth in segment profit to Rs 10.7 crore in the January quarter.

Meanwhile, the company was able to grow its segment profit in the financial services segment by 9.8 per cent y-o-y to Rs 5.84 crore in the January 2006 quarter despite severe competition in the travellers' cheques segment.

Earlier, the Dubai Financial LLC had acquired a 60 per cent stake in the company and made an open offer to domestic shareholders at Rs 619.45. The stock currently trades at Rs 590 levels or about 30.4 times trailing 12 month earnings.

Wyeth: Shareholders' Victory

Wyeth's recent decision to revoke its planned Indian launch of its product Prevenar, a pneumococcal vaccine to combat meningitis and blood infections, through a wholly owned subsidiary, reflects the benefits of shareholder activism.

When Wyeth USA set up a wholly owned subsidiary, the market took it gracefully, but when it transferred marketing rights on Prevenar to this subsidiary in mid-February from the listed entity, the stock collapsed about 25 per cent.

Prevenar grosses revenues of over $1 billion globally, and the marketing rights for India were transferred for Rs 22.6 crore.

Shareholders took up the fight that it is not possible to know what sales Prevenar can deliver in India, and found the company backing off from its earlier statement of introducing the drug through the listed subsidiary. Of course, they also found the valuation of transfer low.

Clearly, this decision serves as a precedent for other MNC pharmaceutical companies which have set up or planning to set up a 100 per cent subsidiary, in addition, to their listed arm.

Also Wyeth's decision, offers an opportunity to domestic investors to participate in growth aopportunities in the medium term via products launched from the parent's global portfolio in the Indian market.

While Wyeth's decision to reverse the decision merits appreciation, it still raises the question on what the parent would have done had it owned more than the current 51.12 per cent in the listed company.