Cut in time

The customs duty cuts signal higher growth, continuing reforms

All those who were predicting that reforms would be at a standstill in an election year have been proved wrong, with duties being slashed across the board. The reductions have been timed right, considering the buoyancy in the economy.

While the precise implications of the duty cuts will vary across industries, even those industries which face increased competition as a result of the duty cuts are currently better equipped to face it as a result of the resurgent economy.

In industries such as steel and petrochemicals, for example, demand is so high that these reductions in duty will hardly affect them. On the other hand, input costs will come down across the board, while consumer demand should also increase.

The duty reductions and the proof of ongoing commitment to reform (which will also go down very well with FIIs) should have a positive overall impact on India Inc and on the stock market.

At the macro level, the buoyant economy will mean higher tax receipts for the government, and the lower costs will result in higher profits and taxes, offsetting the lower customs duties.

Lower input costs will also lower inflation, which has been going up on the back of higher fuel and commodity prices. That should help the bond market. Lower import duties may also spur imports, helping to offset the build-up of forex reserves.

Telecom to aid Hughes Soft

Hughes Software sprung a positive surprise when it announced a 13.53 per cent sequential rise in revenues and a 41.42 per cent jump in net profit. The stock jumped 8.8 per cent, as a result, to Rs 601.

Compared to its lows earlier in the year, the stock has now jumped 460 per cent, making it among the highest gainers in the infotech sector.

According to analysts' estimates for FY05, the stock trades at around 19 times FY05 earnings. At the rate the market is going currently, that would be seen as hardly expensive, since expected growth in earnings is much higher.

Last quarter's performance was driven by a 15.5 per cent sequential jump in the non-Hughes Network Systems (HNS) side of the services business.

Much of the improvement is because the company's top customers have been ramping up - Lucent Technologies has given a new contract in the 3G area. Nokia has delivered two new contracts and Alcatel doubled its outsourcing to Hughes last quarter.

The HNS business saw a decent sequential growth after several quarters of flat to negative growth. But this was partly on account of a one-time royalty payment on the Spaceway project.

This project will now be billed on a 'time and material' basis, which means the performance may not be sustained. The 480 basis points jump in operating margin was also partly because of the royalty payment.

In summary, last quarter's performance may not be sustained but the company's expertise in telecom is expected to result in higher than industry growth, going forward.

Testing times for MphasiS

MphasiS BFL reported a 3.99 per cent sequential increase in revenues, which was much lower than the 9.76 per cent rise in the September quarter.

Growth in both IT services and BPO (MsourcE) businesses were lower compared with the September quarter, but between the two, the performance of MsourcE was relatively better.

It accounted for 62 per cent of incremental revenues and 96 per cent of incremental profit before taxes. Also, MsourcE managed a 10.14 per cent operating margin last quarter compared with just 4.33 per cent in the September quarter.

The management says the drop in MsourcE's revenues growth last quarter was because of an effort to focus on profitable growth. Now, in order to meet its guidance of doubling revenues in FY04, MsourcE needs to clock a growth of 17 per cent in the March quarter (growth last quarter was less than 8 per cent).

Will the company be able to go back to double-digit growth rates while maintaining operating margin at current levels?

The IT services business had a rough quarter, with gross margins falling over 600 basis points, leading to a 14 per cent fall in gross profit. The reason: the company increased its bench strength substantially to meet the strong pipeline of business in the next quarter.

This led to a drop in utilisation from 75 per cent in Q2 to 71 per cent last quarter. The management has decided to reduce its dependence on project-based work and focus more on maintenance work to reduce volatility.

Once this falls in place, the firm will be better placed to take advantage of the pick up in IT services demand. But as of now, the volatility of the IT services division and the lower-than-expected revenue growth in the BPO business has resulted in a 1.6 per cent decline in the firm's stock price on a day when the markets were euphoric.

Booster shot for Reliance

Reliance's acquisition of the petrochemicals and plastics products of Nocil could not have come at a better time. The petrochemicals sector is on a cyclical uptrend and prices of polymer products have rallied sharply.

While domestic demand has risen, exports to East Asia especially to China are booming. One analyst mentions how authorities in the Olympic city - Beijing"" have mandated that all residents should ensure that their window panes use only plastic.

It will make sense, therefore, for RIL to leverage Nocil's 60, 000 tonnes polyethylene capacity to meet the surging demand in East Asia. Also costs to transport the products to East Asia will be economical, since Nocil's operations are located close to JNPT.

Analysts said RIL could substantially boost its polymer production in 10-15 months, by investing Rs 50-75 crore to upgrade Nocil's 80, 000 tonne ethylene cracker to world standards.

Alternatively, a gas-based ethylene cracker could be set up at the 400 acre plot that Nocil has on lease. And since the petrochemical cycle is expected to remain strong until FY07, making optimum use of Nocil's facilities could be a cost effective way for RIL to meet surging demand.

Said a senior RIL official, "Nocil is of strategic significance to RIL and we are evaluating how to bring the existing facilities to global competitiveness." While bulls on Dalal Street greeted the development enthusiastically, analysts pointed out that the financial benefits to RIL will accrue possibly from FY05 earnings.

Analysts also pointed out that there exists a possibility that RIL could use Nocil's 400-acre plot located adjacent to sister concern Reliance Infocomm, for the expansion needs of the telecom major.

With contributions byMobis Philipose and Amritheswar Mathur