Firstsource: Sky high

The company trades at higher valuations - 4.1 times its FY07 revenues and nearly 20 times operating profit.

The Firstsource stock gained 10 per cent on Monday after it announced the acquisition of the $99-million MedAssist, USA, for an attractive price.

At an acquisition price of $330 million, MedAssist is valued at 3.33 times CY06 revenues and about 14.5 times operating profit. Firstsource trades at higher valuations""4.1 times its FY07 revenues and nearly 20 times operating profit.

The acquisition is good even in terms of business as it will lower Firstsource's dependence on the BFSI (banking, financial services and insurance) segment, which at Rs 423 crore, accounted for over half its FY07 revenues. Healthcare accounted for just 9 per cent of its revenues and will now become the second largest contributor to revenues.

The funding for this purchase will be met partially through foreign currency debt of $275 million, which will take the company's debt-equity ratio to 1:1, which should not be difficult to service. The rest of the funding will come through internal accruals.

The Firstsource management will be able to leverage its BPO services and relations across its business, which is focused on the insurance side, while MedAssist is on the hospital side.

MedAssist is growing at 12 per cent a year, and enjoys margins of 22-24 per cent. The US healthcare business is facing margin pressures, and companies are looking at saving costs through BPO services of both firms.

In the June 2007 quarter, Firstsource's revenues and operating profit remained flat sequentially at Rs 270 crore and Rs 55.2 crore respectively.

This is impressive because during the quarter, the rupee appreciated, Firstsource effected salary hikes and its BFSI revenues were lower q-o-q as its collections business peaks in Q4, and fall in Q1. Also, the operating margin improved 30 basis points to 20.4 per cent, despite the dollar depreciation and salary hikes.

Analysts estimate this acquisition to increase Firstsource's FY09 earnings by about 8 per cent. Its core business is expected to grow at 35-40 per cent as well. At Rs 79.50, the stock trades at about 15 times FY09 earnings, which is not expensive.

Exide: Charged up

Exide Industries' Rs 150 crore rights issue premium of Rs 29 is at a steep discount to the current market price of Rs 59, and in that sense very attractively priced. But the rights ratio could have been more favourable.

It appears that the management doesn't want to dilute the equity too much. So at 1:15, the effective discount, if one considers the ex-rights average price of Rs 57, is less than 4 per cent. What will happen is that the stock will become slightly more liquid.

Nonetheless, India's largest producer of lead acid storage batteries, which caters both to the automotive and the industrial segments, has potential for growth. First, there's reasonably good growth expected for the automobile sector and Exide already sells to OEMs such as Maruti, Mahindra & Mahindra and Tata Motors.

Apart from demand for new cars, the replacement market also provides an opportunity for the company with car batteries being replaced every four-five years on an average.

Margins are higher in the replacement market and a larger exposure to this segment should boost Exide's operating margin, which stood at 19.7 per cent in Q1FY08.

The company's top line should grow at around 25-30 per cent over the next few years and unless lead prices see very high increases, the earnings growth could also be in the region of 25-30 per cent. At the current price,the stock trades at 19 times estimated FY08 earnings and 14 times FY09 earnings and is reasonably valued.

Tata Steel: Consolidated profit surges

Tata Steel reported its June 2007 consolidated results including the performance of its recent acquisition of UK-based Corus for the first time. In addition, the company's consolidated results include other international operations such as NatSteel and Tata Steel (Thailand).

The company's consolidated operating profit surged 186.5 per cent y-o-y to Rs 4,904.33 crore in the last quarter, while its net sales expanded 442 per cent to Rs 31,154.56 crore. However, the results are clearly not comparable with the corresponding period of the previous year, given the inclusion of Corus results only in Q1 FY08.

Nevertheless, the merged entity's operating profit margin declined a whopping 1,410 basis points y-o-y to 15.74 per cent in Q1 FY08. In contrast, in late July 2007, the company had reported its standalone operating profit margin was steady at 40.5 per cent on a y-o-y basis.

Meanwhile, in its consolidated results, Tata Steel saw its interest costs surge 1511 per cent y-o-y to Rs 892.08 crore in Q1 FY08, as its borrowing costs surged due to nearly $7.2 billion of loans raised to fund the takeover of Corus Group.

In addition, the company had to grapple with increased depreciation in the last quarter, which resulted in its consolidated profit before tax and exceptional items rising at a comparatively slower pace of 110.8 per cent y-o-y to Rs 3,156.6 crore in the last quarter.

The stock surged 6.4 per cent to Rs 660 on Wednesday and it discounts FY08 consolidated earnings by 9.5 times.

With contributions from Shobhana Subramanian and Amriteshwar Mathur