Hexaware: Future tense

PeopleSoft's takeover is not a positive for Hexaware

One of the risks for the high-flying Hexaware Technologies stock was the possibility of Oracle taking over PeopleSoft.

After all, it got almost a third of its revenues from the PeopleSoft practice, at least part of which will be impacted because of a change in ownership at PeopleSoft.

Rather surprisingly, the Hexaware stock jumped almost 5 per cent after the company issued a statement that the takeover was a positive development.

But it's difficult to fathom how the development could be positive. About 10-12 per cent of Hexaware's revenues currently comes from a dedicated centre (India Solutions Centre or ISC) which develops product enhancements for PeopleSoft.

Oracle, too, has a development centre in the country, and it's not clear whether it would want two separate development centres.

Rusi Brij, CEO of Hexaware summed up the uncertainty well in an earlier interview, "If Oracle acquires PeopleSoft, what will happen to ISC, I do not know."

Besides, over 20 per cent of Hexaware's revenues come from implementing PeopleSoft software applications. Oracle has said that it will continue to service existing PeopleSoft customers and would continue with product improvements. This would help the maintenance and annuity kind of business done by Hexaware and other partners of PeopleSoft.

However, to avoid confusion in the market place, Oracle has decided not to actively market Peoplesoft products. This would close an important growth avenue (in the form of new license sales) for Hexaware, which was among the bigger beneficiaries of PeopleSoft implementation because of its long relationship and experience with the product.

Currently, although the company is an Oracle partner, it does not enjoy as strong a relationship. One positive is that there could be a surge in the signing of PeopleSoft maintenance contracts (because of uncertainty going forward). But on the whole, the takeover is anything but positive.

Indoco Remedies

With mid-cap pharmaceutical stocks currently in vogue, Indoco Remedies has decided to cash in on investor appetite for these stocks. It is offering equity shares at a price band of Rs 220-Rs 240 a share.

The issue size is Rs 66 crore (assuming the lower price band) and investors would get the shares at a trailing 12-month P/E of 9.1.

For the year ended June 30, 2004, Indoco derived 88 per cent of its sales from manufacturing and the rest from marketing medication in segments such as diabetes, gynaecology and opthalmology.

The company will use the funds raised for financing a plant to manufacture active pharmaceutical ingredients, repayment of loans and for meeting the costs for a plant being set up by its subsidiary to manufacture products such as ointments and toothpaste. The subsidiary, incidentally, had no operations in 2004.

The company's net profit before extra-ordinary items grew 45 per cent to Rs 21.26 crore for the year ended 30th June, 2004 aided by net sales, which rose 22.5 per cent to Rs 156.68 crore. Operating profit grew 42.66 per cent to Rs 31.17 crore. The company has grown through acquisitions, the last one being in FY04.

However, the company has no prior experience in manufacturing APIs, but has been marketing APIs made by its group company. And while the management points out that they will be working with several large generic players in a bid to curb marketing costs overseas, margins are not expected to be high given tough US FDA regulations.

The attraction for investors lies in the possibility of earning a large listing premium because of the current frenzy in mid-cap stocks, especially those from the pharma sector.

Industrial output: the magic has just begun

Industrial production surged in October, with the index of industrial production (IIP) hitting multi-year highs. More importantly, the index for manufacturing was up 11.3 per cent.

A look at the table shows a slow but steady rise in the manufacturing index from May, with the big jumps occurring in September and October. It could be argued, as some have done, that this jump reflects growth in the festive season.

But then this is year-on-year growth, and festivals occurred last year as well. The big question is""""are the rising numbers suggesting that a growth momentum is building up in manufacturing, a momentum that would lead to sustained double-digit growth as had happened in the mid-nineties?

One encouraging sign is that the index of "Machinery and equipment other than transport equipment" was up 21 per cent in October, above its September growth rate of 19.8 per cent.

But it's still well below its August growth rate of 26.3 per cent or its July rate of 30.2 per cent. Also, one reason for the jump in the manufacturing index in October was the low base in the previous year.

November and December last year, however, were months in which the manufacturing index saw a sharp rise.

Nevertheless, bankers say that although there are hundreds of thousands of crores worth of capex in the pipeline, it's going to take six to 18 months to get them started.

If that is correct, October's double digit rise in the IIP is only the beginning.

With contributions from Mobis Philipose and Amriteshwar Mathur