ITC Hotels: Reasonable recipe

The ITC-ITC Hotels swap ratio is fair to both parties

The ITC Hotels stock fell around 16 per cent to Rs 122 to adjust for the swap ratio set for its merger with ITC. That, however, does not mean ITC Hotels investors have got a raw deal.

ITC Hotels' share price was only correcting, as it had jumped 20 per cent to Rs 162 when its management said that it was considering a merger with ITC.

Based on the merger ratio and the closing prices of ITC and ITC Hotels on Wednesday, it turns out that the ITC Hotels scrip has been given a value of Rs 124.

This is close to the average of the closing prices of the scrip six months prior to the merger announcement. On the NSE, the average of six month's closing prices was Rs 126.5.

From an ITC shareholder's point of view, the deal doesn't have any major financial implications. ITC holds around 72 per cent of ITC Hotels, which was already reflected in its consolidated accounts.

The equity dilution would be less than 0.5 per cent, and although the deal is EPS accretive, the increase is negligible.

HCL Info

HCL Infosystems has done exceedingly well for the second year in a row. Consolidated revenues grew 65 per cent, once again driven by the office automation and telecommunication business. This segment, which mainly consists of the Nokia handset redistribution business, accounted for 80 per cent of incremental revenues.

The computer systems segment also grew at a healthy 39.4 per cent. This is important since its profit margin of around 9 per cent is much higher than that of the office automation and telecom business, which has a margin of less than 3 per cent. Overall, profitability was maintained, and since interest and depreciation costs were lower, net profit jumped 89 per cent.

Given the high base, growth rates could be lower this year. But at the same time, both of the companies' major segments, PCs and GSM handsets, continue to thrive because of a lower price differential between the organised market and the grey market.

What's more, HCL Infosystems is the market leader in both segments. Yet, its net margins are just 4 per cent, pointing to a commodity-like business. It's no wonder it gets a discounting of just around 9 times forward earnings.

P&G

From HLL's June quarter results it was evident that the price war with P&G had hurt its performance. Yet it's difficult to figure how P&G's detergents and shampoo business are doing, since they come under a 100 per cent subsidiary.

But P&G sources these products from its listed entity, P&G Hygiene and Health Care, which announced annual results recently. Its segment results show that revenues from contract manufacturing jumped 95 per cent in the period from January to June 2004 (the price cut happened during this period).

In the preceding six-month period ended December 2003, revenues from this activity had risen 31 per cent. It's evident that P&G's detergents business has got a big topline boost from the price cuts.

BILT builds on uptrend

An upturn in domestic and international prices of paper has helped Ballarpur Industries Ltd (BILT) report improved June quarterly results. Net profit went up 21 per cent to Rs 37.34 crore in the last quarter . Operating profit rose 12.7 per cent to Rs 107.28 crore. Other income went up 158 per cent to Rs 5.12 crore.

BILT's key advantage is that it its pulp requirements are largely met from captive sources, in contrast to its competitors who have had to deal with rising international pulp prices.

Also, analysts say that the company is understood to be increasing the use of wood for making paper and it has kept a tight control on this input through numerous initiatives with farmers located close to its paper factories.

As a result, while realisations in the high end paper segment like maplitho paper have improved approximately 7-8 per cent year-on-year, BILT was able to grow the segment profits of its paper division by 18.6 per cent in the last quarter due to tight control of input costs.

The company hopes to leverage the demand by adding 35,000 tonne of paper capacity in this financial year.

Meanwhile profits in the APR pulp segment were more or less flat and analysts point, possibly due to large customers like viscose filament yarn manufacturers keeping a tight check on their input prices.

One concern for the industry is cheaper imports from ASEAN, after the signing of free trade agreements, but the impact on BILT should be negligible given its limited presence in the low end of the market. However, paper companies will have to contend with rising fuel cost due to a recent increase in coal prices.

With contributions from Mobis Philipose and Amriteshwar Mathur