Jet Airways: No jet lag

The drop in Jet Airways' earnings growth is negligible

Jet Airways was expected to report a drop in growth rates this fiscal mainly because of its foray into the lower-margin, international operations and also because of a spike in oil prices.

But although the earnings growth rate has dropped, it's negligible. Profit before tax rose 175 per cent last quarter on a year-on-year basis, not much lower than the 227 per cent increase reported for FY05.

On a quarter-on-quarter basis, profit before tax fell 28 per cent, despite a 9 per cent increase in revenues. But it's important to note that the March quarter represents a peak period in terms of the seasonality of the business, while the June quarter is a more lean period.

Although revenues have not been impacted because of an increase in volumes (and because of revenues from international revenues that were launched last quarter), there is a higher incidence of discounted travel during lean months, which hit profitability in the June quarter.

Even on a year-on-year basis, EBITDA margins fell by 300 basis points mainly because of a jump in fuel expenses. Besides, selling and distribution expenses were higher owing to the launch of the international operations.

It's commendable that the company cut other operating expenses by 370 basis points as a percentage of sales despite the launch of the lower margin international business.

Importantly, the company's load factor (utilisation) improved by over 600 basis points y-o-y and its revenues yield rose by 14 per cent for its domestic operations.

Besides, lower interest and depreciation charges (on a written down asset value) made up for the drop in margins. As a result, although EBITDA increased by only 24 per cent, PBT jumped by 175 per cent.

It's unlikely, however, that such high growth rates would be sustained since going forward the year-ago base would be even higher. Besides, the proportion of international business would be higher going forward and worse still, fuel prices have risen further this month.

While valuations are not expected to drop from current levels simply because Jet is the best available play in the fast expanding domestic market, a re-rating from current levels is also equally unlikely given the above concerns and the fact that valuations are not cheap at over 20 times forward earnings.

Orchid "" expanding margins

There's a marked contrast between Orchid Chemicals & Pharmaceuticals' 2 per cent y-o-y decline in net sales in the June quarter, and a 61 per cent growth in its profit before tax.

The reason for the fall in sales is a simple one""-cephalosporin prices have plummeted. Weak cephalosporin prices had earlier resulted in a 10.5 per cent drop in the company's profit before tax to Rs 7.4 crore in the March quarter.

In the June quarter, there has been a bit of a recovery in the price in many overseas markets, but they were still lower on a y-o-y basis in the June quarter. The upshot""-a 2.54 per cent fall in segment revenues at its bulk division to Rs 146.68 crore.

But how did the company's profits improve? That's largely owing to lower raw material costs""""consumption of raw materials declined 37.28 per cent on a y-o-y basis to Rs 70.62 crore.

As a result, not only was the company able to show substantial profit growth, but operating profit margin expanded 549 basis points to 26.67 per cent. Operating profit went up 23.32 per cent to Rs 45.42 crore in the June quarter.

Cephalosporin prices are expected to pick up further over the next few quarters and that should flow directly into the company's bottomline.

Also, the company had recently entered into fresh marketing agreement with Par Pharma for distribution of antibiotics in the US generics market.

This agreement is just one of several deals the company has recently entered into enhance growth prospects. Collectively, these initiatives are expected to result in a revenue stream of $25 million over the next two years, subject to certain milestones being met.

Biocon "" in a commodity business

Biocon's first quarter results validate the concerns about the commoditisation of the statin business. The company reported a 5.7 per cent decline in its operating profit to Rs 50 crore in the June quarter, a key reason for the unispiring performance being the pricing pressures in the European markets for the company's portfolio of statins.

That led to stagnant net sales, while a small rise in manufacturing and other expenses pulled down operating margins. OPM fell 172 basis points to 28.73 per cent in the June quarter, although it has improved a bit sequentially. No wonder the stock fell 3 per cent on Wednesday.

At the PBT level, profits fell 14 per cent to Rs 45 crore, but that's because depreciation rose 40 per cent to Rs 7 crore owing to the commissioning of new facilities.

This will stand the company in good stead going forward""-the revenues streams from these facilities are expected to fully come through in FY07, when the company would be able to leverage the expiry of patents on Simvastatin and Pravastatin in America.

Nevertheless, the results have a silver lining""""the company's contract research business saw a 35 per cent y-o-y jump in the June quarter, although, to put that in perspective, income from contract research was Rs 19 crore, compared to Rs.135 crroe for the biopharma business.

Going forward, there could be further pricing pressures in the European statins market, given the entry of a number of new players.

However, in the short term, some amount of sales growth is expected to be provided from its contracts research business. The stock has a discounting of 16.8 times forward earnings, which is steep, given the immediate prospects of the business.

With contributions from Mobis Philipose and Amriteshwar Mathur