Jet Airways: The lag effect

Given Sahara's financials, Jet has not cut a sound deal

Jet Airways' current debt-equity ratio is over 2 and the additional burden of Rs 1,450 crore that it will need to fork out for Sahara will certainly strain its balance sheet further.

Even if the deal price has been revised downwards by about 20 per cent, the amount is not justified given that Sahara is not exactly in the pink of health.

Moreover, market share really has no meaning in today's market where the low-cost carriers are attracting huge numbers of passengers; it is revenue market share that really matters.

The enterprise valuation for Sahara of Rs 1,950 crore, for an airline that is in bad shape financially, with a relatively low share of just 8 per cent market share, limited brand salience, a few flying slots and parking bays, is very expensive. So it was no surprise that the Jet stock fell 6 per cent in Wednesday's trading.

However, Jet's international operations are doing well and the stock is a good play on the world aviation market given that it has the best access to one of the biggest pool of travellers and an established presence in India.

The airline plans to spend around Rs 8,000-10,000 crore to add to its fleet. With the uncertainty over the Sahara acquisition having ended, it should be easier for Jet to mop up resources, though it seems unlikely that it can raise equity at an attractive premium.

Even if it raises debt to finance the fleet expansion, it can improve the international routes. However, if Jet cannot garner the money, that will slow down the momentum in the international operations.

Given that the domestic market still needs to see price rationalisation and the overseas operations will take time to stabilise, the company is unlikely to post net profits in a hurry. It is the expansion in the EBITDAR, which stood at 16.6 per cent in the December quarter that will drive the stock, currently trading at Rs 608. That could take some time.

iGate: Top line blues

Though iGate delivered its promised 15 per cent operating margin in the March 2007 quarter, it fell short on top line growth. Revenues were down 0.3 per cent q-o-q, as the company was adversely impacted by the meltdown in the US sub-prime mortgages.

According to the management, nearly 10 per cent of its revenues come from this sector-both fulfillment of new loans and servicing of existing loans, and as new loans have stopped, the company's top line was impacted adversely.

iGate was adequately hedged so the rupee appreciation did not impact margins, though it did push down the top line by 2 per cent in rupee terms. But on other parameters, the iGate result is no disappointment. It has managed to reduce direct costs by shifting more work offshore while other costs have also dropped, ensuring better profitability.

Offshore billing rates improved by 10 basis points, while onsite billing rates were up 180 basis points. For the full year, the operating profit margin went up 175 basis points to 11.4 per cent.

The road ahead is not so good for investors over the short term. The sub-prime mortgage problem will spill over to Q1 FY08, which will result in iGate's margins falling below those in Q4 FY07.

However, the company expects margins to improve sequentially from Q2 onwards. But the management said that if the rupee continues to remain firm against the dollar, then it will impact margins from Q3 FY08. iGate stock declined 4.4 per cent to Rs 385 on Wednesday, and trades at 16 times estimated FY08 earnings.

Prism Cement: Better operating margins

Prism Cement has been able to report an impressive performance in the March 2007 quarter thanks to higher despatch levels and better price realisations on a y-o-y basis. As a result, operating profit grew 79.1 per cent y-o-y to Rs 91.1 crore in Q4 FY07 compared with 20.8 per cent growth in net sales to Rs 201.92 crore.

Operating profit margin also expanded 1470 basis points y-o-y to 45.1 per cent in the previous quarter.

The company's cement despatches were at 0.6 million tonne in Q4 FY07 compared with 0.57 million tonne a year earlier. Prism's realisations were estimated at Rs 3,365 per tonne in the March 2007 quarter compared with Rs 2,931 per tonne a year earlier. To the company's credit, its total expenditure has fallen 4.7 per cent y-o-y in the last quarter, and it also helped improve operating margins.

Despite the improved performance by the company in the last quarter, the stock has moved broadly in tune with the broader market - it has declined 7 per cent over the past three months compared with 6.5 per cent fall in the BSE Mid-Cap Index.

Clearly, investors are adopting a cautious approach given the cement industry's earlier decision to hold prices for a year. The stock trades at a reasonable 5.5 times estimated June 2007 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur