MphasiS BFL: Not in sync

EDS offer for MphasiS BFL sounds too conditional

EDS' offer to MphasiS BFL shareholders may be at a 30 per cent premium to the 26-week average price but it falls a little short of the current market price. Plus, the fact that the offer is conditional to EDS acquiring a 51.72% stake indicates that EDS is willing to buy a stake in the company, but only at its terms.

For MphasiS, an owner like EDS will obviously be helpful. Mid-sized software companies such as MphasiS are finding scaling up to the next level difficult, and EDS will help in meeting that end. In MphasiS, EDS' India operations are small, and this buy will help it increase its India headcount by about four times and also gain a strong player in the BFSI space.

The MphasiS stock has gained about 30 per cent in the past three months owing to an improvement in its financial performance and the bullish markets. MphasiS has seen its margins decline in FY05, compared with levels seen in the previous two years, but the last two quarters have been better.

The volatility in earnings, which has been an intermittent occurrence in the past, has also reduced.

Unless there is an upward revision, there is little reason for shareholders to tender their shares at the offer price of Rs 204.5 a share.

The public holding in the company is just 8.41 per cent and is unlikely to make much difference to the success of the offer, which depends mainly on what Barings and the institutional investors decide, as they own over 77 per cent together.

The stock price may dip if EDS fails to acquire its targeted stake, but for investors there is little to lose as MphasiS is one of the better mid-tier software companies to own. At the current price of Rs 212, the stock trades at about 17 times FY07 EPS.

Cement despatches: Double-digit growth

Top four cement companies have once again reported robust despatches, which grew about 12 per cent y-o-y to 59 lakh tonne in March 2006. A strong growth in January and February helped despatches grow 13.6 per cent y-o-y to 167 lakh tonne in the March 2006 quarter for the companies concerned.

Analysts say demand has been particularly strong in southern and eastern markets. For FY06, cement sales have risen 8.88 per cent to 598 lakh tonne.

Though cement stocks witnessed some profit booking on Tuesday, but they have outperformed the broader markets over the past two months.

For instance, Gujarat Ambuja has gained about 24.6 per cent over the past two months compared with 19.6 per cent gain in the Sensex. Grasim too has appreciated 39.25 per cent during this period.

Cement prices have increased across the country owing to a combination of stronger demand and rising operating costs. Higher freight rates following an SC decision on overloading of trucks have pushed up costs by Rs 8-10 per bag in the last quarter, say analysts.

However, in several southern markets, the price rise has been lower than the rest of the country, given the upcoming elections, say analysts. Going forward, domestic demand is expected to remain buoyant in the run-up to monsoon.

The market has factored in the better performance, with Grasim trading at about 17.4 times estimated FY07 earnings, while Gujarat Ambuja trades at about 21.8 times estimated June 2007 earnings.

Maruti: Export blip

A spectacular March with record sales notwithstanding, Maruti posted just under 5 per cent y-o-y growth in sales in FY06, selling 5.61 lakh vehicles. The culprit was exports, which declined 29 per cent y-o-y primarily because Suzuki has been sourcing cars from other locations overseas.

Even if the export performance had been better, it's unlikely that Maruti would have managed to match the 19 per cent growth of FY05.

Fiscal 2006 was not great even for domestic sales: sales were up just 8.1 per cent compared with around 6 per cent for the industry, a sign that demand is not as robust perhaps as is made out to be. The excellent numbers in March""-sales of passenger cars up 21.2 per cent y-o-y and domestic sales up 20.6 per cent y-o-y"" are encouraging.

The company dropped prices following the excise duty cuts in the Budget and evidently, it has paid off. With interest rates having risen by about 150 basis points over the last six months, consumers were apparently rethinking their purchases.

The demand should sustain in a strong economy, though for Maruti it could mean some pressure on margins, because steel prices are once again on the rise. Looking ahead, analysts believe Maruti should manage a 12-14 per cent increase in domestic volumes in FY07, with the Swift driving growth and the Alto chipping in.

At the current price of Rs 914, the stock trades at around 18-19 times estimated FY07 earnings. The stock has outperformed the market in the last six months and should do well with especially if the the diesel engine plant comes on stream in January next as expected.

With contributions from Amriteshwar Mathur and Shobhana Subramanian