Patni Computer: It's clicking

Improved operating efficiency helped Patni Computer offset losses from rising rupee

It was a better-than-expected quarter for Patni Computer during December 2006. As compared to its revenue guidance of $152 million and net profit guidance of $20.4-20.6 million, Patni posted revenues of $154.3 million and a net profit of $25.7 million.

Though the rupee appreciation resulted in its revenues declining 2.4 per cent q-o-q, its gross margin remained at the same level of 35.5 per cent, as the rupee appreciation impact of 1 per cent was compensated by the improvement in operating efficiencies.

Unlike the other IT players, who had some price increases, Patni's pricing remained unchanged over the previous quarter, while the volume growth was about 1.7 per cent. Even in the previous quarter, pricing had remained flat.

The December 2006 quarter was muted in volumes due to the Christmas holidays and lower business from one of its key financial services customers, which is going through vendor rationalisation. Going forward, this client will impact revenues in the March quarter further, as the bulk of the transition will take place this quarter.

Patni's operating margin improved by 60 basis points q-o-q to 18.3 per cent in December, as selling and marketing expenses declined 4.3 per cent, and general and administrative expenses dropped 7.5 per cent.

During the quarter, the contribution of GE in revenues declined by 60 basis points q-o-q to 13.5 per cent, and utilisation rates improved by 140 basis points. Rising 290 basis points q-o-q, attrition rate at 27.4 per cent is high, and the company is addressing the problem.

Besides the impact on the top line, margins too are going to be weaker by about 120 basis points in the March quarter, as there will be a 50 basis point impact of SG&A expenses, 20 basis point depreciation due to its new facilities in Navi Mumbai and the rest on account of seasonal factors leading to lower utilisation.

However, the company is optimistic for the remaining three quarters of 2007 (year ending December). The stock trades at about 14 times estimated CY07 earnings and 12 times CY08 earnings and appears cheap.

For this quarter, there are few triggers, but any clarity on the future, be it in terms of new contracts or acquisitions, will result in a positive re-rating on the stock.

GAIL: Subsidy woes

GAIL's performance in the December 2006 quarter has been adversely affected by a rising subsidy burden.

As a result, the company's operating profit declined 5.15 per cent y-o-y to Rs 864 crore in the third quarter of FY07, as compared with a 14.9 per cent growth in net sales (including internal consumption) to Rs 5,106.2 crore. Its operating profit margin also declined 360 basis points y-o-y to 16.9 per cent in the last quarter.

In its petrochemical business, production was up 25 per cent y-o-y, coupled with prices on an average up 20 per cent. Segment profit of the petrochemical business rose 54.7 per cent y-o-y to Rs 277.4 crore in the last quarter. Meanwhile, its natural gas transmission volumes were more or less flat on a y-o-y basis in the last quarter.

The company, however, had to bear a subsidy burden of Rs 315 crore in the December 2006 quarter, a growth of 52.9 per cent y-o-y. It resulted in the segment profit of LPG and liquid hydrocarbon division declining 62.3 per cent y-o-y to Rs 90.48 crore in the last quarter.

In contrast, ONGC's subsidy burden declined 22.5 per cent y-o-y to Rs 2,204 crore in the last quarter.

Going forward, there continues to be a lack of clarity of the subsidy sharing burden for upstream players such as GAIL. As a result, the stock trades at about 10 times estimated FY08 earnings.

Exide Industries: Input blues

Exide Industries' operating margins in the December 2006 quarter were adversely affected by the rising cost of key raw material lead. As a result, the company's operating profit grew 23.5 per cent y-o-y to Rs 68.2 crore in the last quarter, as compared with a 35.2 per cent growth in net sales to Rs 457.7 crore.

Its operating profit margin also fell 50 basis points y-o-y to 14.9 per cent in the last quarter. This pressure on margins in the last quarter was due to adjusted raw material costs as a percentage of net sales, rising 260 basis points y-o-y to 58.8 per cent.

In contrast, in the September 2006 quarter, the company's operating profit margin grew 50 basis points y-o-y to 18.6 per cent.

The company has hiked product prices by 5 to 6 per cent in January 2007 and it is expected to ease the margin pressure going forward, say analysts. Exide is also expanding its capacity by setting up a one million unit plant, which will be an EOU.

However, with the stock trading at 19 times estimated FY07 earnings, it appears expensive, considering that its profitability depends a lot on how lead prices move.