Ranbaxy: Tonic for growth

Europe and India were the key growth drivers in the March quarter.

Ranbaxy's growth in the March 2007 quarter was primarily driven by improved sales in Eastern Europe and India. As a result, the operating profit grew 34.1 per cent y-o-y to Rs 190.8 crore and the total operating income grew 22.4 per cent to Rs 1582.1 crore. The operating profit margin in Q1 CY07 also grew 110 basis points y-o-y to 12.1 per cent.

During the March quarter, the company's sales in Romania grew 50 per cent y-o-y to $37 million (Rs 155 crore), thanks to its acquisition of Terapia and the UK sales grew 77 per cent. The European sales thus improved 78 per cent y-o-y to $93 million (Rs 390 core). In other fast growing markets such as Ukraine, sales grew 61 per cent y-o-y, while in India they expanded 26 per cent to $65 million (Rs 273 crore).

However, in the key US market, the sales were flat in the last quarter at $86 million, on a y-o-y basis. To the company's credit, the key operating costs such as cost of sales as a percentage of total operating income remained more or less at 52.8 per cent on a y-o-y basis in the last quarter.

The future growth for Ranbaxy is expected to be powered by its 180-day exclusivity for the 80 mg pravastatin (medication for reducing the risk of hardening of the arteries), coupled with the US FDA's approval for the same medication in 10, 20 and 40 mg dosage. The market size of the 80 mg dosage is pegged at around Rs 900 crore a year. At Rs 371, the stock discounts estimated CY07 earnings by 21 times, which more or less prices in the growth opportunities for the company.

Patel Engineering: Sound construction

Patel Engineering had a good quarter. During the March 2007 quarter, the revenues grew 35 per cent y-o-y and operating profits went up 49 per cent. The company managed to reduce its cost of construction by 330 basis points y-o-y to 79.3 per cent. The operating profit margin was up 117 basis points to 12.38 per cent. For the full year ended FY07, Patel Engineering saw its top line increase by over 30 per cent and the operating profit margin improved by 57 basis points to 13.5 per cent. In May 2006, the company had made a follow-on issue of Rs 425 crore.

At the end of Q4 FY07, the company's order-book stood at Rs 5,000 crore, up 5 per cent q-o-q. Of this, water supply and power projects account for 55 per cent, irrigation projects take up 25 per cent, while the transportation and other sectors account for 20 per cent.

During the quarter, Patel Engineering bagged a Rs 144 crore order to construct a 6.1 km-long tunnel in Mumbai, and a Rs 806 crore order as part of a joint venture with Gammon India. In September 2006, it had also acquired a 51 per cent in Michigan Engineers. It has set up a power generation subsidiary and would also be developing nearly 500 acres of real estate that it owns across Hyderabad, Bangalore and Maharashtra. The results were ahead of market expectations and the stock gained 3 per cent on Monday. At its current price, it trades at about 15-16 times estimated FY08 earnings and should be an outperformer.

Nalco: Poor alumina realisations

Nalco's performance in the March 2007 quarter was adversely affected on a y-o-y basis by the weak spot alumina prices. The operating profit fell 8.8 per cent y-o-y to Rs 879.8 crore and the net sales grew 1.8 per cent to Rs 1566.75 crore. Operating profit margin also declined 655 basis points y-o-y to 56.15 per cent in Q4 FY07. This is because the profitability (before interest and tax) in the chemicals division (comprising mainly alumina) declined 67.35 per cent y-o-y to Rs 253.46 crore.

Spot alumina realisations were estimated at $317 a tonne in Q4 FY07, a decline of nearly 47 per cent on a y-o-y basis. The weakness in the alumina prices is attributed to surging global output. As a result, Nalco cut production by 1.9 per cent y-o-y to 395,700 tonnes. Nalco's improved performance in its aluminium division could not prevent a fall in its overall operating margin. The company's production of aluminium declined 1.17 per cent y-o-y to 88,820 tonnes in the last quarter. However, the average aluminium price was up 12 per cent y-o-y to $2,746 a tonne on the LME in Q4 FY07.

Analysts also highlight that the increased use of captive power helped lower the company's cost of production in the last quarter. As a result, segment profit of the aluminium division grew a whopping 1017 per cent y-o-y to Rs 448.7 crore in the last quarter. For 2006-07, its overall OPM improved 680 basis points y-o-y to 59.5 per cent.

With the weakness in the alumina prices expected to continue over the next few quarters, analysts expect the company's profit growth to be muted. They thus consider the stock, trading at nearly 9 times estimated FY08 earnings, to be expensive.