Reliance Info: Losing out

Reliance Infocomm is valued much lower than Bharti

Reliance Industries has valued Reliance Infocomm's equity at about Rs 22500 crore, based on its diluted equity (post the preference shares conversion) of 704 crore shares.

This gives it an enterprise value of Rs 25,600 crore, point out analysts, based on the net debt on Infocomm's books as on March 2004. The debt could be different now, but that wouldn't materially change the enterprise value of the company.

In comparison, Bharti has an enterprise value of Rs 48,850 crore, which means that Reliance Infocomm has been valued about 48 per cent lower than Bharti, against analysts' estimates that it would be valued at a 20-25 per cent discount.

In FY05, Infocomm's revenues were 33 per cent lower than that of Bharti, although its subscriber base was pretty much identical at around 11 million subscribers.

Besides, its EBITDA was about 70 per cent lower than Bharti's, but this differential is expected to narrow considerably going forward. First, the difference in ARPUs (average revenue per user) is expected to come down from the current high levels. Also, Infocomm's high fixed cost will be spread over a larger base of subscribers, which again would lead to an increase in operating profit.

Over time, analysts expect the valuation differential to be only about 10 to 15 per cent, based on which the current discount of 48 per cent is rather high.

From a Reliance Industries' shareholder point of view, the company's investment in Infocomm is now valued at Rs 14,850 crore. This is against an equity infusion of Rs 2,362.5 crore (includes equity infusion in Reliance Communications Infrastructure) and the preference capital investment of Rs 8,100 crore.

The total investment, therefore, is Rs 10,500 crore, on which the return works out to about 42 per cent. Analysts point out that the return is not enough on an annualised basis, considering the high risk involved with the project in its initial stages.

At the same time, there could be a further unlocking of value in Reliance's Infocomm investment when the telecom company is listed.

Exide Inds

Exide Industries' fourth-quarter (Q4) results are a re-run of the old familiar story of high lead prices biting into profits. Although net sales for the quarter were up 20 per cent to Rs 311.44 crore, operating profit fell 15 per cent to Rs 41.6 crore.

PBT fell even more, thanks to high finance costs. The upshot "" earnings of Rs 2.4 per share for the quarter compared with Rs 3 per share a year ago. Operating margins have been squeezed badly, at 13.4 per cent for Q4, in contrast to 19.1 per cent for the year-ago period.

The main damage to operating margins has been done by rising lead prices, and raw material costs as a percentage of net sales moved up to 56.6 per cent in the last quarter. This percentage was only 48.2 per cent in Q4, FY 2004, which gives an idea of the hit that Exide Industries has had to absorb.

But is there any indication that things are getting better? Revenue growth was 28 per cent in Q3, and has slowed down to 20 per cent in Q4.

On the other hand, operating margin was slightly lower at 13 per cent in Q3, and raw material costs amounted to 58 per cent of net sales.

That seems to indicate that the rate of rise in lead prices may be slowing down, and prices have remained more or less flat in the last few months.

That would be positive for Exide Industries, particularly because volume growth should be maintained as the rapid growth in the automobile market results in higher demand from the profitable replacement market.

Copper, aluminium: divergent trend

The tables for the futures price of Comex copper and aluminium show a divergent pattern"""" the futures price of aluminium is at a premium to spot, while that of copper is at a discount. Moreover, the futures price of aluminium too used to be at a discount last year.

Future prices are usually higher than spot prices, since they reflect the interest factor. So why this departure from the norm?

In the case of aluminium, the premium could be attributed to the steps under way in China to gradually phase out tolling and processing, a system which permits smelters to import alumina and export metal duty-free.

Such a move is expected to help restore pricing power in the aluminium industry and that is reflected in an uptick in the futures prices.

Meanwhile, in the case of copper, concerns over high energy prices has led to weaker demand forecasts from key user industries such as automobiles.

Further, copper prices had recently scaled multi-year highs, with very low inventory levels. As a result, copper futures have shown signs of easing.

With contributions from Mobis Philipose and Amriteshwar Mathur