Sahara: Flight of fancy

Sahara buyout will give Jet an enviable 48% market share

Triggering consolidation in the aviation space, Jet Airways has snapped up Sahara Airlines for $500 million. Prima facie, it would appear that the deal has been a trifle expensive, given that Jet's market share at 36 per cent is three times larger than that of Sahara's at 11.5 per cent.

At an enterprise value (EV) of Rs 11,000 crore for Jet, the EV/EBITDAR (earnings before interest, depreciation, tax and rentals) works out to around 7.8. At Rs 2,225 crore, the price Jet has paid for Sahara, and an estimated EBITDAR of between Rs 350 and Rs 400 crore, the EV/EBITDAR for Sahara is between 5.6 and 6.3. The ideal multiple would have been perhaps closer to three.

However, the deal will give Jet immediate command of an enviable 48 per cent market share and, hence, it can, through some predatory pricing, take on low-cost carriers (LCCs) and value airlines such as Kingfisher.

Jet also gets access to parking bays and hangars in already congested airports, apart from people, who are in short supply. By managing the business more efficiently, Jet should be able to improve the EBITDAR margins currently estimated at around 19-20 per cent compared with Jet's margin of 32 per cent.

Faced with the onslaught of LCCs, the Jet stock has been an underperformer in the last six months. At the current price of Rs 1150, the stock trades at 15-16 times estimated FY07 (pre-merger).

L&T: Bulging order book

The Larsen & Toubro (L&T) stock has doubled in the past year thanks to the capex boom in India and the Middle East. For Q3 FY06, its operating profit margin improved by 177 basis points y-o-y to 6.18 per cent, along with a 13.53 per cent growth in net sales.

L&T's key engineering & construction (E&C) segment grew 9.46 per cent, but that came on a higher base after a 35.3 per cent growth in December 2004.

The good news is that the E&C division's order book has grown by 116 per cent y-o-y compared with the overall order book growth of 108 per cent in Q3 FY06.

L&T benefited from lower steel prices, as raw material cost declined 28.67 per cent, which also cushioned the 90 per cent increase in cost of construction materials. L&T's foray in the booming Middle East has resulted in exports contributing 19 per cent of Q3 sales.

With an order backlog of Rs 22,915 at the end of 2005, L&T's prospects remain bright. The stock closed at a new high of Rs 1,900, and trades around 19-20 times FY07 EPS.

Ranbaxy: Lower realisations

Pricing pressures in the US generics market have resulted in Ranbaxy reporting a 70.35 per cent y-o-y drop in its consolidated operating profit to Rs 65.4 crore.

Operating margin slipped 1081 basis points y-o-y to 4.57 per cent in the last quarter, after a staggering 2064 basis points y-o-y decline in previous quarter.

Ranbaxy's US sales were about Rs 418 crore in the December quarter, down 27 per cent y-o-y, owing to lower realisations across several product categories. To offset this difficult environment in the US, the company has pushed sales in emerging markets.

For instance, sales in Russia and Ukraine grew by 33 per cent y-o-y and domestic sales went up by 14 per cent y-o-y in December quarter. Nevertheless, its consolidated net sales declined 1.2 per cent y-o-y to Rs 1387.7 crore in the last quarter.

The recent defeat of Ranbaxy's patent challenge for Pfizer's anti-cholestorol drug Atorvastatin, has once again led analysts to point out that the company needs to aggressively pursue the partnership model in R&D to revive earnings. Ranbaxy, with a CY05 P/E of well over 70 times, is the most expensive Sensex stock.

With contributions from Shobhana Subramanian and Amriteshwar Mathur