TCS: Opting for a cheaper float

At the top of the price band, TCS is valued slightly lower than Infosys Technologies

Tata Consultancy Services's IPO price band of Rs 775-Rs 900 comes lower than what media reports had projected. Based on FY05 estimates for the company, a subscription at the higher end of the price band would mean a valuation of between 21 and 22 times.

Infosys, the current market favourite in the IT sector, gets a valuation of 23.6 times its guidance estimates for FY05.

The difference is not much, and even if TCS's valuation aligns with that of Infosys post listing, it means an upside of only about 10-12 per cent.

Simply put, there's not much left on the table. All this is based on the assumption that the issue will be at the higher end of the band, which is usually the case.

Nevertheless, response to the TCS IPO is expected to be good, especially since it's the largest company in the sector, and no investor can afford to ignore the market leader.

Moreover, the company's profitability (net margin of 23 per cent in FY04) compares well with peers, despite a high proportion of fixed price contracts, onsite revenues and a huge exposure to the GE group. Margins are expected to expand going forward, as SG&A expenses are expected to come down from the high levels of 20 per cent in FY04. The issue also comes at a good time, when appetite for tech stocks has been whetted by Infosys' hugely positive guidance.

Nice IPCL numbers

The key take away from IPCL's results is that demand and profitability levels in the industry continue to be excellent "" quarterly profit before tax and extraordinary expenses of this Reliance group company have jumped 282 per cent to Rs 195 crore.

While profit growth has been explosive, the company's net turnover has grown at a comparatively slower pace at 33.6 per cent. The rise in net turnover reflects a 15 per cent rise in sales volume and a 19 per cent rise in product prices.

The company has also faced an increase in its cost base ""- cost of raw materials has jumped 60.7 per cent to Rs 839 crore in the last quarter. Analysts point out that the surge in input costs could be attributed to petrochemical products bought from group companies and sold by IPCL, in overseas and domestic markets.

Nonetheless, production volumes also rose smartly by 20 per cent. Further, while other companies in the industry have reported increases in staff cost, it is commendable that IPCL has managed to keep staff costs under check in Q1 FY05. And a larger turnover base helped offset rising input costs ""- operating profit in the June quarter '04 were Rs 13 crore versus an operational loss of Rs 164 crore in the previous year.

Going forward, NCDEX is planning to launch polymer futures later this year and this should help companies operating in this sector to cover their price risk. And with the strength in the petrochemical sector looking intact, analysts are forecasting that parent RIL is expected to show a growth of 35 - 40 per cent in its Q1 FY05 profitability levels.

HDFC sticks to the script

HDFC's results have become boringly predictable, with loan approvals rising by 31 per cent and disbursals going up by 29 per cent. A rise of around 30 per cent has been the story every quarter, and the June quarter has been no different. Gross profit rose by 20 per cent.

That's hardly any different from the 19.8 per cent rise in gross profit last year, and it's better than the 19.3 per cent rise in the fourth quarter. If rising interest rates in the bond markets were supposed to impact HDFC's profit, there have been no sign of that happening yet.

As a matter of fact, loan spreads have gone up very marginally from 2.20 per cent as at end-March to 2.21 per cent. With the subordinated bond issue, HDFC's capital adequacy now stands at 14.7 per cent of risk weighted assets, and just in case there are signs of any pressure developing on the cost of funds, HDFC has armed itself with an enabling resolution to raise up to $500 million by way of external commercial borrowings.

Company officials also point out that 80 per cent of the retail loan portfolio are currently on floating rates, which will cushion the company when interest rates rise.

The only point of concern for HDFC is the level of non-performing assets, which have gone up to 1.29 per cent from 0.89 per cent as at end-March.

Further, this level is on the current six-month NPA norm, which means the level will rise once the 90-day NPA requirement comes into effect from March 31, 2005. However, the National Housing Board has permitted housing finance companies to phase out the additional provisioning over three years.

With contributions from Mobis Philipose and Amriteshwar Mathur