Wipro: Off target

The Unza acquisition is not going to add significantly to Wipro's bottom line.

It's hard to understand why Wipro wants to focus on the consumer segment when it has no particular edge in the space.

While there is a legacy business it might have been better for the management to exit the sector altogether to focus on information technology. It's also difficult to fathom why the firm has coughed up nearly $246 million to pick up the Singapore-based Unza Holdings which has a basket of products including soaps, detergents, talcum powder and other skin care products.

In addition, Wipro has picked up $45 million of debt, which is on Unza's balance sheet. So at an enterprise value of $291 million (Rs 1,200 crore), the valuation is just under two times trailing sales "" Unza turned in revenues of Rs 683 crore for the year ended April 2007.

That doesn't seem too expensive but then Unza is not very profitable. Unza's net margins in FY05 were about 5 per cent and numbers for subsequent periods are not available.

Wipro will need to work hard to improve the firm's profitability""by the management's own admission, the acquisition is not going to add significantly to Wipro's profits.

While synergies may exist because both operate in Asian economies, products take time to gain acceptance with users even if these are marketed under familiar brand names as Wipro proposes to do with Unza's shampoo brands.

Sure, the addressable market and distribution network for Wipro may be bigger, because Unza has a presence in 40 countries, but pushing Wipro's products in these markets could be a time consuming and expensive affair.

Wipro reported cash of around Rs 36 crore in its consumer care business in FY07 and the total capital employed is Rs 300 crore. Perhaps the money that it has spent on Unza could have seen better returns had it been invested in technology-Wipro has been snapping up small companies at regular intervals.

Unless the profitability of Unza improves dramatically, the money will not have been well spent because it's not too difficult to earn yields of 6-7 per cent these days.

Prism Cement: Buoyancy continues

Prism Cement has been early of the block to report its June 2007 quarterly results and its results do highlight that the buoyancy in the sector has continued, despite steps by the government to keep prices under check in the last quarter.

Prism's operating profit grew a whopping 68.2 per cent y-o-y to Rs 108.9 crore in the last quarter, while net sales grew 21 per cent growth to Rs 215.4 crore. Operating profit margin also improved an impressive 1415 basis points y-o-y to 50.55 per cent in the June 2007 quarter.

Cement dispatches were 6.07 lakh tonne in the previous quarter compared with 5.83 lakh tonne in the corresponding period of the previous year.

Also, Prism's realisations were estimated at Rs 3,548 per tonne in the June 2007 quarter compared with Rs 3054 per tonne a year earlier, indicating buoyancy in prices in the key market of Andhra Pradesh.

An improved performance by the company has not gone unnoticed by the street - the stock has risen 52 per cent over the past three months as compared to a 25 per cent rise in the BSE Mid-Cap Index.

Even on Friday, the stock was locked at the upper end of the price band, as sentiment on the sector has also improved in the past few days.

For its year ended June 2007, operating profit margin grew 1670 basis points y-o-y to 43.1 per cent.

Going forward, cement prices are expected to rise over the next few quarters and this should help Prism improve operating margins. At Rs 46.95, the stock trades at over 7 times year ended June 2007 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur