Mastek Strokes

BS Compass

Obviously, the high growth estimate is a result of a very low base in FY2001, when earnings had dropped 72 per cent year-on-year (YoY) to just Rs 8.4 crore or 3 per cent of revenues.

But since the earnings per share (consolidated) estimate for the year had been revised by around 38 per cent, a realignment in Mastek's share price was imminent. The stock jumped 18.7 per cent today to Rs 434.7 in intra-day deals, reaching a new 52-week high in the process, but later gave back some of the gains to close at Rs 407, 11 per cent higher than the previous day's close.

Mastek, incidentally, has been among the major beneficiaries of the tech rally post-September, with current prices being over 600 per cent higher than the lows reached last September.

Hence, profit booking at current levels is bound to happen. Moreover, current valuations of around 19 times FY02 earnings are also not particularly inexpensive, going by the discounts at which Mastek has been historically traded to some of its peers.

And some of the concerns due to which the company's valuations have been hit in the past seem to be still plaguing the company. It continues to depend on a few top clients for a chunk of its revenues.

In fact, the contribution of Mastek's top 10 clients jumped further to 68 per cent of total revenues last quarter, against 61 per cent in the December quarter.

The top 5 clients alone accounted for 55 per cent of revenues, up from 48 per cent in the December quarter.

Moreover, repeat business accounted for 97 per cent of total revenues, indicating that newly acquired clients did not play a big role in the 9.2 per cent sequential growth in revenues seen last quarter.

The company's investments in beefing up marketing infrastructure in the US has pulled down its profitability in the region "" US operations reported a negative earnings before interest and tax-level margin of 25 per cent last quarter.

But the company's March quarter results were helped by a drop in staff costs as a percentage of sales, down almost 10 percentage points compared with the preceding quarter.

According to the company, the drop in staff cost is due to higher offshore work as well as an increase in the proportion of fixed-price contracts. Besides, manpower utilisation rates improved to 87 per cent last quarter.

Likewise, operating margins improved from 15 per cent in December to 24 per cent last quarter. Another positive sign was the addition of 45 employees in the joint venture with Deloitte Consulting, which analysts feel will contribute to revenues significantly in the next few years.

A next possible trigger for Mastek would be the guidance it gives for FY03 after its Q4 results, although one has to keep in mind that the company was far from accurate in its estimate for the current year.

Arvind Mills

Good times seem to be here again for Arvind Mills after a long while. Denim prices have been rising and are higher by around 20 per cent YoY. Contributions from exports have also gone up.

On the financing front, Arvind Mills stands to gain significantly through a debt-recast approved by the financial institutions. As per the restructuring, institutions have the option of buying back their loans at 55 per cent of their principal values.

The company expects a reduction in debt levels by Rs 900 crore involving an outflow of Rs 400 crore. This would also result in a Rs 500 crore one-time gain by writing off the loan from its books.

For the quarter ended December 2001, Arvind Mills had a net loss of Rs 21 crore, while that for the last financial year (ended September 30 for 18 months) was Rs 451 crore. Operationally, Arvind Mills' performance has improved significantly with operating margins at 21 per cent in the September-December 2001 quarter against 10 per cent in the corresponding period.

The high margins were on account of higher realisations for fabrics combined with higher volumes as well as lower cotton and naphtha prices.

From a market dominated by denim, Arvind Mills has changed its structure towards other value-added fabric used in cotton shirts and trousers. In line with this, the contribution by denim fabric fell from around 65 per cent in 1999 to approximately 55 per cent in 2001, though the periods are not comparable.

Being accredited by international brands has also meant an increase in exports, which increased from 47 per cent in 2000 to 55 per cent in 2001. Arvind Mills is also contemplating growth in the garment packages business where they provide ready-made garments to be branded.

The tear in Arvind Mills fabric is that it is prone to the volatility in naphtha prices, (naphtha is used in its captive power plants) which track changes in crude prices. The December-ended quarter was beneficial for the company as crude prices had dipped post-September 11.

However, the recent highs of $26 per barrel will no doubt impact naphtha prices too.

(With contributions by Mobis Philipose and Sameer Ranade)