Moving up the value chain

The Patni share has beaten the BSE IT index since listing

Since it listed earlier this year, the Patni Computer Systems stock has gained 27 per cent, in line with Infosys and much better than the 12 per cent rise in the BSE's IT index.

Last quarter, revenues grew 10.7 per cent in dollar terms (in rupee terms, this works out a growth of over 17 per cent), and much of this growth came from non-GE accounts.

Non-GE clients accounted for 91 per cent of the incremental revenues. What's more, the company has posted an operating margin of 20.9 per cent in the six months till June, higher than the margin of 18.8 per cent in CY2003.

And although there was a salary revision in the June quarter, even gross margin in the first half period at 39.9 per cent was higher than last year's margin of 38.7 per cent.

A look at the revenue break-up at the service line shows that the company has moved up the value chain, albeit marginally. Proportion of revenues from application development and maintenance fell from 77.6 per cent last year to 75 per cent in the first half of this tear.

Meanwhile, the Patni stock, although it has done well vis-a-vis the industry, trades at less than 14 times estimated FY05 earnings. Adjusted for the huge amount of cash on its books, the PE works to less than 11 times earnings.

The generics problem

Two large Indian generic exporters Ranbaxy Ltd and Dr Reddy's Ltd, recently reported a decline in their June quarterly results.

While these companies do have differences in their product portfolio and strategy, both have encountered similar problems in the last quarter, resulting in lower profits.

Crucially, in the critical American market, both companies had to grapple with a difficult environment "" in the case of Dr Reddy's Laboratories (DRL), it faced strong pricing pressures in two of its best selling generics "" Fluoxetine and Tizanadine, leading to its combined sales in America dropping 60 per cent in Q1 FY05.

In addition, its R & D expenditure jumped 50 per cent in the last quarter "" analysts point out that this increase in expenditure is unavoidable given the fact that the company has had no big product launch since its exclusive marketing rights for a generic version of Eli Lilly & Co's anti-depressant Prozac ended almost two and half years ago.

To the company's credit it has grown its formulation and bulk drugs business but that that could not prevent its net profit falling 78.16 per cent in the last quarter to Rs 17.3 crore. Also operating profit margins declined 1716 basis points to 2.97 per cent in the last quarter.

Ranbaxy Ltd also saw its sales in the US decline 9 per cent in the last quarter, largely due to a fall in sales of Cefuroxime Axetil. Ranbaxy's R&D expenditure also rose by 16 per cent in the last quarter, albeit slower than its rival DRL.

While the company has expanded its sales in Europe and domestic markets in the last quarter, that couldn't prevent its net profit declining by 6 per cent.

Going forward, for both the companies to grow profits aggressively quick products launches are the key.

Inflation""the base effect

Everybody knows that inflation has moved up from 6.09 per cent on June 26 to 6.52 per cent on July 17, setting off alarm bells in the bond markets.

It doesn't seem to have set the alarm bells ringing in the Finance Ministry, though, if chief economic advisor Ashok Lahiri's remarks are any indication.

Lahiri has said that while there's a possibility of a one-off hike in fuel prices, good news on the monsoons will "stabilise" inflation.

There's good reason for the chief financial advisor's sang froid. Because, while the inflation rate has gone up sharply, the wholesale price index has remained at exactly the same place. The WPI was at 184.7 on July 17, precisely where it was three weeks ago on June 26.

So why has the inflation rate gone up? Because while inflation was at 5.15 per cent as on June 26, 2003, it fell to 4.65 per cent as on July 17, 2003. In other words, the only reason the inflation rate has gone up is the base effect.

The bond market doesn't seem to find that very comforting, however. That's because, as the table shows, one reason why the overall index has remained steady is because the index for fuel has come down. With oil prices setting fresh records everyday, that's clearly an unsustainable trend.

 

Gauging costs
Levels of price indices, 2004	Jun 26	Jul 17
Wholesale price index	184.7	184.7
Primary products	186.3	185.6
Manufactured products	163.9	164.4
Fuel products	274.9	274.4

On the other hand, there was a clear spike in the WPI in September last year. Average WPI went up from 173.4 in July to 173.7 in August, with a jump to 175.6 in September.

The base effect in September will therefore ensure that the headline inflation figure is muted next September.

With contributions from Mobis Philipose and Amriteshwar Mathur