Hexaware Technologies Ltd’s shares have gained 33% in the past six trading sessions. True, most information technology (IT) stocks have risen in the same period, but Hexaware’s gains have been far higher—the CNX IT index has risen just 6% in the same period. The company’s recent results for the quarter and year ended December 2007 don’t seem to have anything to do with this.
The results were hit by an exceptional item of around $26 million (Rs104 crore today), which almost wiped out the company’s net profit of Rs110 crore for the whole year. It was already known that the company would announce the exceptional expense, owing to a fraud by an executive in the finance department. When the company first disclosed the fraud in late November, it had estimated the losses between $20 million and $25 million.
But it’s not that things were heartening at the operating level. For the year, operating profit fell by 13.7%, although revenues rose by 22.6% to Rs1,040 crore. Operating margin fell nearly 400 basis points. Last year was the first full year of operations for FocusFrame Inc. as a subsidiary of Hexaware, and the US-based testing firm could have contributed to the decline in margins. FocusFrame lost two clients last year on account of the subprime crisis, impacting its performance. Hexaware was also impacted because of lower employee utilization and a drop in the proportion of work done in offshore locations. Operating profit fell by as much as 61% on a year-on-year basis in the December quarter, partly because of large one-off expenses such as a client event.
The firm’s guidance for the year until December 2008 implies revenue growth of between 23% and 25%, which is heartening, but hardly exciting enough to warrant the sharp increase in its scrip in the past few trading sessions. It’s more likely that the shares are playing catch-up after underperforming peers by a large margin since last year, even before the fraud was made public. Prior to the recent rally, it traded at less than eight times its adjusted earnings per share for the year until December. But now at more than 10 times trailing earnings, there’s little reason for the rally to continue much further.
Allcargo Global Logistics: betting on higher volumes
The Allcargo Global Logistics Ltd stock continued to move up on Thursday, buoyed by the premium paid for a stake by private equity firm Blackstone Group Lp. The stock had fallen substantially in the past few months, with the company posting uninspiring results in the last quarter. For the consolidated entity, net sales growth during the December quarter was 9.6%, while net profit fell 26.9% compared with the year-ago period.
The fall in net profit was on account of higher depreciation, lower other income and a higher tax outgo—at the earnings before interest, taxes, depreciation and amortization (Ebitda) level, profit was up 8.8%. Analysts say that it’ll take time for integration of the company’s global ECU Line NV business.
However, even the standalone numbers for the December quarter haven’t been very good, with net sales up a mere 0.8% and net profit down 25% year-on-year (y-o-y). The problem has been that despite volume growth at the firm’s container freight stations (CFS), average realizations plummeted 15.4% y-o-y. The addition of Mundra and Chennai CFS, which have lower realizations than the Jawaharlal Nehru Port Trust, is the reason.
While realizations may remain under pressure on account of competition, analysts believe that volume growth will make up for it. The company will be expanding by setting up eight inland container depots (ICDs) countrywide. Phase II of the expansion of the Chennai CFS, too, has commenced. By the end of calendar year 2009, the firm plans to have nine CFS/ICDs, and around Rs300 crore is required for the expansion. Of this, Rs242 crore will now come from the money pumped in by Blackstone. While there’s an option for the warrants to be converted at a higher price if the company’s Ebitda is higher than Rs190 crore in calendar 2008, that’s substantially higher than most analysts estimates.
While the Blackstone deal has given a boost to the Allcargo stock, the fact remains that Gateway Distriparks Ltd, which incidentally is also seeing pressures on margins due to competition, is available at a far cheaper valuation.
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