The Sebi chief’s soothing words, his promise that he will ease registration norms and facilitate the conversion of sub-accounts to foreign institutional investors (FIIs) led to a huge relief rally on Tuesday. The Sensex is now just 2.9% away from its levels prior to the participatory note (PN) scare. The chart shows quite a few emerging market indices have either fallen as much or more in the same period. While Sebi’s clarifications help, there is bound to be an impact on incremental flows—current Indian equity prices seem to ignore that possibility.

That said, the government may actually have achieved its objective to some extent. Massive inflows of about $1 billion-a-day have ceased and the rupee has already corrected. And despite speeding up the FII registration process, there will always be some PN holders (such as hedge funds that are not regulated) who will not be able to take the FII route. Also, the signal has gone out loud and clear that regulatory risk exists in the Indian market. These may have the desired impact and lead to the hottest of hot money not coming to our shores. But if that was the objective, the ham-handed manner in which the new rules were announced and the confusing signals given were completely unnecessary.

The authorities’ pronouncements on the PN issue have been riddled with contradictions. For instance, the finance minister had clearly stated that the purpose of the new regulations was to moderate inflows. At a meeting in New York, he went even further and said the colour of money had nothing to do with the decision. And yet the Sebi chief made it amply clear on Monday that as far as he was concerned, the regulation was to improve the quality of inflows. If that was all that was being aimed at and if the regulator did indeed want to speed up FII registration and revisit the rules to allow hedge funds and other investors access to the market, then the whole package could have been presented very differently and the uncertainty and volatility of the last few days avoided.

Satyam: high on growth, low on margins

Among the top five companies in the sector, Satyam Computer Services Ltd has been the only one to grow revenues by over 10% in rupee terms over the June quarter. Last time around, it was the only company to report double-digit revenue growth in dollar terms. It’s likely that Satyam would end the year till March 2008 with the highest revenue growth amongst its peers.

However, Satyam’s operating margin has fallen below the 20% mark, from over 22% in the June quarter. In comparison, Infosys Technologies Ltd reported an operating margin of 31% last quarter. And although the company’s revenue growth has been the highest in the first half period, growth in core earnings before interest, tax and non-operating income, at 14%, has been much lower than that of Tata Consultancy Services Ltd (TCS) and Infosys.

According to the company, the sharp 260 basis points drop in margins in the September quarter is mainly due to wage hikes, which hit margins by 450 basis points. But analysts point out that companies such as Infosys and TCS have been able to manage margins much better through benefits of scale and lower per capita wage costs. Satyam’s core profit margin has dropped by over 200 basis points in the six months till September, against a drop of less than 100 basis points for TCS and Infosys.

Satyam has indulged in higher-than-industry salary increases for two years now. Salary costs as a percentage of sales rose to as high as 64% last quarter, up from 61.4% in the year-ago September quarter. While this has helped curb attrition, the impact on margins is telling. The positive for the company is that revenues are growing at a fast pace. It’s because of this that analysts are planning to retain earnings estimates for the year, despite the higher-than-expected drop in profitability.

Volume growth boosts Suzlon

Suzlon Energy Ltd’s consolidated profits after tax rose by 68% during the September quarter, a welcome change from the poor show during the first quarter. Volume growth was excellent, with sales of 683MW compared with 388MW for the year-ago period. True, part of the reason was because of the turbines in transit coming down from 178MW at the end of the June quarter to 38MW at the end of the September quarter, but even apart from this, sales growth was robust and the management says that volumes can only increase during the next few quarters. New orders are pouring in thick and fast, with the consolidated order book at 3250MW, up from 2,882MW three months ago.

Suzlon is also going in for massive capital expenditure that will take its capacity from the current 2,700MW to 5,700MW by 2009 and the company plans to take funding approvals to issue equity/debt/quasi-equity amounting to Rs5,000 crore. While the capex will push up interest and depreciation costs, that should be neutralised by higher volumes. Ebitda (earnings before interest taxes depreciation and amortization, a measure of operating profit) margins in the second quarter were at 16.1%, well above that in the first quarter. Margins were also impacted by wind turbine restoration expenses following disturbances at the company’s sites at Dhule and Sangli—this affected Ebitda by 1.4% in Q2. With volumes in the second half at 60% of full year volumes, margins should, at the very least, be maintained during the second half. However, rupee appreciation will also have an impact and the management says that a 10% appreciation of the rupee will squeeze Ebitda margins by 1.5% to 2%. Despite substantial capex by all players, the Suzlon management says that supply will continue to remain tight in the industry. The company is fully booked for the next two years and they have also started receiving orders for 2010.

What are the risks? Revenues booked per MW were Rs4.59 crore in Q2, down from Rs4.73 crore in Q1. But that has been offset by higher volumes. The main risk comes from a volatile supply chain, with timely availability of gear boxes and bearings being a challenge. But the excellent second quarter results, the proposed listing of its subsidiary Hansen Transmissions International and its stock split sent the stock soaring 9.8% on Tuesday.

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