Ringing right

VSNL shares have jumped by over 10% since its results were announced this Monday. But that doesn’t necessarily mean that the markets were excited about the results. Analysts point out that the rise in share price is probably because of rumours that the value of surplus land in the company may finally get unlocked.

The results, actually, weren’t very encouraging. The highlight of last quarter’s results announcement was that the company shared financial details of its international operations for the first time. On a cumulative basis, international operations (mainly consisting of Tyco Global Network and Teleglobe International) posted a loss of Rs 410 crore for the year ended March 2006. On a standalone basis, the Indian operations reported a net profit of Rs 524 crore after excluding exceptional items. The losses on the international operations, therefore, have wiped away nearly 80% of the company’s profit. Consolidated net profit (adjusted for exceptionals) stood at Rs 114 crore, or just 2.5% of the company’s total turnover of Rs 4,562 crore. For the standalone business, net profit margin was as high as 14%.

Also note that Tyco’s results have been consolidated only for a nine-month period commencing, while Teleglobe’s results are for just 46 days starting February 14, 2006.

Considering that these loss-making companies will be part of consolidated accounts for the whole year in fiscal 2006-07, profit growth could be under pressure. But the company is confident that profits would grow thanks to benefits of scale and better utilisation of networks and other assets of various group companies. Currently, there’s a duplication of networks, which if rectified would result in significant cost savings.

VSNL would also see the full benefit of the cut in annual license fee announced by the government earlier this year. In financial year 2005-06, the benefit accrued only in the March quarter. The wholesale voice segment (57% of revenues) saw a 75% jump in profit in the March quarter thanks to the fee cut. But analysts said the extent of savings on this account may whittle down owing to competitive pressures this year. The data business is already witnessing pressure on margins owing to a drop in IPLC (international private leased circuits) prices. With realisations expected to be under pressure, much depends on volume growth and the resultant benefits of scale.

On the valuation front, it needs to be noted that VSNL’s land holdings and its stake in Tata Teleservices are together valued at about Rs 160-170 per VSNL share. Excluding this, the core business is valued at a little over Rs 200 per share. This seems high based on last year’s consolidated EPS of Rs 4, but the markets seem to be hoping that once the synergies from the acquisitions kick in, earnings would be much higher.

Pfizer riser

Pfizer has reported strong operating profit growth for the second quarter in a row. Profit grew by 50% last quarter, more or less in line with the 56% jump in profit in the preceding quarter. Analysts said the improvement in profit margins is on account of the restructuring of the company’s sales force.

Revenues, too, grew at an impressive rate of 24% last quarter. The pharmaceutical business accounted for a major portion (about 88%) of the revenues while the remaining was brought in by the animal health and service clinical development operations.

Operating margins for the quarter improved by 380 basis points to 22%, which resulted in a 50% jump in operating profit. But net profit grew at a much higher rate of 132%, thanks to an exceptional gain of Rs 12 crore arising out of the sale of a property in Hyderabad.

Thanks to the jump in profit, analysts may have to revise earnings estimates for the year. Consensus estimates put core earnings growth at about 12% for this year. But core earnings have grown by over 40% in the first-half period.

Also, thanks to strong earnings growth and correction in the markets, PE valuations have come down significantly to less than 20 times trailing earnings, from about 30 times just last quarter.

Interestingly, Pfizer’s shares haven’t risen since the results were announced, which indicates that the markets still need convincing that growth rates would be high even going forward.

Contributed by Mobis Philipose and Pallavi Pengonda