Infosys Technologies' first quarter results have come as a pleasant surprise to the stock markets. While it was largely expected that net profits would be in the region of Rs 50 crore, the actual figure is much higher at Rs 60.61 crore. The scrip touched an all-time high of Rs 4,012 on Friday before closing 4 per cent higher than the previous close at Rs 3,861. However, the impressive 156 per cent jump in net profits could not have been achieved without the Rs 8.13 crore earned due to exchange differences on the translation of foreign currency deposits kept abroad and the Rs 3.52 crore interest on the deployment of funds raised through the issue of ADRs. Sans the non-recurring income of Rs 11.65 crore, the company would have posted a post-tax profit of Rs 48.96 crore - in line with market expectations.

The company has reported a 74.58 per cent jump in operating revenues to Rs 170.27 crore for the quarter ending June 1999. Total expenditure as a percentage of operating revenueshas fallen from 68.51 per cent to 62.33 per cent. As a result, the growth in operating profits has been higher at 108.86 per cent. While the operating profits stood at Rs 64.14 crore, operating margins have improved from 31.49 per cent to 37.67 per cent. After adjusting for the Rs 11.65 crore non-recurring income, cash profits have grown by 109.68 per cent to Rs 66.28 crore. Cash margins have improved from 32.11 per cent to 36.01 per cent. While profits before tax have grown by 113.57 per cent to Rs 56.96 crore, pre-tax margins have improved from 27.10 per cent to 30.95 per cent.

The improvement in margins coupled with the sustained high growth rates augur well for Infosys Technologies' shareholders. Considering that the company has cash & cash equivalents of Rs 444.72 crore, it would find it relatively easier to grow through acquisitions. While the revenues from the y2k business as a proportion of total revenues have been falling continuously since the first quarter of the previous year, e-commerce hasbeen contributing more to revenues. Also, the company has been consciously reducing its dependence on the US market by increasing its concentration on the European markets. In percentage terms, there has been a significant increase in revenues form Europe.

Reliance Industries

The cap on capital expenditure imposed by Reliance Industries in the next three years may see the company going the Bajaj way in giving returns to shareholders. The operations of Reliance Industries have started generating huge cash inflows and its active treasury department has ensured that income from cash also generates substantial returns. Income from treasury operations has surged ahead and forms a substantial part of the total income. This strategy is quite similar to that of Bajaj Ltd, where the company parks funds in investments and loan and advances to generate income close to 50 per cent of the pre-tax profit.

In the first quarter, Reliance's "other income" consisting of dividends and interest on investments, is 29per cent of the company's earnings. The importance of treasury operations lies in the simple fact that if we remove the effect of earnings from investments, we find that earnings from operations have shown an approximately flat growth rate. In this quarter the earnings from operations are at Rs 360 crore, while in the same quarter last year, the earnings from operations were at Rs 350 crore.

Treasury operations cannot be strictly said to give assured returns to the company. In fiscal 1997-98, the company earned Rs 249 crore from effects of volatile exchange rates. But in fiscal 1998-99, this income dropped to Rs 42 crore only. According to analysts, returns on financial assets would be at best 10 - 15 per cent. The volume of funds invested can rise and so would be earnings. But since the capital base also rises, the return on capital employed in future can get depressed because of increased emphasis on financial assets. So far as Reliance's operations are concerned, although there was a volume growth of 12per cent, the drop in realisation by seven per cent saw sales growth of 5 per cent only. Lower exports of Rs 156 crore ( Rs 170 crore) also contributed to lower sales growth.

Accordingly the operating profit rose marginally from Rs 713 crore to Rs 750 crore in the current quarter. The operating profit was also adversely impacted by higher rise in raw material prices. Raw materials such as Naptha, Paraxylene and EDC prices rose by 15 per cent, 5 per cent and 40 per cent respectively, while product prices on an average improved only by 2-5 per cent. Higher product prices also saw lower inventory levels and resulted in much higher sales volume growth rate compared to the production growth rate. For example in Q1 1998-99 compared to Q1 1997-98, industry sales for polyester grew by 27 per cent, while the production volumes for the entire industry grew by only 7 per cent. The imports were marginal in this sector. The same picture is repeated in polymers and fibre intermediates. The upshot was reduced inventory.Depletion of inventory has a direct impact on reducing the operating profits and margins.

The interest capitalised in Q1 was Rs 121 crore ( Rs 64 crore in Q1 1997-98) and net interest expense was at Rs 183 crore ( Rs 168 crore). Although new plants were commissioned the effect on depreciation levels was marginal at Rs 207 crore ( Rs 195) in the first quarter.

Reliance foresees better price realisation in polyesters. They expect that the market would be able to absorb a price hike. Hence although the second quarter is part of the slack season,higher prices can be realised.

Further an extra one lakh tonnes of polyesters are required per year for the next five years. This would mean additional PTA requirement of 4.5 lakh tonnes and 1.65 lakh tonnes of MEG capacity. The company would be building these through a mixture of de-bottleknecking and revamping the existing units. Importantly the investments for most of the projects would be comparable to maintenance cost in the existing polyester plants. Thesevolumes along with higher realisations should be able to boost earnings. Analyst say that impact of polyester on Reliance's bottomline is around 20 per cent. This may rise to upto 30 per cent of total earnings in future. Nevertheless, the net impact on growth rate of earnings would be less as other sectors may not show a similar rise in earnings.

In polymers bulk of stated expansions and additions would be completed in a few months. With lower value addition from propylene to polyproplene conversion as compared to converting ethylene to polyethylene, the effect of current PP additions to the bottomline would be less than what was achieved by installing PE plants. Even the management feels that the growth rates in earnings seen earlier would be difficult to sustain. Consequently the ROCE would remain at existing levels or improve marginally. With Rs 2000 crore of liabilities refinanced at lower interest, and the company pushing active strategies in reducing debt cost, the cost of capital would continue toreduce. With stagnant or marginally improving ROCE,perhaps the reduced cost of capital, along with moderate growth in earnings, would aid the re-rating of the stock from the current levels.

With contributions from Sarad Saraf & Manish Saxena