Already, with software activities constituting about 14.5 per cent of total revenues against the previous year's figure of around 9.25 per cent, Aptech has seen its operating margin improve from 21.35 per cent to 22.15 per cent. Cash margin, of course, has risen by a far greater extent but that has more to do withthe fact that the company has been able to prune interest costs to negligible levels following the raising of about Rs 100 crore through a private placement of equity early in the year. While cash profit has risen by 60.63 per cent to Rs 79.93 crore, cash margin has improved from 17.87 per cent to 21.75 per cent. The 140 per cent rise in depreciation charges, which appears to be mainly on account of the newly added software development facilities, has resulted in a 51.36 per cent growth in net profit to Rs 51.07 crore.

Although Aptech's future outlook appears to be bright, the performance of the company in the quarter ended December brings forth a few concerns. One of the advantages of the rising contribution from software activities is that it helps to do away with the cyclicality in earnings. E&T majors like Aptech derive lower revenues in the quarters ending December and March but software income does not suffer from this phenomenon. Pure software companies are known to show a positive quarter-on-quartergrowth. However, Aptech's software revenues for the quarter ended December were significantly lower than the quarter ended September. This was the case even in the previous year. Thus, it may not be entirely correct to assume that the company would rid itself of the cyclicality problem by concentrating more on software. True, the company has also been increasingly concentrating on corporate training which apparently does not suffer from such a seasonality in earnings. But even this does not appear to be helping much.

The acid test for whether or not the company's initiatives are really helping to do away with seasonality in earnings would be the company's performance in the current quarter. For the last two years, Aptech has been posting a loss during the quarter ended March. If for the current quarter, it is able to post a profit, one could say with confidence that the company is well on its way to rid itself of the seasonality in earnings.

Essel Packaging
On third quarter to third quarterbasis, Essel Packaging has posted good results. Net sales at Rs 51.57 crore is higher by 29.35 per cent and despite operating margin (excluding other income) being lower by 2.35 percentage points at 38 per cent, net profit - Rs 8.91 crore is up by 40 per cent.This despite the fact that the tax outgo at Rs 4 crore has actually doubled and effective tax rate at 31 per cent is 7 percentage points higher. Adjusted for the expenditure of Rs 1.19 crore towards the import of material (nil in Q3 98-99), OPM is same as in the corresponding period of the previous year.

However, though due to Y2K stocking by all major clients of Essel was expected to post better than second quarter results exactly the opposite has happened. Lever did no Y2K stocking of lamitubes. Net sales is lower than the second quarter by 11.45 per cent and PAT is sharply lower by Rs 2.5 crore despite the tax, interest outgo and other income being flat. Even adjusted for Rs 1.19 crore expense incurred on outsourcing of material, PAT is lower thanin Q2. It is clear that the Q3 performance is affected by topline as the OPM has remained flat compared to Q2. However, one point that needs to be considered is that in the Q2 2000 despite the 44 per cent growth in topline, OPM had declined compared to Q1 whereas in the third quarter despite topline being lower and imports of material amounting to 2.3 per cent of net sales, margins have remained flat. The reason for negative growth in topline is that in Q2, the company had assembled and sold two machines boosting the topline by Rs 3-4 crore which is not the case in current quarter.

The better side is that the volumes in fourth quarter were expected to be less than in the third quarter due to stocking in Q3 but severe winter will result in volumes of better margined seamless tubes used mainly in cosmetics being higher. This will result in higher volumes and margins. The company is in the final stage of price-hike negotiations with a major customer (effective from January 1, 2000) and this alone is expectedto push up OPM by at least 1.5 percentage points. On a nine month to nine month period, OPM at 36.75 per cent is lower by 3.35 percentage points, but for 1999-2000, the OPM will be 1.5 per cent lower assuming that Q4 OPM will be 40 per cent or 4.7 percentage points lower than Q4 1998-99 but because of topline growth, the PAT will grow by 42 to 45 per cent compared to the previous year.

Emcee (with contributions from Sarad Saraf & Urmik Chhaya)