The Hindu Business Line : Stock Takes

With reports of Coca Cola's interest in the Glaceau brand doing the rounds for quite some time now, the stock price of Tata Tea had already run up to a significant extent in expectation of a deal to buyout Tata Tea's stake in Energy Brands Inc (owner of Glaceau).

Apart from a sizeable cash inflow of $1.2 billion (about Rs 4,800 crore) from the deal, Tata Tea has also managed to pocket a tidy profit of $523 million (about Rs 2,100 crore) representing the difference between its own acquisition price for Glaceau and the recent sale price for its 30 per cent stake. However, the manner in which the company chooses to deploy this cash would be crucial to the future direction of the stock price. If used to retire the substantial debt on the groups' balance-sheet after a series of debt-funded overseas acquisitions in recent years, the cash inflow could help improve earnings prospects.

Balanced against this is the fact that Glaceau was among the most promising brands in Tata Tea's current portfolio, in terms of its growth potential. With the sale of this brand, Tata Tea is once again left with a clutch of conventional beverage businesses spanning the globe. As these are unlikely to offer the growth potential of Glaceau, the company may again be forced to scout for new acquisitions to drive growth. The stock may continue to trade at a valuation discount to its FMCG peers.

Everest Kanto faces margin pressure

Everest Kanto Cylinders (EKC) registered an 80 per cent growth in net sales and 114 per cent increase in earnings for FY-07, on a consolidated basis.

Healthy realisations and high utilisation led to the expansion of net profit margins. However, on a standalone basis, revenues remained flat while earnings fell by about 50 per cent. This can be explained by the exclusion of contributions from EKC's Dubai facility in Q4 of FY-07 compared to the corresponding previous quarter, as the Dubai facility has been transferred to EKC's wholly-owned subsidiary.

On the operational front, while margins expanded on a year on year basis, change in sales mix in the Indian operations led to a decline in margins on a sequential basis. Driven by a robust demand, EKC has announced an investment of $60 million (approximately Rs 240 crore) for further expansion through equity-linked instruments. This apart, the company has also announced a 5:1 stock split.

Tension mounts for Fortis

The Fortis Healthcare stock has been under pressure in recent times following an escalation in tension between the Fortis management and a leading cardiologist at its key hospital — the Escorts Heart Institute and Research Centre (EHIRC). The two parties have reached an out-of-court settlement towards the end of the week. But irrespective of this outcome, uncertainties remain about the initial takeover and operation of EHIRC by the Fortis group, which is under litigation.

Further clarity on this front may emerge only after the next Court hearing. At the current price of Rs 92, the stock trades at a premium to Apollo Hospitals, a peer company which has better profitability and return parameters. This suggests that further downside to the stock cannot be ruled out.

BL Research Bureau