THE BACKBENCHERS

THE YEAR 2010 was the year of bigbang recovery for India Inc. Most companies in the big league were back on track after suffering from the financial meltdown. Though it was an all-round revival in demand spanning across sectors, there were a few laggards. These companies failed to show an improvement over their previous year’s performance for reasons including supply glut, stiff competition, entry of new players and rising input costs. ET Intelligence Group’s Jwalit Vyas and Ramkrishna Kashelkar tell you more about some of these laggards and what you can expect from them in the New Year

Reliance Capital
RELIANCE CAPITAL HAS suffered from reduction in its brokerage revenue due to a shift in the trading pattern from share delivery to derivatives. A delivery-based model earns better margins. Its general insurance business has also not been able to scale up. The only segment in which the company reported growth was consumer financing. The company is planning to set up its investment-banking arm, which is likely to take months to have a meaningful impact on the revenues. In spite of its weak financial performance and tepid stock market performance in the past one year, the company’s stock trades at a price to earnings multiple (P/E) above 50, which is very high compared to its peers.

Petronet LNG
INDIA’S LARGEST LNG IMPORTER Petronet LNG successfully carried out its expansion plan to double the capacity at its Dahej terminal in mid FY10. Still its earnings growth has remained negative for the past 12 months. The company’s inability to scale up volumes due to pipeline constraints has been the main reason behind this. Increased interest and depreciation burden on completion of capex has been the other important reason. In the 12 months ended September 2010, the company’s revenue fell 8.4% as against 55% jump in its interest and depreciation costs. The company’s problems are expected to solve as Gail expands its key Dahej-Vijaipur pipeline to transport more gas. Stagnating production at RIL’s KG basin fields also bodes well for the company. Its buoyant stock market performance captures these positives.

Suzlon Energy
LOWER DEMAND FROM BOTH THE US and European markets has affected Suzlon’s wind power business. Clients deferring deliveries resulted in losses in spite of a strong order book position of 1,550 mw as on October 2010, out of which 55% includes international orders. However, the Indian operations contributed almost three-fourths to its sales in the first half of FY11. During the beginning of FY11, Suzlon had 700 mw of international orders, out of which has managed to execute only 20% in the first half. With no clarity on the renewal of tax credits for alternative energy in the US, order flow is expected to slow down drastically. Higher raw material costs are also eating out its profits. To add to this, the company has huge debt of around Rs 1,200 crore. This means that the company will have to bear high interest burden too. The outlook therefore looks uncertain.

ACC Cement
ACC, LIKE OTHER CEMENT players, is grappling with sluggish demand conditions at a time when the industry’s capacity is set to grow rapidly. In addition, the sector is facing a rising cost structure, with higher fuel and freight costs. Weak demand conditions resulted in a drop in ACC’s realisations from selling every tonne of cement in both the June and September 2010 quarter year-on-year. The operating environment for the cement sector remains difficult, with cost pressures not showing any signs of easing. And while cement prices have shown an uptick post-monsoon, there is an uncertainty over their sustainability, particularly in the absence of any fresh government-funded infrastructure project announcement.

GE Shipping
SHIPPING COMPANIES INCLUDING GE Shipping are facing a difficult operating environment for nearly 18 months now. That is because of a sluggish demand from Western countries in the key tanker segment, which is the transporting crude oil and allied products. The companies are yet to see any recovery in demand for vessels from the key consumers in the US and Europe, despite the quantitative easing programmes put in place by several governments. GE Shipping trades at 8.6 times its consolidated profits for trailing four quarters. However, investors could well avoid the broader shipping sector, until there is further clarity.

Reliance Communications
STEEPER COMPETITION AND FALLING per user revenue have crippled the performance of Reliance Communications (RCOM). Its poor show is visible in an 11% fall in revenue and a 20% drop in operating profit in the 12 months ended September 2010. The company is saddled with a debt of over Rs 37,000 crore. Its recent low-cost fundraising to replace one-fourth of this amount is unlikely to bring any sizeable gains. Unlike its bigger peer Bharti Airtel, which has expanded into other geographies, RCOM is dependent on the Indian market. This single dependence is likely to keep its growth prospects muted given the fast saturating domestic market and low tariffs. Also, the 3G services launch will take at least four quarters to add to the bottomline. Due to these factors, RCOM is expected to report depressed numbers in the near term.

Punj Lloyd
THE LEADING INFRASTRUCTURE AND construction company Punj Lloyd has been under pressure in 2010 due to recurring problems on project execution. With its projects getting delayed it had to pay damages to its customers. The scenario is changing slowly. After posting a consolidated loss of Rs 300 crore in March 2010 quarter, the company curtailed its losses in June quarter to be followed up by a profit in the September quarter. The company’s subsidiaries, which were suffering losses, appear to have turned profitable in the September quarter. The company continues to add orders to its kitty. It has an order book of Rs 25,470 crore as of November 2010, which is 2.6 times its revenue for the 12 months ended September 2010 on consolidated basis. However, nearly 40% of its unexecuted orders are from Libya and there is some uncertainty on their timely execution. For the 12 months ending September 2010, the company had a net loss. It is currently trading at a price-to-book-value (P/BV) of 1.15 times, which is substantially low.

Methodology
We gathered trailing 12-month growth to September 2010 in revenue and operating profit for the companies that are part of the BSE 200 index. The index encompasses majority of the frequently-traded big and medium-sized companies. We then selected those companies which reported falling topline when compared with their performance in the 12 months to September 2009. After arranging such companies in the ascending order, we opted for those companies that reported a similar fall in their operating profits.