ONGC: Co’s Sept nos way below expectations

INDIA’s largest petroleum producer ONGC threw up disappointing figures in its September 2010 quarter results, reporting a profit growth of just 6% despite higher oil production, gas prices and higher realisations. What dragged it down was the spurt in the cost of dry wells, while the appreciation of the rupee also added to its woes.
ONGC’s subsidy burden grew 14.8% to . 3,019 crore bringing down its net realisation to $62.75 per barrel, from a gross billing of close to $79.21 per barrel. Still the net realisation was 11.2% higher y-o-y. Considering the impact of the rupee appreciation, however, the growth was reduced to just 6.8% at . 2,918 per barrel.
The company also wrote off close to . 2,441 crore of dry-well cost — 273% more than the year-ago period — which increased the depreciation burden by 87% to . 4,400 crore. While in FY10, the company had to write off a substantial amount on the failed Kerala-Konkan expedition, the current year’s losses were on ultra-deep exploration efforts in the Krishna Godavari basin. The company’s total gas production too came down 3.1% to 6.25 billion cubic meters during the quarter against the year-ago period, mainly due to reduced production from the Panna, Mukta and Tapti fields.
These negatives effectively nullified most of the positives. The company enjoyed the first full quarter of deregulated gas prices, which brought in additional revenues of around . 1,759 crore. These revenues, after adjusting for royalty, directly boosted pre-tax profits. In the meantime, output from the Rajasthan’s Barmer oil field, in which ONGC controls 30% of the equity, enabled the company report a growth of 3.3% in oil production to 6.85 million tonnes.
The quarter’s net profit was 6% higher at . 5,388.8 crore on a 20% rise in net sales at . 18,430 crore. The company also managed to improve its operating margins thanks to a reduction in other expenditure. But for dividends, other income for the quarter might have been substantially lower from the year-ago period, when the company had received interest income of . 230 crore from ONGC Videsh. This quarter, the dividend from Indian Oil, in which ONGC has an equity stake of 8.77%, rose nearly 3.5 times to . 277 crore.
The ONGC stock ended slightly up at . 1,308 before the company announced its results for the September quarter. The company is set to get nearly . 1,500 crore with the dismantling of the gas pool account, while the excessive write-offs remain a non-recurrent feature. Similarly, the government appears keen on coming up with a formula for subsidy-sharing ahead of the FPOs of Indian Oil and possibly of ONGC. The scrip’s p/e at 17.6 appears to discount much of these factors that can boost its profits in the near term.

UNITED PHOSPHOROUS: Sept nos don’t back up co’s high valuation

THE results of United Phosphorous showing a doubledigit profit growth failed to cheer the market as the scrip tumbled over 7%. The company has been showing a muted growth over the last several quarters, which does not support its current high valuations. Considering the results of the September quarter, the scrip is now trading 17.4 times its earnings for the trailing 12 months.
Over the last four quarters, UPL has been facing pressure on its sales growth, which has always remained in single digits. In the September 2010 quarter, too, the trend continued, with the consolidated sales growing 9.6% against the year-ago period. This was mainly due to the rupee’s appreciation.
The company’s revenues in the two key geographies of North America and Europe, which together contributed 37% of its total sales during the September quarter, fell in comparison with year-ago period. The contribution from India grew substantially to 35% as domestic revenues showed a huge jump of 45%.
The company improved its operating margins by 150 basis points to 18.5% in the quarter as raw material and staff costs stagnated. The 47.7% growth in other income, which stood at . 25.9 crore, pushed up the PBDIT by 20.8%. However, a 61% jump in interest cost and a substantial jump in the effective tax rate limited the growth in net profit to 13.3% at . 114.7 crore.
The company is currently carrying cash or equivalents amounting to nearly . 2,100 crore on a consolidated basis and is scouting for acquisition targets. Its latest acquisition was Mancozeb, the fungicide business of DuPont, in June 2010. The September quarter was the first quarter of this business contributing to the company’s revenues.
Going forward, the company is expecting to achieve around 8% to 10% organic growth in its topline, excluding this newly acquired Mancozeb business. If Mancozeb is also included, the growth could touch 15% for the whole FY11. Increasing volumes will mainly lead this growth. It appears that the key to its high valuations remains in the success of its M&A strategy.

Flying High

After facing headwinds in the past few quarters due to slowdown, the aviation industry is seeing a revival with demand growing faster than supply. But will this enable the industry to continue generating superior returns in future? Rajesh Naidu finds out

NDIA’S aviation sector has come a full circle. After the opening up of the industry and the phase of growth, competition and consolidation, airlines, which have racked up losses, are now seeing a revival with demand growing faster than supply. Strong economic growth, range-bound fuel prices and the return of pricing power signal an uptrend for the industry.
The fortunes of the aviation industry are linked closely to the state of the economy. And with growth being more or less broadbased, business as well as leisure travels are expected to pick up further, a far cry from the scenario a few months ago when several airlines had piled up huge losses and in some cases payment defaults.
What would be weighing high on investors’ mind are the prospects for the industry and whether airlines would be able to sustain profits. Can airlines still create value for its investors? The ET Intelligence Group did a reality check on the industry and found out that the answers were reassuring.
COPING WITH CONSTRAINTS
Airline companies have learnt the hard way, the lessons to optimise profits during the past five years. The huge investment that the industry attracted, thanks to the India growth story, led to excess capacity, which resulted in a price war. During the five year period — FY04-FY08 — the industry players faced consistent losses or profits, which were erratic and generated mainly in the form of nonbusiness income. This was followed by the financial meltdown.
In this situation, it was natural to see a shake-out. Over the past two years, Jet Airways acquired Air Sahara, while Kingfisher took over Air Deccan. The government went on to merge Air India and Indian Airlines. A few other insignificant players faded out of the scene. However, this process of consolidation did not have a deep impact apart from an increase in market share, as both the topline and bottomline of airlines continued to stagnate.
Airlines companies — especially the fullservice carriers — also realised that in order to boost their topline, it was crucial to focus on two areas. First, apply the brakes on capacity addition and secondly giving primacy to a low-cost carrier (LCC) service to create a hybrid business model.
LCC IN VOGUE
LCC has now become an integral part of the business model of Indian airlines. It is a key positive for airlines’ future, as the industry remains highly cyclical. The cheaper ticket price of an LCC ensures a better passenger load factor and in turn a good topline for many airlines. Among the cost-conscious Indian travellers, an LCC player, such as SpiceJet, Go Air and IndiGo would remain the first preference. Most often, it is only when they fail to obtain a seat in a no-frills airline, do they opt for full-service carriers. Realising this, purely full-service carriers, such as Jet Airways and Kingfisher Airlines, also started LCC services. Jet Airways launched JetLite and Jet Konnect services, while Kingfisher Airlines kicked off its service — Kingfisher Red. These initiatives that work on low costs have helped enhance their revenues and earnings tremendously. A rapid adoption of the LCC model has enabled Jet Airways to report consistent profits during the past three consecutive quarters. In contrast, Kingfisher, which was late in adopting this, continues to report losses and now has a negative net worth.
On the sidelines, pure LCC players, such as SpiceJet, IndiGo and GoAir, continue to thrive with the three of them commanding close to 34% of the market share today. In fact, SpiceJet was the first among the three listed players to bounce back after the slowdown and post a net profit for FY10. A rising debt burden and interest outgo have weighed down these full-service carriers. In FY10 alone, both Jet Airways and Kingfisher Airways paid almost 1,100 crore each towards interest costs, while carrying a pile of debt several times their equity base. As a result, such players chose to adopt a leaseback model to acquire new aircraft without adding to the debt burden. Take for instance, Jet Airways. The company now has 60% owned and 40% leased aircraft. It has dryleased three long-haul Boeing 777-300ERs to Thai Airways and THY Turkish Airlines.
HOW THE THINGS HAVE CHANGED
With growth back on the fast track and passenger traffic growing, there is not much of a change which is expected on the supply side. During the first nine months of 2010, the airlines passenger growth stood at a strong 20% according to the latest data published by the DGCA. This has greatly improved the load factor of the industry. From an average of 65% two years ago, the load factor has risen to 80%. And considering the upcoming holiday season, this is likely to improve even further. Better occupancy is also helping airline players increase their ticket tariffs, or revenues per passenger per kilometre. The improvement in sentiment has prompted Jet Airways to convert 60% of its flights to fullservice mode. Crude oil prices, that had wreaked havoc on the industry couple of years ago due to high volatility, have remained range-bound over the past one year. This has helped the three listed players to a large extent. The benign situation is expected to continue for the next 12-15 months, thanks to high inventories and spare production capacity in OPEC countries.
The buoyancy in the stock markets will also encourage some of the debt-laden airlines to raise funds through equity offerings. There have been media reports on QIP of Jet Airways, which, if it completes, could help it reduce its debt burden, bring down its interest outgo and improve balance sheet. There are no further capacity additions planned for the next few months as companies, such as Jet Airways and Air India, have deferred some of their earlier orders for new aircraft. At present, there are around 380 aircraft in the industry and analysts estimate if the continuing passenger growth continues within 15to 18%, around 150 aircraft can be accommodated over next five years.
VALUATIONS
On the valuation front, Jet Airways India is, at present, trading at an EV/EBIDTA of around 12 times on a trailing basis. Based on expected numbers for the FY11, the multiple will improve to around 8.5-9. The flexibility in its business model — when demand weakens it pushes its LCC services JetLite and Jet Konnect and leveraging its full-service carrier when demand improves — will be a key advantage. Investors could hold onto the company’s stock as of now.
SpiceJet, on the other hand, is trading at an EV/EBIDTA of around 12 times. The company’s successful LCC business model and a better balance sheet justify the premium. The challenges before Kingfisher appear daunting at present and apart from just the improvement in operational environment, a debt restructuring or equity infusion appear inevitable to get the company fully on track.
WHAT’S NEXT…
The coming two quarters would be good for all airlines companies considering the fact that the December and the March quarters are holiday seasons. This will ensure their yields grow and capacity utilisation improves. This will be reflected in improving numbers in their quarterly financial results and makes the industry attractive for investors. Another LCC IndiGo Airlines is also contemplating approaching capital markets for fund raising. While the industry has also been lobbying with the government to allow foreign airlines to pick up minority stake in domestic airlines, any development on these matters also will be positive news for the industry.

With inputs from Ramkrishna Kashelkar

Kajaria to shine on capacity growth

Strong Results, Current Low Valuation And Expansion Moves To Add To Its Glaze

TILES-maker Kajaria Ceramics has seen its share price rise by over 80% in the past one year, sharply outpacing the Sensex, which gained 16%.
Substantially improved operations and consistent financial results over the last five quarters have helped the growth.
For the recently completed September quarter, the company reported a smart 52% jump in net profits to 13.3 crore as it curtailed its fuel costs and reduced the interest burden. The company’s net sales growth stood at 19.6%, while its volume growth increased 4.4% to 7.08 million square metres (msm) of tiles. The operating margin weakened slightly by 70 basis points to 15.7% on account of lower capacity utilisation of the ceramic floor tile unit at Sikandrabad and the need to offer more discount to dealers for pushing sales due to heavy rains and floods in the northern parts of the country in the months of July and August.
The company witnessed a steep rise in the sale of high-end glazed vitrified tiles, which it currently imports. This resulted in a 78% jump in its cost of traded goods.
The company cushioned the fall in its margins through 16% reduction in its fuel cost and 21% cut in other manufacturing expenditure. The supply of natural gas at its Gailpur plant in Rajasthan starting May helped it curb the fuel costs.
Of the 6.9 msm ceramic floor tile capacity at its Sikandrabad plant in Uttar Pradesh, 4.2 msm was for dry-grinding technology, which couldn’t succeed in India.
After scaling down the production, the company finally closed the unit in July. The company is in the process of converting this capacity into a vitrified tile plant by adding some balancing equipment by February 2011.
Except for this plant, the company has been running its other plants at nearly 90% capacity level.
The company is also in the process of adding six msm capacity of high-end polished/glazed vitrified tiles at its Gailpur plant to be commissioned by January 2011. Once commissioned, this will replace the company’s imports and help improve operating margins. The company is aiming to achieve about 950 crore of turnover in FY11 with operating margins above 16.5%.
Considering the recent results, the company’s current valuation is 12.4 times its earnings for trailing 12 months. Considering the various efforts that the company is taking to expand capacities and augment margins, the valuations appear attractive.

L&T Top show,but slow growth in orders a worry

L&T SURPRISED the street with a better-than-expected set of numbers for the September 2010 quarter. Sales and profit growth for the last quarter was in sharp contrast to its performance during the last few quarters, which was a source of worry for analysts. A slowdown in the growth of the order book, should it persist, could be a worry going forward. Yet the company appears well placed to achieve its growth targets for the year. The strong revenue growth coupled with margins improvement was the main highlight of the company’s September 2010 quarter results. L&T’s topline for the quarter grew 17.8% to 9,331 crore — almost twice the growth rate achieved in the 12-month period till June 2010 quarter. Its operating margins improved slightly by 20 basis points to 10.8% despite rising commodity prices, and it registered a healthy 22% jump in its net profit excluding the impact of extraordinary income. The growth tempo continued for the company in its main business segment of engineering and construction with a revenue growth of 17% and 110 bps improvement in the segment margins. This hints at a pick-up in the speed of conversion of order book into revenues. Machinery and industrial products’ segment emerged as the second largest segment for the company with a 37% jump in revenues to 698 crore. The electricals and electronics segment registered a 5% dip in revenues to 672 crore.
The company had registered a 63% jump in order inflow during the June 2010 quarter, but the order inflow during the September quarter was only 11% higher on y-o-y basis at 20,464 crore. The company reported a slowdown in the process of awarding contracts to its customer industries. According to its estimates, contracts worth nearly 40,000 crore that were to be awarded during the September quarter were pushed to the second half of the year. A slowdown in the Middle East also impacted the company’s overseas order book. Although the current unexecuted order book stands strong at 115,393 crore — more than three times its FY10 revenues — investor sentiment could dampen if the growth of order inflow continues to be slow in the coming quarters.
Taking into account the latest results, L&T’s valuation is now 34 times its earnings for the past 12 months. The company is expected to improve its execution speed going forward and is likely to achieve a higher turnover and profit growth. However, the rich valuations capture most of this upside.

Rallis may be a pricey pick for new investors

PESTICIDES maker Rallis India’s growth drive continued unabated as the company posted a 28.4% growth in its net profit at 58.7 crore in the quarter ended September 30, 2010. The company has been performing well in the past three years with improving profitability.
The rise in the company’s September quarter numbers were driven by a 14.7% growth in net revenues at 368 crore. Operating profit inched up by 80 basis points to 24% despite a jump in trading activity, as the company curtailed its other expenditure. A dip in depreciation and interest costs boosted the profit growth to 20.8% at the PBT level. However, 2.1 crore of extraordinary cost towards VRS in the yearago period meant the growth in PBT appeared 24.4%.
Tax provisioning at a slightly reduced rate raised the profit growth further to 28.4%. The company’s performance in the September quarter was helped by a better monsoon this year. While the overall acreage under cultivation increased around 7% across the country, the acreage of high pesticide consuming crops, such as paddy, pulses and cotton, grew particularly higher. Even heavy rains resulted in an increase in weeds and fungal diseases, which also favoured the company’s growth.
The company is currently in the process of completing its greenfield agrochemicals plant in Dahej by the end of November 2010. The plant, which is being set up at a capital cost of 150 crore, is expected to generate revenues of 500 crore over a three-year period. This will add nearly 50% to the company’s gross block. While the first phase of the new unit will be primarily used to meet Rallis’ captive requirements, it is contemplating a second phase for expanding its contract manufacturing portfolio. Rallis has utilised its strong operating cashflows over the past couple of
years to pay off its debt.
The outstanding debt, which stood at 82.5 crore as on March 31, 2009, has fallen to 9.2 crore as on September 2010. This improved cash generation, out of better working capital management, has enabled the company raise dividends over the past six years. The favourable conditions have induced it to consider an interim dividend this year. In accordance with the company’s strategy to give specific emphasis on new products, it launched three new products in the first half of FY11.
Considering the recent results, the company is being valued over 23 times its earnings for the past 12 months. This is the highest among leading domestic agrochemicals players. The company’s growth for the past few years and improving financial health indeed justify a premium valuation. However, for a new investor, the scrip is no longer attractively valued.

CASTROL INDIA: Co holds its own, but raw material costs are a worry

CASTROL India, the leader in the lubricants business, has reported a healthy 22.3% growth in its September 2010 quarter’s net profits, which stood at 16.9 crore, as its revenue growth was aided by improved operating margins, reduced depreciation charge and a lower effective tax rate. This, however, failed to meet the market expectations; the scrip fell by 0.6% on Wednesday, in an otherwise buoyant market when Sensex jumped 2.4%.
Castrol’s September quarter numbers saw sales growing 13.5% to 643 crore with a 100 basis points improvement in operating profit margin to 26.4%. The margin improvement came despite rising raw material costs, as the company aggressively reined in its other expenditures such as staff cost and selling & admin costs. The company’s raw material cost to net sales ratio jumped to 52.4% this quarter, from 47.5% in last September. In fact, it was the highest in the last six quarters. The company achieved an absolute reduction of 11% in its expenditure on staff, selling & administration and manufacturing in spite of the rising turnover.
An 11% fall in its depreciation provisions and reduced effective tax rate at 31.2%, further helped the bottomline in achieving a higher growth rate.
For the company, brand-building and consumer-connect initiatives remain the key to its success besides developing novel products. In this regard, the company launched extensive marketing campaign with the punchline “instant protection from the moment you turn on the key”. It also launched Castrol Safe2GO programme to promote importance of vehicle safety. Sanjeevani, a rural-outreach programme for tractor owners, achieved a milestone by reaching two million tractor owners within a year of its launch.
In the last couple of quarters, the company has seen an upward trend in raw material costs, denting its margins. Its efforts to maintain and even grow its profit margins so far have proved effective. However, it could become difficult going forward, if the trend in raw material costs continues. Its future volumes growth will also depend on the performance of the automobile industry.
The company has outperformed the markets over the last one year, nearly doubling in value, while Sensex gained a little over 21%. It continues to remain a stable cash-generating company with little debt and healthy dividends.