Stocks
BHEL cashes in on markets gained from Chinese players

The company has received 80% to 90% orders from the private sector. Analysts believe markets gained from Chinese players as the main reason for BHEL’s order book overflowing

While Bharat Heavy Electricals Ltd. (BHEL) current order book stands at Rs125,800 million, as per analysts 80% to 90% of the orders received in the first half of the current fiscal have been from the private sector. All thanks to a combination of weakened presence of Chinese players in the Indian power sector and reduced orders from the public sector.

Historically, being a public sector undertaking, BHEL’s major chunk of orders has been from public sector utilities. This trend of more order inflow from the private sector companies has been witnessed recently in the first two quarters of this fiscal and analysts expect this to continue.

“BHEL has received a lot of private sector orders, especially from the second quarter onwards. If you study the first half of this fiscal as a whole, 80% to 90% orders for BHEL are from the private sector,” said an analyst.

Market players say this new trend is a result of the private sector companies now moving towards domestic companies like BHEL and L&T, rather than the Chinese players who were predominant last year. Introduction of new product categories has also helped BHEL gain more market from the Chinese players.

“Unlike last year, wherein lot of Chinese companies were taking the market away from BHEL, this year BHEL has gained on the private sector. BHEL has introduced a lot of new product categories like the super-critical 600MW unit and the 500MW unit; these moves have helped it gain market share. There is pricing advantage if you do a 660MW plant, compared to a 500MW plant. It could prove cheaper by 3% to 4%,” added the analyst.

In addition, price cuts announced by BHEL in the beginning of this year have also helped it gain more orders. “The price cuts were announced due to low cost of raw material,” added the analyst.

This new trend of orders from the private sector for Indian power companies is likely to continue for the next two quarters of this fiscal. “There were 70% to 80% orders from the private sector in the first two quarters; the second half of the fiscal is likely to witness around 30% to 40% orders from the private sector,” said the analyst.

Analysts believe this market gain from the Chinese players will be helpful to both the players in the power sector —BHEL and L&T. While L&T is strongly increasing its presence in the power sector, BHEL has the largest market share of 60%. Analysts believe BHEL will continue to retain this market share and enjoy more orders, while L&T is likely to witness an incremental advantage in orders, as it is a new power sector entrant.

In addition, the new statutory norms for the Indian power sector are likely to help Indian companies like BHEL and L&T further. As per analysts, Chinese players in the power sector are unlikely to match the new heat rates to be proposed for boilers in India. This in turn, would translate into more orders for Indian companies, which were earlier contracted to the Chinese players. Officials from BHEL were unavailable for immediate comments.

Amritha Pillay [email protected]
 

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HUL continues to suffer from poor sales and profit growth

Its much smaller rivals Dabur and Emami continue to record strong growth quarter after quarter

Despite endless restructuring of its business portfolios and continuous high-profile change of its top management, Hindustan Unilever is unable to generate any traction on its sales and profits. For the September quarter, HUL’s revenues were up by 4% while operating profit was completely flat. Compare this with the performance of Dabur India whose revenues were up by 15% while Emami Group’s sales were up by 27%.

HUL’s revenue growth has been stagnant for many quarters now. Over the past three quarters, average topline growth has ranged between 4%-6% which does not even cover inflation. Revenue growth has been continuously declining from a high of 20% it recorded in September 2008.

The recent September quarter has been especially good for fast-moving consumer goods (FMCG) companies mainly because raw material prices were sharply down in that quarter. For instance, Emami’s raw material cost was down by 35% and even Godrej Consumer Products Limited’s (GCPL’s) raw material cost was down by 15%. Both these companies took advantage of lower cost of raw materials and steady demand for their products. Emami’s operating profit was up by as much as 65%. On the other hand, even though HUL’s raw material cost was down by 9%, it had no profit growth. Dabur’s raw material cost has gone up by 3% and yet it has reported a sales growth of 15% compared to the same quarter last year. What is remarkable about HUL is that it had to spend 41% more on advertising compared to same quarter last year to get only a 4% growth in turnover this quarter (Q2 FY 10).

Another key issue with HUL is that it would maintain its high operating profit margin (39% in September 09) rather than creating growth in sales and operating profit. Interestingly, Dabur also enjoys an OPM of 36% which is as high as HUL but Dabur is able to increase its operating profit and revenues virtually every quarter. In the September quarter Dabur’s operating profit jumped by 21% compared to the same quarter last year.

Debashis Basu with Pallabika Ganguly [email protected]
 

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Shipping industry just can’t float despite govt support

Government has provided many benefits and tax incentives to the Shipping industry but in vain. Shipping companies have not made a mark in the past decade.

The shipping industry is somewhat of a blot on the India growth story. It hasn't added any significant tonnage in over 14 years as compared to the growth in most areas of business. And this, despite a large number of tax incentives, benefits and facilities doled out by the government in every annual budget over this period. In 1996, the industry carried 30% of India's foreign trade; this is now down to just 13% while the rest has gone to foreign shipping companies.

The world sea borne trade has increased by CAGR of 3.6% from 4900 million tonne in 1996 to 7000 million tonne in 2006, at the same time India's sea borne trade has also galloped by CAGR of 10% from 166 million tonne in 1996 to 471 million tonne in 2006, while our GDP has quadrapuled in the period to $ 1100 billion (2007); but Indian shipping has failed to take advantage of this growth. The overall capacity of Indian shipping increased by CAGR of just 2.2% from 7.05 million GT (Gross Tonnage) in 1996 to 9.06 million GT in 2007. This is mainly due to the greed of Indian shipping companies who are active in buying and selling ships at every profit opportunity, rather than expand the freight business. There are however a couple of exceptions such as GE Shipping and Varun Shipping.
Public sector companies like Shipping Corporation of India (SCI) had around 117 vessels of 5.1 million DWT (Dead Weight Tonnage) in 1996, that increased to 5.35 million DWT (87 vessels) in 2009. In effect, they added only 0.2 million of gross tonnage during last 14 years. Most ships purchased in this period were to replace old ships and maintain the age profile of the fleet – this too has remained constant in 14 years with no increase whatsoever. The present age profile is 18 years, which is the same as in 1996. The company’s annual investment has only gone into age profile maintenance.

In the shipping industry, tankers are usually replaced in 25 years and bulk carriers in 20 years. SCI Chairman S C Hazara told Moneylife Digital that the company plans to spend $ 4 billion on 68 ships by 2014. He says that 32 ships are likely to be delivered by 2012 and the remaining will come in by 2014 – this will expand SCI's capacity to 9 million DWT. By 2014, the average age profile of its existing fleet would have increased from 18 years currently to 23 years and will again need replacement and reduce overall capacity. In other words the same story will be repeated over and over again where new ships only replace old ones without any significant increase in gross tonnage. SCI's pervious chairman had also talked about expansion plans but did not delivery and capacity expansion. The saving grace is that SCI does not trade in its ships like other ship owners, but that is only because of the tiresome and time consuming process of getting approval from the shipping ministry.

However, there are plenty of trading opportunities for private companies. Ship valuations move in sync with the freight market, when the freight market slows down, ship valuations decline and offer excellent buying opportunities. When freight market improves, ship prices increase and private shipping companies are quick to sell off ships to make a quick profit.

Essar Shipping used to have 39 ships worth 1.5 million DWT in 1996, now their capacity is down to 1.39 milion DWT in 2007.

GE Shipping had 64 ships worth 1.59 million GT in 1996, it has doubled capacity to 2.84 million DWT with average age of 10 years in 2009 despite taking advantage of trading opportunity. This is probably due to their strategy of buying mainly old ships, which they are quick to trade. Varun shipping had 13 ships for 0.28 million DWT, it has more than doubled capacity in LPG carriers. Today they have 20 ships worth 0.63 million DWT. However, the two private companies were hardly able to create the capacity required to expand India's overall shipping tonnage despite large business opportunities.

Consider this: In 1996, Indian shipping company carried 10.4 % of general cargo, 14.5% of dry bulk and 54% of petroleum products and crude. This has declined to around 4% of general cargo, 8% of dry bulk and 26% of petroleum products and crude – the rest of the business has gone to foreign shipping companies.
Shipping ministry's plans for major investment in capacity have gone haywire. Whether it is boom times or depression, over a longer term, India's total tonnage has remained constant. For instance, between 1996 to 2004 the industry saw the deletion of 2.78 million tonne of capacity as against an addition of just 2.29 million tonnes.

This was followed by unprecedented boom in shipping time during 2005-08 when freight prices rose and triggered high valuation of ships. In fact, second hand ships were more expensive than new ships, which had a waiting period of two to three years for delivery. Consequently, that period say an addition of 4.99 million tonnage against deletion of 2.7 million tonnes. Yet, over the 14 year period, we are terribly short of what we needed to command a respectable shipping tonnage and that has reduced the share of Indian shipping to just 13 % of tonnage of total foreign trade.
Dhruv Rathi with Amritha Pillay   [email protected]

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