Q3FY11 preview: Capital goods to do better, GRMs up for oil & gas, lower PLF in power-II

CAPITAL GOODS

The last two quarters are normally strong for engineering companies, so strong execution is expected. However, margins may fall with a rise in raw material prices and there could be some issues in terms of order booking. 

Larsen & Toubro

Q3 orders intake so far stands at Rs74 billion. Margins could be flattish to negative.

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

80,714

92,608

96,674 – 107,234

Net profit

6,103

6,941

7,294 - 7,906

BHEL

Steady execution is expected to drive a 20%+ revenue growth. However, margins could fall a bit. 

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

71,003

84,907

85,914 – 91,942

Net profit

11,096

11,423

12,238 – 14,893

OIL & GAS

For the December quarter, Singapore gross refining margins (GRMs) were up 31% q-o-q and up 90% y-o-y at $5.5 per barrel. Polyester margins were up 15%. Polymer spreads were down about 3%.

Under recoveries in the system are expected to rise with rising crude. In the September quarter, the government gave ONGC around Rs 130 billion as subsidy for 1HFY11. At an average brent rate of $81 per barrel and the forex rate at Rs 45.5, the total under-recoveries for this year could be Rs 639 billion (Motilal estimates).

Reliance Industries

KG gas production was low at around 55 mmscmd (million metric standard cubic metres per day). But gross refining margins (GRMs) were up and petrochemical margins are expected to be higher, contributing to growth.

Rs bn

Dec 09

Sept 10

Dec 10

Net sales

568.6

574.8

542.8 – 692.3

Net profit

40.1

49.2

49.9 - 52.5

ONGC

Gross realisations for the oil explorer are expected to be up both on year and on quarter and could be almost $90. Net realisations could be around $65. The hike in APM gas prices will continue to help.

Rs bn

Dec 09

Sept 10

Dec 10

Net sales

153.1

181.9

149.6 – 189.2

Net profit

30.5

49.9

43.3 - 65.9


GAIL India
Gas transmission volumes for the public sector gas distributor are expected to be higher y-o-y and marginally higher q-o-q. Transmission tariffs are also expected to be higher.

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

61,880

81,041

68,537 – 86,402

Net profit

8,599

9,235

8,016 - 12,187

Cairn India

Cairn's earnings are expected to rise substantially over the December quarter, as well as the coming quarters, with rising output from its Rajasthan block.

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

4,955

26,864

27,299 - 34,381

Net profit

2,910

15,851

15,810 - 19,946

POWER

Merchant power will likely suffer a negative impact due to lower spot prices. All-India generation is up around 5% for thermal, 11% for hydro, and 4% for gas-based plants. Power deficit is down by about 7%, for a fourth consecutive month. While there has been generation growth due to capacity addition, plant load factors have shown a negative trend.

NTPC

There have been delays in commissioning new capacity by the power utility. Consequently, generation growth could be moderate.

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

111,837

147,526

131,754 - 45,388

Net profit

22,550

21,074

18,863 - 23,734


Tata Power

Haldia and Trombay will suffer due to lower merchant tariffs. Higher costs of fuel (coal) will eat margins. 

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

15,665

15,708

15,933 – 17,764

Net profit

1,479

2,517

1,081 – 2,008


FMCG
Sales growth for consumer goods producers is expected to be volume driven. Raw material costs will put pressure on margins. The competition for marker share is intensifying.  

ITC
Cigarette volumes may rise a bit; they were down 2% in the first half, due to a sharp 16.5% increase in excise duty and price hikes of up to 15%. FMCG business losses could be flat q-o-q.

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

45,802

51,472

51,648 - 54,684

Net profit

11,442

12,467

12,596 – 13,915

Hindustan Unilever Volume growth for the country's largest household products and consumer goods maker is estimated in the lower teens. Price increases for palm oil and tea may hit margins in Q3; higher input costs for LAB and HDPE could hit in the next quarter. The company has not increased prices despite the increased raw material costs.

Rs mn

Dec 09

Sept 10

Dec 10

Net sales

45,732

47,647

48,646 – 51,185

Net profit

5,990

5,257

5,801 – 6,596

 (This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)

User

Q3FY11 preview: Good growth in pharma-III

As the rush of third quarter results picks up this week, we take a look at how the big names in some major sectors are expected to fare. This is the concluding part of a three-part series

PHARMACEUTICALS

Good topline growth is expected. Contract research and manufacturing companies would not have done very well. MNC pharma companies will do slightly better than the big four Indian generic companies. 

Dr Reddy’s Laboratories

The branded generics and regulated markets business is expected to come strong for the country’s No.2 drug maker by sales. This segment of its German operation suffered losses in the previous corresponding quarter. The December quarter should see some gain in market share in Prevacid, Allegra and Prograf generic sales in the US. 

Rs million

Dec 2009

Sep 2010

Dec 2010

Net sales

17,296

18,704

19,106–19,860

Net profit

5,217

2,456

2,379–3,313

Sun Pharmaceuticals

The company’s topline will gain substantially from its subsidiary Taro. Domestic formulations and exports will probably grow by around 13%. Taro is expected to cause a sharp margins decline. 

Rs million

Dec 2009

Sep 2010

Dec 2010

Net sales

10,209

13,701

13,838–19,332

Net profit

2,575

4,107

2,712–4,823

Cipla  

Rs million

Dec 2009

Sep 2010

Dec 2010

Net sales

14,385

16,154

15,439–16,204

Net profit

2,890

2,630

2,519–3,075

Lupin

Formulations and growth from advanced markets such as Japan should be substantial. The US generics business should sustain strong momentum (branded business revival, especially Antara, would be key to growth). The domestic business will be helped by steady new introductions. 

Rs million

Dec 2009

Sep 2010

Dec 2010

Net sales

12,554

14,051

14,274–15,351

Net profit

1,606

2,150

2,144–2,533

User

It’s a Brave New World out there on the oceans. . .

If you thought everything was ship-shape in the sea-transport business, you have another think coming

Here's another simplified statistic, where all the numbers have been reduced to one parameter and length. If placed stern to bow, touching each other, in line, then the large bulk carriers- (Capesize ships and similar vessels), presently anchored off the coal and iron-ore loading ports of Queensland, flooded Australia-they would stretch for over 60 kilometres.

In double file.

One reason for this is the bad weather and climate-change induced floods currently swamping an area in this part of Australia-which is larger than France and Germany put together.

BHP-Billiton and Rio Tinto, the largest and second-largest mining companies respectively in the world, have already declared 'force majeure' in this part of the world-thereby taking advantage of conditions permitting them to legally back out of contracts.

Another reason is, simply, is that there doesn't seem to be enough cargo going around for so many ships. With large numbers of new ships ordered during the boom periods a few years ago now being delivered worldwide, often going straight from shipyard into lay-up (storage), there is no denying that excess tonnage far exceeding demand exists afloat and in new building yards, mainly in the Far East. Read: China.

M2M Management Ltd, a hedge-fund group, had to actually pay a charterer to use its Capesize bulker (that's a capacity of over 100,000 tonnes) to move coal from the Asia-Pacific region to the Atlantic Europe region. Something like you and I being paid by a car-rental company to hire a chauffer-driven car-and all we pay for is the actual-stuff like insurance, fuel, parking and tolls.

So why, then, are the fluctuations in ocean freight rates so important to the world's economy? The answers are complicated, but here are a few reasons that try to explain the larger 'macro' picture.

Alan Greenspan used to, famously, watch the shipping freight indicators as a means to predict future trends. Today, it is simply not so easy-smaller ships, like Panamax and Handy Sized bulkers, for example, command better freight rates than do the larger Capesize bulkers.

Piracy surcharges and insurance rates, as well as costs of providing security, are loaded directly on to the shipper. Oil-pollution indemnities running into billions of dollars are covered under conventions and funds which are-you guessed it-pulled out of the pockets of the rest of the world.

Simultaneously, with prices for commodities of all sorts going through the roof, insuring cargo and carrier has become another money-spinner. Even fuel prices have to be hedged-so there are fuel surcharges and then there are further insurance covers on the fuel in the bottoms, and the environmental risks from them.

What fun. But freight rates in the negative? For some reason, ship-owners don't seem too perturbed. And justifiably so-large parts of the world's fleet are now owned and controlled not by ship-owners-but their banks and insurance companies. Who then will give those ships back to the ship-owners to operate these vessels?

So, it's the rental car for negative sums vaalaa example again-the guy who owned the rental car company has now become an employee on sub-contract in what is now owned by the bank.

Is shipping, then, about to become a game, where the ship itself is operated at a notional loss so that the owners, who increasingly are in hock to the banks and insurance companies can actually make more money, but for the banks and those who back the banks?

That, actually, is not such a strange idea. Nor is it, for that matter, a fresh one.

Merchant shipping, till about a few decades ago, and most certainly in the centuries when the colonial powers went about conquering the 'New' Worlds, the 'Old' Worlds and also the unknown worlds, was by definition and actual truths, an extension of the red ensign, the ruler's sword and the religious evangelists.

Not to forget the financiers. Even today, the actual financial returns on owning and operating ships are not really anywhere close to what investors would make in other commercial ventures, especially those involving international trade.

The deeper reason for owning and operating ships internationally is today rapidly returning to dominance. That's from where the word 'dominion' was derived, incidentally, and rightly so too.

That's why 'domination' now rules the game. Consider the flow of information, for example, nobody knew better than the (dominant) ship-owner-who was in the thick of reality-on what was really happening in a far-off country. It was again domination that ruled the exchange of all sorts of commodities worldwide-salt for diamonds, slaves for gold, tea for opium, silks for cotton-and all the rest of it which we were not taught in our history books.

Today, the routes are the same, but the commodities have changed-they dominate the flow of large sums of money, it could be from the narcotics-oil-weapons triangle, via the other beneficiaries of 'hot' money, and there are no taxation standards or money-laundering processes which can even get close to trying to control ocean ship monetary conversion methods.

And the most important dominate, certainly, the 'National Interest'-where beneficial and despondent ownership are hidden behind layers of secrecy but end up in the clutches of a handful of countries.

Think of how 'National Interest' ensured that international entities like the Vatican, DuPont, IBM and Ford-amongst others-happily played both sides of the Allied and Nazi interests, till clarity was reached on which side would win-at which time National Interest quickly aligned itself.

So is the fact that a large ship is currently steaming across oceans at a notional loss any stranger than a similar expedition made by merchant ships centuries ago to "discover" and "conquer" other countries, in the "National interest"? Not really.

Look at it this way-it is now well-established that China controls the fastest-growing mercantile fleet, as well as the shipbuilding industry, worldwide. It is also known that many other "developed" countries are certainly not comfortable with such a situation-after all, what half-a-dozen merchant ships did and can do to change the political equilibrium of a distant "dominion", cannot be done with an armada of fighting ships. Even today. See China in Africa, for example.

Now consider a "what-if" scenario-what if "they" manoeuvred things in such a way that the banks and insurance companies made all the money, while the ship-owners and shipyards were bled dry? After all, 'they' control the banks and the insurance companies, so 'they' can certainly do so. Not very farfetched, and certainly in line with the way things were explained to me, and easy to understand if you also have a mosaic background as well as understanding of shipping and financial numbers.

Ocean freight rates are likely to dip even further in the days to come.

The eventual cost to a customer for transporting goods is not going to dip, however, by a long shot. What a strange thing. Not, actually, if you know the score.

Go back to the free rental car hypothesis laid out at the beginning of this article. Now put some numbers to it-a rental car that would cost, say, Rs1,000 a day, is now available to you for Rs50 payback to you. But the insurance and other sundry costs, not including high fuel costs, would be, say, Rs5,000 a day.

And eventually, the insurance company owns the taxi. Or ship.

Statistics can be explained so simply, that is, if you have a vivid imagination, and were always interested in the numbers that went around behind making ships move worldwide.

A pity about the rains in Australia, though, and the effect on their shipping. If it hadn't been for those ships that came from Europe a few centuries ago, Australia would have been something else. And their coal as well as iron ore would have been happily resting under the ground.

(Veeresh Malik started and sold a couple of companies, is now back to his first love-writing-and is also involved actively in helping small and midsize family-run businesses re-invent themselves).

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)