India Cements Ltd shares got a drubbing after the company reported a 42.9% sequential drop in net profit for the December quarter.
The company’s shares fell 5% on Wednesday, taking the total fall this calendar year to more than 16%. Cement companies based in the South have been under pressure from the Tamil Nadu government to cut prices, thanks to which their shares have been under pressure.
The results for the December quarter reveal that South-based companies continue to enjoy pricing strength. Net realizations last quarter increased by Rs132 for every tonne of despatches compared with the September quarter.
A year-on-year comparison does not make sense because of the company’s merger with Visaka Cement Industry Ltd this year.
Due to heavy rains during the quarter in key markets such as Tamil Nadu and Andhra Pradesh, volumes fell by about 7% sequentially. Key costs such as raw material, power and fuel, and freight continued to rise, however, leading to a 20.3% sequential drop in operating profit. Power and fuel costs rose by Rs103.6 per tonne of production because of rising coal prices. In addition, freight costs rose by a sharp Rs122 per tonne. Due to heavy rains in the home state of Tamil Nadu, despatches to neighbouring states such as Kerala were higher than usual, leading to a spike in transportation expenses.
Besides, Indian Railways levied a ‘busy season surcharge’ October onwards, which also impacted freight costs. The company’s net profit fell at an even higher rate because of a deferred tax liability of Rs40 crore.
While the results were disappointing, it’s important to note that pricing strength continues to be in play.
To quell the Tamil Nadu government’s concerns, the industry has decided to sell a small portion of its output at a lower price. According to an analyst with a domestic brokerage frim, this won’t alter the strong earnings growth estimates of the South-based companies. As pointed out in this column earlier this month, South-based companies are the best bet in the cement industry currently.
Better pay a high price for entry, rather than be left out of the party.
That seems the motto of Great Offshore Ltd (GOL), which has at last made its long-awaited move to acquire offshore drilling assets. It’s reportedly paying $1.4 billion (Rs5,502 crore) for Seadragon Offshore Ltd’s two submersible rigs, the first of which is scheduled to be delivered in the fourth quarter of 2009 and the second in September 2010.
Last December, DryShips Inc., a global shipping transportation company, paid $405 million for acquiring a 30.4% strategic stake in Ocean Rig ASA, which owns and operates two ultra-deepwater harsh environment semi-submersible drilling rigs. This month,Chevron Corp. struck a deal with offshore drilling contractor Atwood Oceanics Inc. for a deepwater rig for a value between $570 and $590 million.
The acquired rig, which is expected to be delivered in three years, will be leased at a daily rate of $470,000. At these rates, Great Offshore’s payback period for the investment will be less than four years. Given the global shortage of drilling rigs, the rising price of crude oil and the need to drill further offshore into deeper waters, lease rates for rigs will remain very high for many years.
And, although Great Offshore has raised Rs150 crore worth of redeemable preference shares and $42 million through foreign currency convertible bond (FCCBs), that’s not going to be enough for such a large acquisition.
But here’s what a research note by Emkay Research had to say after Great Offshore’s June quarter results: “...Even after the completion of its committed capital expenditure (capex), GOL is expected to have a free cash flow of $250 million over fiscal 2008-2010. Going by GOL’s current funding structure of 3:1 for committed capex, GOL could possibly do a capex of $1 billion. GOL’s historical track record of spotting growth opportunities better and earlier than others makes us believe that there is a strong possibility that GOL has some huge capex plans up its sleeve, which in turn would lead to earnings upsides.”
Geojit and Motilal Oswal
Broking firms have been the prime beneficiaries of the booming market. Take the two that have already declared their Q3 results—Geojit Financial Services Ltd and Motilal Oswal Financial Services Ltd. Compared with the preceding (September) quarter, profit after tax went up by 77.8% to Rs22 crore for the former and by 64.3% to Rs 53.7 crore for the latter. A huge increase in trading volumes has been the prime driver. Volumes in the National Stock Exchange cash market, for instance, have gone up 148% in the December quarter over the year-ago period. Similarly, volumes in the futures and options segment have increased by 153%. With that kind of growth, these are heady times for broking companies.
Nor are the margins to be sneered at. Geojit’s earnings margin before interest, taxes, depreciation and amortization in Q3 was 43%, while Motilal Oswal’s was 35%, despite the competitive pressures in the business.
Geojit would have done even better were it not for the regulatory shackles on commodity trading.
Both companies are seeking out new areas of growth. Geojit, for instance, is spreading its wings across the country, getting into institutional broking with BNP Paribas, increasing margin financing and expanding in West Asia. Motilal has recently tied up with State Bank of India for online broking, apart from strengthening its wealth management services. Great Offshore’s Seadragon deal was managed by Motilal Oswal Investment Advisors Pvt. Ltd. There’s a very strong case for secular growth of the broking business in the country. The Geojit stock had a smart run up recently and currently trades at around 25 times fiscal 2009 earnings. Motilal trades at around 19 times fiscal 2009 earnings. But broking is a cyclical business and should be valued at a discount to the market, unless companies in the sector diversify their revenue streams and de-risk their businesses.
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