Bhel: Capex play

Outstanding order book swells for Bhel

Bharat Heavy Electricals Ltd (Bhel) has been one of the key beneficiaries of the upturn in the power capex cycle and it has helped the stock to outperform the Sensex over the last three months. The stock has gained about 10.7 per cent compared with a 4.1 per cent gain in the broader market during this period.

This upturn in capex cycle has helped the company's operating profit margin expand 162 basis points to 13.24 per cent in the September quarter. Sequentially, margins expanded 516 basis points in the September quarter.

The company's key power division has reported a robust performance in the September quarter "" revenues expanded 62.8 per cent y-o-y to Rs 2,107.9 crore.

Analysts say the company had signed a technology transfer agreement with Alstom SA for advanced boiler technology in Q2 FY06, which enabled Bhel to widen its products range.

As a result, the company was also able to build 800-1000 mw generating units. These steps helped the segment profit of the power business expand almost 60 per cent y-o-y to Rs 422.1 crore in the September quarter.

Meanwhile, the company's industry business segment profit grew almost 28.1 per cent y-o-y to Rs 114.7 crore in the last quarter on improved demand for equipment in transmission and renewal energy products.

Operating costs have also risen. For instance, raw materials, as a percentage of net sales, rose 680 basis points y-o-y to 48.11 per cent in the quarter.

However, an emphasis on higher value products, coupled with a larger turnover, helped overall operating profit expand 66.2 per cent to Rs 369 crore in Q2 FY06

The growth momentum for the company is expected from its outstanding order book, which grew 11.8 per cent y-o-y to Rs 32,200 crore at the end of the last quarter.

Also, the recent agreement with Alstom SA is expected to help Bhel maintain its domestic market share at over 70 per cent in the power equipment business, said analysts.

The street, however, appears to have factored in the growth, given that the stock trades at almost 19.6 times estimated FY06 earnings.

Shipping: Freight rate blow

Shipping freight rates across several product segments have shown signs of weakening in the September quarter, both y-o-y and sequentially.

In the VLCC segment, spot freight rates averaged about $30,172 a day in Q2 FY06 compared with $ 59,399 a day in the corresponding period of the previous year. However, sequentially, freight rates in the segment moved up about 13.8 per cent in the September quarter.

VLCCs are used to transport crude oil from the Middle East to refiners in the West, and the upcoming winter season helped improve freight rates sequentially.

Meanwhile, in the case of Suezmax, average spot rate in the quarter was estimated at $ 24, 460 per day as compared to $ 44, 490 per day a year earlier. Sequentially too, these rates have declined about 17.5 on a sequential basis too. Seuzmax carriers are used to transport products for relatively shorter distances.

Similarity, the Baltic Dry Index averaged about 2431 in Q2 FY06 compared with 4019 in the corresponding period of the pervious year. Weakening of rates in the dry bulk segment is attributed to the growing capacity coming on stream.

This weakening of freight rates has resulted in the shipping stocks under - performing the Sensex over the past two month. For instance, the Shipping Corporation of India stock fell about 6.3 per cent as compared to a 1.85 per cent rise in the broader market, during this period.

Shipping Corporation of India's key bulk division reported a 6.6 per cent y-o-y fall in its segment revenue to Rs 566.34 crore. Lower freight rates coupled with higher operating costs resulted in the segment profit of the bulk division falling 40.63 per cent y-o-y to Rs 97.54 crore in the last quarter.

However, players such as Varun Shipping had managed to grow their profit before tax by 104.6 per cent y-o-y to Rs 43.81 crore.

This improvement in performance was thanks to Varun Shipping's strategy of enhancing their presence in more profitable areas such as the Caribbeans and the UK, which enabled them to get better realisations than those prevailing in the spot market.