Blue Dart: Linking up in Lanka

Blue Dart's move doesn't enthuse the market

Blue Dart's share price, till Monday, had jumped 35 per cent in the span of just about 10 days, giving rise to speculation that some major deal has been brewing at the company.

The company has indeed inked a deal, a strategic alliance with a Sri Lankan logistics company, but this will not have any significant impact on Blue Dart's financial in the near term. It's no wonder the stock has corrected by around 7 per cent after the alliance was announced.

The alliance with the Hayleys group of Sri Lanka gives Blue Dart access to 400 locations in Sri Lanka. In addition, it also delivers to locations neighbouring countries such as Bangladesh, Bhutan and Nepal.

The alliance, clearly, is in line with the company's plan of being a strong player in the SAARC region. Cargo movement between Sri Lanka and India has grown five-fold in the past five years, and growth is expected to remain high what with the free trade agreement between the two countries.

Nevertheless, as a proportion of Indian operations, the Sri Lankan market is still minuscule, so overall growth would still depend on the Indian market.

The Indian market has picked up lately "" Blue Dart's sales grew 22 per cent in the June quarter, higher than the 13 per cent growth in FY04. Also, it's been able to pass on the increase in fuel cost to consumers, and operating margin actually improved 365 basis points last quarter.

Yet, thanks to the sharp rise in the scrip this month, it trades at over 20 times trailing earnings, which is high, unless of course some other deal is brewing.

Steel prices

Is the government barking up the wrong tree in trying to bring down HR coil prices? The fact is that Hot Rolled coils are used for making flat steel, the prices of which have not been as volatile as for long products. It is the prices of long products, which use billets and not HR coils, where the price rise has been the highest.

For instance, prices of rebars and wire rods have gone up from around Rs 22,000 per tonne in March to around Rs 25,000 per tonne. While there is a splurge of capacity expansion in the flat steel products category, there is very little activity in the long products segment.

A substantial demand supply gap in the long steel category in the country has pushed up prices by almost 15-18 per cent in the last six months.

Companies prefer to put up more capacity in flat products, as flat products command better realisations. Except for Rashtriya Ispat Nigam Limited and the Steel Authority of India, who have announced a capacity increase of 7 million tonne and 3.5 million tonne, respectively in the next 7-8 years, there is no visible capacity enhancement in the long segment.

This situation is not helped by the fact that the two major players account for around 30 per cent of the total production, with the rest being provided by the unorganised sector.

Therefore prices have not only increased, but have been extremely volatile. The situation is far more stable for flat products. Perhaps the only reason why the government is concentrating on controlling the prices of HR coils is because there is no way in which it can contain long steel prices.

Iisco-SAIL merger announcement

Iisco's merger with SAIL led to the SAIL stock closing down 2 per cent on Wednesday. With some of the other steel scrips too losing ground, the merger announcement hasn't had much of an effect on the stock.

One reason for that could be because Iisco is a fully-owned subsidiary of SAIL, and Iisco's performance is already reflected in SAIL's consolidated accounts.

Nevertheless, SAIL is expected to get the tax benefits due to the carry forward losses of Iisco consequent upon the merger. It has also been pointed out that SAIL would get direct control of coking coal mines belonging to Iisco.

Production levels of SAIL during Q1 in FY 2005 were affected by a shortage of coal and Iisco's deposits are expected to prevent the recurrence of such a trend.

So far as the iron ore mines are concerned, SAIL already has them. However, these mines were presumably available to SAIL by virtue of Iisco being a subsidiary.

On the other hand, Iisco's plant and machinery is completely outdated and will need to be modernised. Many employees will need to be absorbed and retrained, perhaps paying them at the same rate as SAIL workers. The best that SAIL can hope for is to get some concessions in return for taking over a sick unit.

Iisco's balance sheet, obviously, is very weak "" as on March 31, 2003 its net current assets had grown to negative Rs 738.34 crore while the debit balance in its profit and loss account was Rs 979.37 crore.

And although Iisco made a net profit of Rs 27.1 crore in FY 2004, that was on turnover of Rs 1051 crore. That's a rate of return that SAIL could very well have done without.

With contributions from Mobis Philipose, Mansi Kapur and Amriteshwar Mathur