Canara Bank: Cover drive

For Canara Bank's insurance debut, the alliance with HSBC arm and OBC will pay off in the long run.

With an annual growth rate of 30 per cent, the life insurance space is obviously a tempting place to be in. That is borne out by the number of players "� both domestic and foreign "� that have ventured into the arena over the past couple of years whether it's Bharti or Reliance.

So it's not surprising that a financial services player like Canara Bank would want to foray into the industry. On paper, the alliance with the insurance arm of HSBC and public sector player OBC holds a lot of promise.

With 40 million customers between them in the country, selling insurance products to a population that's underfed on financial products would seem the most natural thing to do.

Moreover, in a not-so-mature market such as India, distribution rather than product customisation will drive growth.

However, while a nation-wide network of 3,600 branches will certainly come in handy, cross-selling is not all that simple. Otherwise, existing players would not be working overtime to set up large networks of agents in the remotest of towns.

Moreover, Canara Bank and its partners will be competing against well-entrenched players, some of which have celebrated their seventh anniversary. But then, the country's demographics will allow the market to expand.

The management says it hopes Canara Bank to be among the top five in the fifth year of operations. However, insurance is a long-term business and will require capital before it delivers profits.

The valuation, given by analysts, to ICICI Bank's stake in its insurance (both life and general) and asset management businesses at around $7 billion, is mouth-watering. But Canara Bank's shareholders should not expect such a performance in the near term.

Wartsila: Powerless performance

Wartsila India reported a lacklustre performance for the December 2006 quarter, with its operating profit declining 9.4 per cent y-o-y to Rs 9.7 crore, compared with the 10 per cent fall in its net sales to Rs 78.22 crore. Its operating profit margin remained more or less steady at 12.4 per cent on a y-o-y basis in the quarter.

Analysts say Wartsila India imports a significant portion of its power equipment from its parent's global operations. And given the current global upturn in the capex cycle, its domestic customers have to wait for several months to get equipment supplies.

So it will not be able to leverage the current upturn in the power capex cycle. Wartsila is engaged in medium-size projects (up to 50-75 MW). It has also been focusing more on maintenance of power plants. In CY06 too, its operating profit margin slumped 320 basis points y-o-y to 12.7 per cent.

The Finnish parent had floated an open offer to buy back the remaining 10.3 per cent in it at Rs 400 a share, and delist the Indian arm.

As the Wartsila India scrip does not have large daily volumes on the bourses, the parent has said it has calculated the floor price of Rs 357 a share, based on the price earnings multiple of the engines industry. The stock is currently trading at Rs 468 levels, with the 52-week high at Rs 529. Investors could avoid tendering their stock in the buyback.

Esab India: Riding on demand

Esab India has once again benefited from strong demand from user industries such as civil engineering and gas pipeline projects in CY06 for its welding solutions, but it has also had to grapple with a rising cost structure.

As a result, the company's consolidated operating profit grew 11.1 per cent y-o-y to Rs 65 crore in CY06, compared with the 20.6 per cent growth in net sales to Rs 287.2 crore. Its operating profit margin declined 200 basis points y-o-y to 22.6 per cent in the last quarter.
The pressure on margins was because adjusted raw material costs "� as a percentage of net sales "� rose 200 basis points y-o-y to 49 per cent a year earlier.

Analysts say this was owing to much higher mild steel prices in the first half of CY06, compared with the same period a year ago.

However, in the December 2006 quarter, the company's operating profit margin grew 165 basis points y-o-y to 18.25 per cent.

The company is well positioned to benefit from the shift in user industries in favour of automatic welding methods, going forward. And with the stock trading at 12 times trailing 12-month earnings, it is reasonable.

With contributions from Shobhana Subramanian and Amriteshwar Mathur