Deccan Aviation: Flight of fancy

Deccan Aviation has the right business model for a low cost carrier

Deccan Aviation has certainly caused a stir in aviation, enticing a whole new group of people to fly. It has cornered an impressive 16 per cent of the market, which should grow given consumers' rising disposable incomes and propensity to spend.

The model looks workable: keep fares around 30-35 per cent lower than competition and keep costs lower by about 20-25 per cent.

While expenses on fuel are a given, distribution through the internet, call centres and non-IATA agents can bring down costs considerably.

Besides, a no-frills airlines does not need to offer food or drink. Or, for that matter offer valet services. It can also manage with less staff both in the air and on the ground.

Deccan, unlike low cost carriers (LCCs) elsewhere in the world, operates two kinds of aircraft""Airbus and the ATR Turboprop"" so costs on maintenance and spares would be higher than those internationally.

But it does need to operate on the lucrative trunk routes too. Also, by placing orders for a large number of aircraft, Deccan has managed to get a good deal for itself on the purchases of Airbus, saving about 15 per cent.

What could pose problems for its balance sheet even on a larger scale of operations, are higher fuel costs and more competition.

There are any number of aspirants, whether LCCs or full service carriers, and they could nibble away at Deccan's share. Sustaining growth would require enormous amounts of capital even though planes can be leased.

The issue is not unreasonably priced at the proposed market capitalisation of Rs 1470-1717 crore. Jet which commands a market share of 35 per cent and more if Sahara were to be included, trades at a market capitalisation of Rs 8200 crore.

Spice Jet, an LCC, with a share of 6 per cent, has a market capitalisation of just over Rs 1300 crore. Given time, Deccan's model should work: it has the first mover advantage, an experienced team and aircraft to boot.

The best thing that could happen for Deccan is the government allowing foreign equity in the aviation space, as is being reported.

Asahi: On thin glass

Asahi India Glass had a tough year in 2005-06. Net sales stayed flat at Rs 587.67 crore in FY06, while operating profit fell 1.8 per cent y-o-y to Rs 119.27 crore.

The company was adversely affected by floods in Mumbai last monsoon at its Taloja floatglass plant, which resulted in floatglass segment sales falling 18.4 per cent in FY06. Segment sales of automotive glass improved by 12.63 per cent.

Moreover, Asahi also faced pressure on rising input costs such as oil, glass and other raw materials such as soda ash, which impacted profitability.

Operating profit margin fell 34 basis points to 20.3 per cent for the year as adjusted raw material costs, as a percentage of sales, increased from 30.95 per cent in FY05 to 31.22 per cent last year.

Though the company commands a high market share in segments such as automotive glass, it did face pricing pressure in some segments on account of competition. As a result, even in Q4 FY06, floatglass segment sales declined 27 per cent.

The improvement in operating margin in Q4 FY06 by 15 basis points to 20.79 per cent suggests that things are getting better.

The company is optimistic about its integrated glass plant at Rourkee, which should become operational by the end of 2006.

The company expects its AIS glass solutions division, which provides architectural glass such as strong glass, laminated glass or insulated glass for sun, heat and sound control, to do better in FY07.

It is also looking at increasing exports, which are negligible at present. After a depreciation write-back of Rs 40 crore, the EPS looks better at Rs 6.17. At the current price of Rs 96, the stock trades at a P/E of 15.6, which is not cheap.

Chennai Petro: Subsidy woes

Chennai Petroleum has reported a sharp decline in its performance for the March 2006 quarter. Operating profit has fallen 67.2 per cent y-o-y in Q4 FY06, despite net sales improving 26.27 per cent.

The company has been hit by a surging subsidy burden coupled with a fall in gross refining margins (GRMs).

The company's crude throughput fell marginally on a y-o-y basis to 2.55 million tonne in Q4 FY06. However, the GRM was at $2.95 per barrel in Q4 FY06 compared with $5.75 a barrel a year earlier.

The benchmark Singapore refining margins was also down by about 30 per cent y-o-y to $4.3 per barrel in the last quarter, say analysts.

Meanwhile, the company's subsidy burden mounted to Rs 135.28 crore in Q4 FY06 compared with nil a year earlier. As a result, operating profit margin fell 707 basis points y-o-y to 2.47 per cent in the March 2006 quarter.

Chennai Petro is implementing expansion projects to provide refined auto fuels as per Euro IV requirements. The stock does appear attractively valued at about 7.75 times trailing 12-month earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur