Freight rates: In choppy waters

Weak VLCC rates attributed to sufficient supplies at refiners in Western markets.

The current spot freight rates in the key tanker segment have weakened considerably from those a year earlier and also with respect to the average spot freight rates at the end of Q4 FY07. Indian shipping companies have an overwhelming majority of their capacity in favour of the tanker segment.

For instance, in tanker segments like Very Large Crude Carriers (VLCC), the spot freight rates are currently $29,900 a day compared with $54,500 a year earlier, point out analysts.

The current weakness in VLCC freight rates is attributed to sufficient supplies of crude oil at refiners in Western markets like North America, which has curtailed demand for transporting crude oil from the Middle East to other countries on these large vessels.

The average spot rate in Q4 FY07 in the VLCC segment was $36,306 a day. In other tanker segments such as Suezmax, the current freight rates are $24,300 a day compared with $ 29,000 a year earlier. The Q4 FY07 average spot freight rate in the Suezmax segment was $34,243 a day.

Meanwhile, freight rates in the dry bulk segment continue to remain strong, thanks to surging demand from the Chinese metals industry. The Baltic Dry Index is currently at 5,400 levels compared with 2,700 a year earlier.

This may not appear to be good news for Indian shipping companies, but their long term contracts with key customers will help offset the decline in spot rates.

Even in Q4 FY07, when freight rates were down on a y-o-y basis, GE Shipping's operating profit margin improved 380 basis points y-o-y to 55 per cent in the last quarter.

GSPL: Stepping on the gas

Gujarat State Petronet (GSPL), a transporter of natural gas to its customers in industries such as fertilisers and steel, reported an improved performance in FY07, thanks to improved volume of gas transported on a y-o-y basis.

As a result, operating profit grew 38.1 per cent y-o-y to Rs 268.1 crore in the previous year, while net sales grew 20.5 per cent to Rs 317.56 crore. Operating profit margin also improved an impressive 1070 basis points y-o-y to 84.4 per cent in FY07.

The company transported 5229.68 million standard cubic metres in FY07, a growth of 36.8 per cent y-o-y and that was owing to the commissioning of two pipeline projects - namely the Anand-Rajkot and the Mora-Vapi pipelines respectively.

The improved performance of the company in the previous year has not gone unnoticed by the Street - the stock has gained 22.7 per cent over the past three months as compared to a 19 per cent rise in the BSE Mid-Cap Index.

The company had raised Rs 372.6 crore in February 2006 through its public issue and it has already utilised Rs 292.4 crore of the proceeds at the end of FY07.

Going forward, with the commencement of the monsoon season, analysts point out that they expect subdued offtake through the company's gas pipeline, as demand from user industries tends to be sluggish. At Rs 60, the stock trades at 36.5 times FY07 and leaves little room for further upside.  Lakshmi Machine Works: Volume growth  The textiles industry may not be in the best of health, but textile machinery company Lakshmi Machine Works does not seem to be facing any slowdown in demand.  The company's top line increased by 42 per cent in FY07 to Rs 1854 crore. This growth was led by volumes as the company has not hiked its product price increase during the year.  Though raw material costs went up over 230 points y-o-y, the company managed to control staff costs and other expenditure, which resulted in operating profit margin rising 15 basis points y-o-y to 15.6 per cent.  Though the company also has a machine tools and foundry segment, nearly 90 per cent of its top line comes from textile machines, where it has over 50 per cent market share. In this business, it manufactured 2.3 million spindles, which will go up to 3.5 million spindles this year.  It has a healthy order-book at Rs 5,350 crore and even if the company does not effect a price hike, higher volumes is expected to lead to a 40 per cent growth in FY08.  Its machine tools division, which manufactures CNC machines, and the foundry division is expected to grow at 30 per cent this year. The stock trades at about 12 times estimated FY08 earnings and should be an outperformer.