GE Shipping: Smooth sailing

Higher freight rates in the key tanker segment help GE Shipping put up an improved performance

GE Shipping's September 2006 quarter results indicate that higher freight rates in the key tanker segment on a y-o-y basis helped it to report an improved performance.

As a result, the company has seen its operating profit (excluding sale of ships and other income) grow 30.2 per cent y-o-y to Rs 263.7 crore in Q2 FY07 compared with 25.2 per cent growth in income from operations to Rs 522.3 crore. Operating profit margin grew 200 basis points y-o-y to 50.4 per cent in the last quarter.

The company highlighted that its revenue days in the last quarter fell marginally on a y-o-y basis.

However, that was offset by strong tanker freight rates - for instance, the average spot VLCC rate (ships used to transporting crude oil from Middle East to refiners in the West) was $57,332 a day in Q2 FY07 compared with $51,200 a day a year earlier. In addition, dry bulk freight rates were stronger on a y-o-y basis in the last quarter.

GE Shipping had recently received regulatory approval for the de-merger of its offshore shipping division. This move is expected to unlock value in GE Shipping.

Meanwhile, the daily rig hire charges in the offshore business are expected to continue to remain strong in the medium term, given the expansion in the upstream oil and gas sector.

In contrast, spot freight rates in the key tanker segment have cooled off over the last few weeks, due to expectations of a mild winter in the Northern hemisphere.

GE Shipping has long term contracts in place, to minimise this impact of weak spot freight rates, say analysts. For future investors, this demerger will allow them to select the business they wish to invest in, once the two companies are listed separately.

Solectron Centum

That Solectron Centum's electronic manufacturing services (EMS) business is fast-growing cannot be denied: revenues of this business have grown from Rs 2.16 crore in the first half of FY05 to Rs 60.28 crore in the first half of FY07.

So, the rationale for the company to separate its EMS and components businesses to bring more focus and unlock value makes sense.

The electronic component manufacturing has seen its top line and profits stagnate over the past two years as the US-based parent Solectron divested from C-Mac, which was a key client for Solectron Centum's components.

Moreover, the purchases of key customers such as defence and aerospace are not evenly distributed through the year. However, PBIT (profit before interest and tax) margin in this business was still reasonably good at 30 per cent in H1 FY07.

On the other hand, as original equipment manufacturers such as telecom players, find India to be an attractive market and set up manufacturing bases in India, the EMS business has been growing at a fast clip.

But EMS is a high-volume, low-margin business. While the EMS turnover multiplied fivefold y-o-y in H1 FY07, segment margin, declined 260 basis points to 8.6 per cent.

Even the capital requirements are higher in EMS, and with strong growth, the business may demand additional investment.

Thus, managing both businesses requires different capabilities and strategies, which the company will achieve by separating them.

The stock market is upbeat about the demerger and the stock is up 17 per cent since the announcement, trading at 27 times its trailing 12-month earnings.

Nalco: Metallic sheen

Nalco has benefited from strong aluminium prices on a y-o-y basis in the September 2006 quarter. The company has grown its operating profit by a whopping 91 per cent y-o-y to Rs 875.1 crore, as compared to a 37.8 per cent jump in net sales to Rs 1,441.62 crore.

Operating profit margin also jumped 1690 basis points y-o-y to 60.7 per cent in Q2 FY07. Hindalco's operating profit margins also grew 300 basis points y-o-y to 21.3 per cent in Q2 FY07.

Nalco's aluminium production rose marginally to 91,503 tonne in the last quarter, but average aluminium prices on the LME rising 35.6 per cent y-o-y to $2,482 a tonne.

Meanwhile, in its alumina division, the company cut its production by 13.9 per cent y-o-y to 339,200 tonne in the last quarter. That's because spot alumina prices have crashed from $637 per tonne levels in March 2006 to $280 a tonne level now.

It is understood that the company sells about 65-70 per cent of its alumina output on a spot basis. These spot sales generate about a third of its total operating profit, point out analysts.

Going forward, alumina prices are expected to remain subdued due to rise in its global output, which would put pressure on Nalco's operating margins. As a result, the stock gets a discounting of only 6.7 times estimated FY07 earnings.