Marginal recovery

Low freight rates had an adverse impact because shipping firms derive a big chunk of revenues from the tanker segment.

Current spot freight rates in the key tanker segment are improving from the average spot rate in February 2007, but they are still largely lower on a y-o-y basis.

Indian shipping companies derive an overwhelming portion of their revenues from the tanker segment. In the case of tanker segments like VLCC (ships typically used to transport crude oil from the West Asia to refiners in western countries), current spot freight rates are $36,770 per day, while the February 2007 average was $ 28,366 per day, say analysts. A year ago, spot freight rates in this segment were $42,600 per day levels.

Analysts point to a temporary shortage of VLCC ships in the West Asia to transport crude oil to refiners across the globe, which has resulted in improvement VLCC spot rates.

Meanwhile, in other tanker segments like Suezmax (ships used to transport products for relatively shorter journeys) segment, current spot freight rates are at $26,900 per day as compared to the previous month's average of $ 31,156 per day.

A year ago, freight rates in the Suezmax segment were $ 38,900 per day. Analysts also point out that it is still to earlier to say decisively whether freight rates in the tanker segment have bottomed out and the uptrend will continue.

To minimise the impact of the weakening trend in spot freight rates, shipping companies typically have long-term contracts with their large customers. Also, in the dry bulk segment, the Baltic Dry Bulk Index is currently at 4,963 levels as compared to 2,674 levels a year ago.

Strong growth in Chinese steel exports and the resulting demand for transporting these products have helped to keep this index buoyant. Investors however, appear to be cautious to this sector, with GE Shipping trading at merely 3.5 times estimated FY07 earnings, while Shipping Corporation trades at 4.5 times.

Suzlon: Bidding power

The REpower bidding game got hotter when Areva revised its bid since Suzlon made its offer earlier this month.

This acquisition is all the more interesting as both the bidders already have access to a reasonably large shareholding in REpower""Areva owns over 30 per cent, while Suzlon's bidding partner Martifer, Portugal, owns 25.4 per cent in the target company.

With French major Areva upping the ante to 140 euros per share, the price it is willing to pay is over 55 per cent higher than the prevailing market price before its first bid of 105 euros, and 11 per cent higher than Suzlon's bid price of 126 euros.

At 140 euros, REpower seems to be turning into an expensive acquisition. At this price, the REpower acquisition works out to 26 times estimated CY07 EV/EBITDA. But if Suzlon were to bid even at the current price, it would have to shell out 1.13 billion euros.

If the bid is higher, the company could end up with a debt-equity ratio of about 1.8 times, as compared with 1.6 times at 126 euro per share. Analysts estimate that its FY08 EPS could take a 12-13 per cent hit.

Given the restricted geographical markets for REpower's products and tepid near-term prospects for its offshore 5 MW technology, the deal is no doubt steep even at 126 euros.

Biocon: Research boost

Biocon subsidiary Syngene's agreement with Bristol-Myers Squibb (BMS) to set up a dedicated research centre is quite similar to what happens in the IT services companies, where some large accounts function virtually like a captive development centre. For Biocon, this alliance will provide impetus to its contract research business.

The importance of the deal can be understood from the staffing requirements""at the end of CY2006, Syngene employed 600 people. For BMS alone, Syngene will employ 400 scientists over the next two years. The partnership model will help Biocon leverage its strengths.

In the nine months ended December 2006, contract research and licensing fees accounted for 16.4 per cent of Biocon's consolidated revenues.

Analysts say Syngene's operating margins are over 40 per cent, but it will be slightly lower at a dedicated centre like this.

In the next two-three years, this business should become substantially larger, and bring a significant chunk of revenues, they add. Biocon trades at about 20 times FY08 estimated EPS.

With contributions from Amriteshwar Mathur and Venkatesh Rangan