A safe sojourn

Railway budget has retained its populist essence

The railway minister has kept his focus on the common man in this Budget, given the upcoming assembly elections across the country. He has attempted to keep a check on prices by not raising freight rates.

There are several measures to reduce transportation costs for industry in the short term, which is a positive. For capital goods manufacturers, there are hopes of gains as they participate in the Railways' capex plans over the next few years. The Sensex rose marginally to 13,649 on Monday.

For steel and cement companies, there would be a reduction of about 6 per cent in freight rate for transportation of inputs iron ore and limestone respectively, owing to reclassification.

Analysts say it will lead to a small reduction in total freight costs and it helped Tata Steel gain 2.3 per cent to Rs 469.7, while Gujarat Ambuja rose 3.8 per cent to 127.5.

The Railway Budget has once again recognised the growing competition from low-cost carriers by announcing cuts in AC fares, and airlines are likely to reduce their fares to meet this price cut.

The freight rate cut on diesel and petrol by 5 per cent is unlikely to have much impact on transportation costs of oil marketing companies as a significantly large proportion of these fuels are transported by a network of pipelines.

The announcement of capex plans helped capital goods manufacturers such as BEML, which manufactures wagons, rise 3 per cent to Rs 1,128 and Siemens rose 1.6 per cent.

Also, the construction of eastern and western dedicated freight corridors is viewed as a positive for industry in the long term, as transportation of goods in both the key regions will become much quicker.

Private sector players such as Gateway Distriparks, which already has freight operations, will benefit through public-private partnership.

The Gateway stock was up over 3 per cent after the announcements, while state-owned Container Corporation was down 2.7 per cent as the market is worried that private sector players will challenge its near-monopoly.

Nalco: Metallic sheen

Nalco, like other non-ferrous players, reported an improved performance in the December 2006 quarter, thanks to higher aluminium prices on a y-o-y basis. In addition, its enhanced sales of electricity to the state electricity board, has helped to offset sluggish alumna prices.

As a result, operating profit grew 27.1 per cent y-o-y to Rs 844.9 crore in Q3 FY07 compared with 9.4 per cent growth in net sales to Rs 1,448.57 crore.

Operating profit margin also expanded 815 basis points y-o-y to 58.3 per cent in the last quarter. Other players such as Hindalco's operating profit margin also went up 210 base points y-o-y to 22.4 per cent in Q3 FY07.

Nalco's aluminium production fell 12.7 per cent to 89,827 tonne during the quarter, but prices of this metal were on an average 31.4 per cent higher at $2,723 a tonne.

Meanwhile, its production of alumna also declined 6.3 per cent y-o-y to 382,200 tonne in the last quarter. Also, spot prices of alumna were at $240-250 per tonne levels in Q3 FY07 compared with $400 per tonne levels a year earlier, say analysts.

The company has attempted to offset weak conditions in the alumna business via enhanced sales of electricity to state electricity board in the last quarter.Going forward, the company is expected to earn better realisations for its alumna exports, given the recent uptick in global spot prices.

However, the direction of aluminium prices on the LME will remain a key determinant for the company's profit growth. The stock trades at a reasonable 8.7 estimated FY08 earnings.