Current attraction

Power firms are banking on lower capital costs for ultra-mega projects

For the past year, power stocks have been under-performers against the Sensex. But with Lanco Infratech and Tata Power bagging 4000 mw projects each, the activity in the power sector is bound to heighten.

The bids also indicate that it is possible to sell power at a reasonable rate. Lanco's average tariff will be Rs 1.196 a unit, while Tata Power's average tariff will be Rs 2.264 per kilowatt-hour.

While Lanco's location in Madhya Pradesh is at a pithead coal station, Tata Power will rely on imported coal. Analysts estimate Lanco's cost of coal at 90 paise per unit, while that for Tata Power is likely to be around Rs 1.5 per unit.

The bids seem aggressive but the companies seem to bank on lower capital costs, which will be possible due to economies of scale.

The companies are likely to have factored in cheaper equipment from Chinese or Korean companies, and that may be the reason why the BHEL stock has fallen more than 8 per cent over the past two days, say analysts.

Though Tata Power and Lanco gained nearly 6 and 7 per cent respectively on Monday after the news, in Tuesday's weak markets, they fell as Tata Power declined 3 per cent and Lanco fell 4 per cent.

Since these projects will have a long gestation period, the earnings forecast for the next two-three years will not change. However, investors may be willing to accept a higher /E multiples going forward.

Shipping freight rates: Losing steam

Spot shipping freight rates in the tanker segment, where a majority of domestic capacity is focused, have eased considerably on a y-o-y basis. Senior executives at domestic shipping companies point out that refiners in Western countries had already built up oil inventories in early October 2006.

And with the weather in the Northern hemisphere being unusually warm this winter, it has curtailed demand for transporting additional crude oil from the Middle East to refiners in western countries.

Meanwhile, freight rates in the spot VLCC segment (ships used to transporting crude oil from Middle East to refiners in the West) are at $28,000 a day levels compared with $74,200 a day levels a year earlier, add analysts.

Also, in the Suezmax segment (ships used to used to transport products for relatively shorter journeys), current spot freight rates are currently at $43,000 a day levels compared with $74,100 a day levels a year earlier.

In contrast, freight rates in the dry bulk segment have remained firm. For instance, the Baltic Dry Index is currently at 4,300 levels compared with 2, 500 levels a year earlier. The current buoyancy in this segment is attributed to surging Chinese exports of steel products to Asia and North America.

To minimise the impact of lower spot freight rates, Indian shipping companies have entered into long term contracts. Also, considerable emphasis has been placed on improving capacity utilisation levels. The markets, however, appears to be cautious to this sector.

For instance, the Shipping Corporation of India stock has declined 4.8 per cent over the past one month compared with the Sensex remaining unchanged. Meanwhile, Mercator Lines has declined over 8 per cent during this period.

Pantaloon: Value growth

Pantaloon Retail has grown its same-store lower-margin value retailing segment by 12 per cent in November 2006, while its lifestyle segment grew by 9.8 per cent.

In contrast, between July and November 2006, the retailer's higher margin lifestyle segment same-store sales had grown 20.8 per cent compared with 17.6 per cent growth in the value segment.

Analysts said in the past few months, the company has been expanding its repertoire of fashion brands, coupled with home furnishings to drive growth in its lifestyle segment.

This growth in the higher margin segment has not gone unnoticed by the street - the stock has gained 32 per cent over the past three months compared with 11.8 per cent rise in the Sensex.

However, it is understood that once again growth in the value segment in the last month was driven by low-margin food products.

In fact, in the September 2006 quarter, the 78.7 per cent surge in its value retailing segment, had resulted in the company's operating profit margin declining by 80 basis points y-o-y to 6.9 per cent.

Pantaloon Retail is aggressively expanding its reach to mini-metros. However, with the stock trading at over 40 times estimated June 2007 earnings, it is expensive.