Deccan Aviation: Turbulent weather

Deccan Aviation's losses much higher than anticipated

The Street was expecting Deccan Aviation to turn in a loss of around Rs 150 crore for the 15 months ended June 2006. But the amount has been more than twice the estimate at Rs 340 crore. For the year ended March 2006 too, the loss at Rs 230.29 was way higher than anticipated.

While higher aviation turbine fuel costs""which were up at 48 per cent of sales in FY06 compared with 30.3 per cent in FY05 and 56 per cent in the June 2006 quarter-were the biggest culprit, other costs too have gone up.

For instance, employee remuneration is up around 400 basis points, while operating expenditure "" including leases "" have gone up by about 500 basis points.

In all this, though the carrier has cornered a market share of around 19 per cent, toppling Indian Airlines from its number two position. Revenues are up 174 per cent y-o-y in FY06 at Rs 839 crore.

However, the market share is obviously coming at a price because yields (revenue per passenger km) for the Airbus at less than Rs 3 are way below costs (cost per available seat km) of around Rs 3.60-Rs 3.70. The management has hinted that it would be no longer possible to pass on lower costs of oil given the competition.

The Deccan stock was up around 4 per cent at around Rs 110 in Monday's trading, possibly because the company has managed to find $100 million of funds, which would give it some breathing time.

Meanwhile, if oil prices continue to fall, Deccan, as also other airlines, will continue to gain, as operating leverage is fairly high. In the June quarter, Deccan posted a Rs110 crore loss mainly owing to higher ATF costs.

However, more than oil prices what is worrying is the capacity coming up in the industry. Unless demand grows at over 40 per cent, it will be difficult for the industry to maintain loads and yields.

HCC: Core surge

Increasing demand from the infrastructure sector saw Hindustan Construction Company (HCC) bag two orders worth Rs 794.52 crore from National Hydroelectric Power Corporation.

The orders relate to the construction of barrage, coffer dams and allied infrastructure at different sites in Jammu and Kashmir over the next four years.

Returns from these projects are expected to accrue to the company during this period. These fresh orders helped the HCC stock gain 5.2 per cent to Rs 105.1 on Monday, in contrast to the broad weakness on the bourses.

However, in the June 2006 quarter, HCC had seen its operating profit margins decline by 100 basis points y-o-y to 8 per cent as construction expenses jumped 53.5 per cent, which the senior company management attributed to a rise in input costs.

Prior to this order, HCC had also recently bagged an order worth Rs 246 crore from NTPC in mid Q1 FY07. These orders are expected to strengthen HCC outstanding order book (including joint venture projects), which amounted to Rs 9,143 crore at the end of the June 2006 quarter.

As a result, the stock gets a discounting of 16 times estimated FY 07 earnings, given the high growth potential of this sector.

Gateway Distriparks: Southern comfort

Logistics player Gateway Distriparks has formed a joint venture with Kochi-based Chakiat group to set up a container freight station at the new Vallarpadam terminal in Kochi port.

This development is in line with the company's plans of having a presence at Kochi. Gateway will own 60 per cent in the CFS, which will have a capacity of 15,000 TEUs (twenty-foot equivalent units).

For Gateway, this will be the second JV in the CFS business, after Visakhapatnam, where too it has a 60 per cent stake. Chakiat, a strong player in Kochi, also has a stake in the International Container Transhipment Terminal, developed by Dubai Ports World.

In terms of the market, Kochi port handled 73,320 TEUs in the first four months of FY07-an impressive 17 per cent y-o-y growth, while the growth in the transshipment business, which is yet to start, could also be huge.

However, in June 2006, Gateway Distriparks had a disappointing result quarter. Consolidated revenues fell 2.3 per cent y-o-y despite a 6 per cent rise in the throughput. This was mainly attributed to lower "dwell time", which is the rent Gateway earns till containers lie at its stations.

However, analysts explain that the low dwell time in one quarter is most likely to be an exception, considering that trade is only likely to grow rapidly.

On the positive side, Gateway had a significant development during the quarter, when its 100 per cent subsidiary, acquired 50 acres of land in Faridabad for its second rail-linked inland container depot, and the company flagged off its first container train in May 2006.

Though Gateway's operating profit margin fell 430 basis points, they remain high at 56.44 per cent. The Gateway stock has declined 16 per cent in the past year, and trades at about 14 times estimated FY07 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur