Escorts: Cashing in

The preference share issue will help boost Escorts' bottomline

The Escorts board has approved the issue of cumulative redeemable preference shares to overseas investors.

The issue, which would be done on a preferential basis, is expected to be worth Rs 778 crore and according to reports, the amount would largely be used to retire the company's high-cost debt of around Rs 570 crore.

This comes as a huge relief, especially since interest cost still amounts to around 7 per cent of sales, and is the main reason for the company's losses.

In the six months till December 2004, Escorts managed an operating profit of Rs 26.78 crore (4.1 per cent of sales) thanks mainly to a 77 per cent jump in sales.

In the comparable year-ago period, the company had losses even at the operating level, to the extent of 4.4 per cent of sales. But the high interest cost of Rs 45.26 crore led to a cash loss of Rs 18.3 crore.

Things, however, are getting better - in the December quarter, operating margin improved to around 7 per cent, more than enough to take care of the quarter's interest cost.

In fact, Escorts reported a cash profit of Rs 1.2 crore last quarter. If the debt is retired, the improvement in operating profit should translate into net profit as well.

This is the reason the stock jumped by as much as 7.3 per cent on the news of the preferential issue.

Needless to say, the retirement of the high-cost debt will not be enough. The EBIT margins of the company's core agri machinery products business (85 per cent of revenues) were less than 5 per cent last quarter.

In comparison, Punjab Tractors had an EBIT margin of 13.4 per cent and the farm equipment division of M&M reported an EBIT margin of 12.5 per cent last quarter. There's work to be done on the operating side as well.

It's comforting, therefore, that a portion of the money raised would be used to acquire new assets and invest it in research programmes.

The lure of Uncle Sam

Despite widespread talk of a dumping of US assets by foreign holders because of the fall in the dollar's value, US Treasury data show that foreigners continued to increase their holdings of dollar assets.

However, the data for December 2004 indicate that there has been a slowdown in the pace of foreigners buying US assets, with net foreign purchases of US securities at $82.9 billion in December 2004, compared to $ 100.7 billion in November.

But while it's true that the pace of accretion has slowed down in December, that's no reason to believe that the much-feared sell-off in dollar assets is occurring soon""""-the figure for net purchases by foreigners in December was still higher than for all other months in 2004 except November.

However, India's central bank has been one of the prudent ones, reducing its holdings of treasury securities to $12.9 billion in December from $13.5 in November.

In fact, India's holdings of US treasuries have fallen from a high of $16.2 billion reached in April 2004. While Japan has been selling a small amount of US treasuries, the major seller in recent months have been the Caribbean banking centres, where hedge funds have their headquarters.

Hedge fund holdings of US treasuries have fallen from $100.5 billion last September to $69.4 billion in December. Another interesting trend has been net buying of foreign securities by US residents, which rose to $21 billion in December, the highest outflow from the US in FY 2005.

That flood of money has been responsible for driving equity and bond markets up in emerging markets.

Dolphin Offshore Enterprises

Buoyant crude prices have helped not only upstream players like ONGC, but also the suppliers to these upstream players, who have seen a sharp upturn in their performance.

For instance, Dolphin Offshore Enterprises, which provides a range of services including inspection and maintenance of oil platforms and diving support services while pipes are being laid, has seen a 10-fold increase in its net profit last quarter.

Its performance has been helped by recent orders such as a Rs 45 crore contract from Larsen & Toubro for work in Mumbai High.

The company is now attempting to move beyond diving and installation work and get into higher value contracts.

Its recent order worth approximately Rs 85 crore from Iranian Oil & Engineering Construction Company (IOECC) for execution at Mumbai High would help the company gain expertise in the high margin offshore engineering and construction services.

In addition, the company is also attempting to leverage the booming sub sea construction activity in the Middle East "" its second SAT system (specialised equipment for undersea construction) is being refurbished in Bahrain.

Not surprisingly, the stock has gained around 30 per cent in just the past month and now trades at around 9 times estimated FY05 earnings.

With contributions by Mobis Philipose and Amriteshwar Mathur.