GAIL: Floating on LPG

Petrochem, liquid hydrocarbons make up for flat growth in the transmission division.

GAIL reported an improved performance in the June 2007 quarter, thanks to an improved performance by its two divisions - petrochemicals, and LPG-liquid hydrocarbons.

As a result, operating profit grew 10.3 per cent y-o-y to Rs 1,038.7 crore in the last quarter, while net sales expanded 4.1 per cent to Rs 4,245.7 crore.

In petrochemicals, sales volume grew 29.6 per cent y-o-y to 105,000 tonnes in the last quarter. Also, higher product realisations on a y-o-y basis enabled profit of the petrochem division to rise 69.8 per cent y-o-y to Rs 343 crore in Q1 FY08.

In addition, profits at the LPG and liquid hydrocarbons division went up by 42.4 per cent y-o-y in the last quarter. The reason: the 12 per cent y-o-y growth in price realisations, coupled with a 1.4 per cent growth in volume transported to 354,000 tonnes.

However, in its transmission division, gas volumes transported at 78.7 mmscd were more or less flat on a y-o-y basis in the last quarter.

Besides, analysts also pointed out the lower tariffs on a y-o-y basis realised by GAIL from the HBJ pipeline and K-G basin tariffs due to a stronger rupee. This resulted in profit of the natural gas transmission segment declining 18.9 per cent y-o-y in the last quarter.

Also, GAIL's subsidy burden was Rs 272 crore in Q1 FY08 compared with Rs 250 crore a year earlier.

Analysts said GAIL's profitability in both the segments may come under pressure, as the company may need to make purchase of key inputs such as LNG from abroad, given the declining availability in the country. At Rs 330, the stock trades at 12.5 times estimated FY08 earnings.

Punj Lloyd: Overseas order

Engineering firm Punj Lloyd has bagged two major contracts recently- the Rs 590 crore Bharat Oman Refineries' engineering, procurement, construction and commissioning of the sulphur block and the Rs 666-crore Sentosa project's sub-structural works through its Singapore-based subsidiary Sembawang. Its consolidated order book at the end of Q1 FY07 is at Rs 15,225 crore, to be executed over the next 24 to 30 months.

On a standalone basis (the company had acquired Sembawang in June 2006), revenues in Q1 FY08 grew 82 per cent y-o-y, while operating profit doubled to Rs 72.6 crore.

Standalone operating margins too improved by 100 basis points y-o-y to 10.27 per cent. Consolidated margins were 240 basis points higher at 8.7 per cent.

It has invested Rs 400 crore to acquire a 25.1 per cent stake in Pipavav Shipyard, which will provide Punj Lloyd with fabrication facilities and support growth in its offshore business. It is funding the Pipavav purchase through a placement to qualified institutions. It has also set up a 50:50 JV for real estate development.

The current order book is over three times its FY07 revenues, so the growth should be good in the next few quarters. Profitability at Sembawang and in other businesses is also improving. The stock trades at 22-23 times estimated consolidated FY08 earnings, and is likely to be an outperformer.

Varun Shipping: Carrier boost

Varun Shipping ramped up in its total fleet capacity in the June 2007 quarter, but rising operational costs put pressure on its operating margins.

As a result, the company's core operating profit (excluding foreign exchange gains, other income and sale of ships) grew 20.75 per cent y-o-y to Rs 109.45 crore in the last quarter, while its income from operations grew 31.4 per cent to Rs 193.5 crore.

Its operating profit margin declined 490 basis points y-o-y to 56.6 per cent in the previous quarter. Varun Shipping acquired its twelfth LPG carrier in the last quarter, coupled with two vessels which were acquired in the first half of CY07 and have been deployed with upstream oil players.

However, spot average freight rates in the key tanker segment during Q1 FY08, had weakened considerably on a y-o-y basis. For instance, in the case of VLCC it was $30,553 per day in the June 2007 quarter compared with $34,583 a day a year earlier.

Analysts, however, highlight that Varun Shipping typically focuses on niche markets in the Caribbean and the US to offset weak spot freight rates, coupled with a ramp-up in the booming offshore market.

The pressure on the company's margins in the last quarter was due to total expenditure as a percentage of income from operations rising 495 basis points y-o-y to 43.4 per cent.

Going forward, spot freight rates in the key tanker segment continue to be weak on a y-o-y basis. In addition, Varun Shipping's ability to keep costs under check will be crucial. At Rs 63.60, the stock trades at 6 times FY07 earnings.