Heavy metal

Sterlite's top line improved on strong volume growth and higher metal prices

Better realisations from sales of aluminium, copper and zinc together with strong volumes have resulted in good top line growth for Sterlite (consolidated) in the September quarter.

In the September 2005 quarter, net sales grew a smart 55 per cent y-o-y to Rs 2,646.74 crore. Gaining from economies of scale, Sterlite has expanded capacities of all three products, the company has managed to combat higher inputs costs and post an earnings before interest tax and depreciation (EBITDA) growth of 83 per cent to Rs 522.8 crore.

Higher input costs, primarily those of copper, coal and fuel oil, resulted in raw materials as a percentage of sales rising to 53.4 per cent in the second quarter of 2005-06 compared with 42.6 per cent in September 2004 quarter.

However, the company managed to obtain higher treatment and refining charges in copper and also benefited from larger volumes of its end-products as larger capacities came on-stream.

Thus, EBITDA margins too have improved by 300 basis points to 19.8 per cent. The increase in capacities, though, has meant larger outflows on account of interest and depreciation which led a lower rise at the net profit level. At Rs 256.8 crore, net profit was up 61 per cent.

While the stock has underperformed the Sensex between April and now, it has outperformed the Sensex since August. That has been because the company is in a sweet spot having the best of both strong pricing and higher volumes.

Looking ahead, much would depend on prices of the three commodities""zinc, copper and aluminium. Copper and zinc prices have been remarkably strong in the last quarter. It remains to be seen whether the momentum in metals prices would continue going forward. At the current price of Rs 830, the stock trades at 8.7 times 2005-06 and 7.2 times estimated 2006-07 earnings, and appears to be reasonably valued.

ABG Shipyard

ABG Shipyard's public issue, priced between Rs 155 and Rs 185, is reasonably priced. ABG Shipyard builds and repairs a range of ships. Its project is to set up a new shipyard at Dahej in Gujarat, which will be able to build up to eight ships simultaneously on a modular basis with a capacity up to 120,000 dead weight tonne (DWT).

This tonnage is much larger than what it builds at its existing shipyard. At present, it can build up to 23 ships with a capacity up to 20,000 DWT at the same time.

ABG builds ships for the oil and gas, fleet service and defence sectors. In the past three years its business has changed towards a healthy mix of domestic and export income. In 2002-03, export income stood at 97.6 per cent of total revenues, which has fallen to 56.5 per cent of revenues in 2004-05.

Ship building is a labour intensive business with Korea, Japan and China having 78 per cent market share in the world. India is a small player, with 90 per cent of most India-owned ships being foreign built. Most of India's ship building facilities are in the public sector, with ABG Shipyard and Bharati Shipyard being two of the mid-sized private sector players.

Though there is a push to promote the ship building activity, Indian players will face competition from China where the costs are lower. Korea, on the other hand, has shifted focus to the higher value segment, which will not affect domestic companies.

Despite shipping freight rates falling in the September quarter, the demand for new ships is expected to be strong. The Indian government has taken active steps to strengthen the ship building sector by providing a 30 per cent export subsidy till 2007.

It has also announced 'Project Sagar Mala' to develop India's maritime sector, aimed at capacity expansion and modernisation, and creating new ports. The International Maritime Organisation has mandated to phase out all double hull vessels by 2010, which should also improve demand.

ABG has a healthy order book of Rs 1329.5 crore over the next three years. In 2004-05, its revenues grew 47 per cent to Rs 304.1 crore. Net profit rose from Rs 7.2 crore in 2003-04 to Rs 50.3 crore in 2004-05. Its competitor Bharati had revenues of Rs 179 crore in 2004-05.

ABG's annualised EPS for the first half of 2005-06 of Rs 12.8 discounts the issue price about 12-14 times (based on the price band). Bharti Shipyard trades at about 19 times its 2005-06 estimated EPS of Rs 16-17. On a relative basis, ABG's issue price seems attractive.