In calm waters

Tanker and dry bulk segment freight rates have been stable of late

Shipping freight rates in the tanker and dry bulk segment appear to have maintained the upward trend. This situation is in contrast to the broad cooling off in several commodities over the last few months, that are transported by the shipping industry.

For instance, in tanker segments such as VLCC (ships typically used for transporting crude oil from the Middle East to refiners across the globe), spot freight rates are $61,150 per day levels compared with $40,900 per day a year earlier, say analysts.

For Indian players, an overwhelming proportion of their fleet capacity is in the tanker segment.

Senior executives at private shipping companies point out that several Western countries are attempting to enhance their oil inventory levels before the winter season, by leveraging the current dip in global crude oil prices.

This has resulted in strong demand for VLCCs. Spot VLCC rates averaged $34,310 per day in the June 2006 quarter.

In the Suezmax segment (ships used to transport products for relatively shorter journeys), spot freight rates are currently at $35,000 a day levels compared with $25,600 a day a year earlier.

Spot freight rates in this segment averaged $33,515 per day levels in Q1 FY07. In the dry bulk segment too, the Baltic Dry Freight Index is currently at 4200 levels compared with 3050 levels a year earlier.

This rise in the dry bulk segment is owing to strong Chinese demand for coal and iron ore, coupled with a jump in its steel output. Chinese steel exports grew 22 per cent jump exports in the first half of CY06.

However, investors continue to be cautious on shipping stocks, given the large build-up in global shipping capacity expected over the next year. As a result, GE Shipping trades at 7.5 times estimated FY07 earnings, while Varun Shipping trades at a forward P/E of 5 times.

ICI : Positive shade

ICI India' will start buying back shares via open market purchases at a price not exceeding Rs 350 from Friday. The size of this buy-back is Rs 131.23 crore and assuming the top end of this price, the company will repurchase 37.49 lakh shares.

Prior to the company's decision to start the buyback, the six-month average price of the ICI stock was around the same level. The stock trades at Rs 340.

The promoters, ICI UK, held 50.83 per cent stake in the Indian arm at the end of the June 2006 quarter. ICI derived about 66.6 per cent of its sales from the paints business in FY06.

The company is also strengthening its position in the high growth fragrance and flavours business by ramping up its stake in Quest International India to 99 per cent.

This buyback is at 17.5 times estimated FY07 ICI earnings, while other paint companies such as Asian Paints trade and Kansai Nerolac trade at 25.5 times and 15 times estimated FY07 EPS respectively.

Clearly, with the difference between the current market price and the buyback price not being too large, investors could consider holding their stock as demand conditions are strong for the paint industry from user industries such as housing and automobiles.

Sonata Software: Getting it right

Smaller software companies are making their business models more robust by acquiring companies abroad or setting up joint ventures.

Sonata Software has taken a similar step by acquiring 50.1 per cent stake in TUI InfoTec, an IT company based in Germany. TUI group will hold the balance 49.9 per cent in the company.

TUI InfoTec is a part of the TUI group, which has interests in tourism, hotels and global container shipping. TUI InfoTec develops, maintains and supports applications and IT infrastructure systems for its parent and its subsidiaries in Europe.

Sonata had signed a multi-year outsourcing deal with TUI, UK, for which it has set up two development centres in India and is a among Sonata's top five customers.

In 2005, TUI InfoTec had 400 employees and revenues of 130 million euros. Sonata has paid 18 million euros, valuing the company at less than 0.3 times sales, which is quite cheap.

If margins (profit before interest and tax margin of 9 per cent) at TUI are low, Sonata should be able to improve them by offshoring some business.

By getting Sonata as a partner, TUI InfoTec will be able to leverage the skills of its employees, and market its services to other clients in new markets, while remaining a preferred IT supplier to the TUI group.

In the June 2006 quarter, Sonata's software services exports business grew by 13.7 per cent, and the operating profit margin in this business stood at a robust 26 per cent.

However, its consolidated margin was just 12.2 per cent, owing to its low-margin domestic product sales division, which is a trading business. After the TUI deal was announced, the Sonata stock appreciated 5 per cent.