Business Standard

In troubled waters

Hike in shipping capacities is not matching with slower demand growth

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Niraj BhattAmriteshwar Mathur Mumbai
Shipping freight rates on a spot basis in the key tanker segment are broadly higher on y-o-y basis in the March 2006 quarter, but that has not prevented stocks from this sector from under performing the broader markets over the past two months.
 
For instance, the Shipping Corporation of India stock has lost about two per cent over the past two months compared with 14.55 per cent rise in the Sensex. Varun Shipping has fallen 10.8 per cent, while GE Shipping has gained about 6.3 per cent during this period.
 
According to analysts, the recent ramp-up of shipping capacities across product segments globally at a faster pace compared with a slower demand growth has contributed to investor nervousness in this sector.
 
As a result, investors are factoring in a possible weakness in spot freight rates across the shipping industry over the next few months.
 
Meanwhile, spot freight rates in the VLCC segment (ships used to transport crude oil from West Asia to large refiners across the globe), averaged about $62,500 in the first two months of Q4 FY06 compared with around $54,500 in the previous corresponding period.
 
But, spot freight rates in this segment have declined to around $39,000 per day recently, which is broadly in tune with March 2005. VLCC spot freight rates had averaged about $125,000 per day levels in Q3 FY05.
 
Similarly, in the Suezmax segment (ships used to transport products for relatively shorter journeys), spot freight rates averaged about $50,000 per day in the first two months of the current quarter compared with $47,000 levels a year earlier.
 
But spot freight rates in the Suezmax segment are currently pegged at $35,000 per day compared with $50,000 a year earlier.
 
For shipping companies, the better rates in January and February this year should help overcome the weakness witnessed in March and clock a reasonable growth over Q4 FY05, which was quite bad.
 
EID Parry: Sweet timing
 
EID Parry is leveraging the well-documented upturn in the sugar sector by announcing an expansion of its crushing capacity.
 
The company is already implementing expansion projects worth approximately Rs 300 crore for enhancing its sugar facilities and that is now being ramped up to Rs 850 crore over the next two years.
 
At the end of FY05, EID Parry's sugar production stood at 2.33 lakh tonne. These new projects will raise the production to almost 8 lakh tonne in the medium term.
 
The company's integrated sugar plants would also allow it to leverage emerging opportunities in allied areas such as ethanol-blended auto fuels. It will also expand its power capacity to 130 mw and distillery capacity to 240 kilolitre per day.
 
The company, like other sugar players, also has to deal with rising input costs. But a strong sugarcane crop in the south this year should help ensure supply.
 
The sugar division, which recorded revenues worth Rs 424.06 crore in the first nine months of FY06, already contributes almost 63 per cent of EID Parry's segment sales. In order to focus on the sugar business, it did make sense for the company to transfer its Parryware sanitary division to a wholly owned subsidiary.
 
This subsidiary, Parryware Glamourooms Pvt Ltd, plans to tie up with Spain-based Roca and the foreign partner would invest 50 million euros (approximately Rs 265 crore) to get 50 per cent stake in the joint venture.
 
At this price, the sanitaryware division will get a valuation of about 2.2 times trailing 12-month sales, which is good for EID shareholders. Analysts say that the company's dominant position in several southern markets justify these valuations.
 
Also, the company is attempting to grow its relatively smaller business of bio-products by acquiring Parry Nutraceuticals Ltd for Rs 32 crore.
 
This company makes consumer products such as spirulina-based vitamin supplement and antioxidants, mainly for the exports market.
 
EID Parry's existing bio-products division manufactures neem seed-based pest control products. The bio-products division contributed a mere 2.1 per cent to the company's segment revenue in the first nine months of Q3 FY06.
 
At its current price of Rs 271, EID Parry trades at a trailing 12-month P/E of about 22, which is in line with other sugar stocks.

 

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First Published: Mar 22 2006 | 12:00 AM IST

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