Margin blues

Though crude has eased, all is not well for oil firms yet as refining margins have dipped in Q1.

While crude oil prices may have come down from their highs, and the market is predicting benign or declining prices going forward, not all is well for oil companies yet. Much against expectations, refining margins have come down substantially over the past quarter. Driven by strong demand growth of 2.6 per cent in Asian economies led by China and India, which outstripped the growth in supply at 0.6 per cent during 2000-04, Singapore Complex refining margins scaled up to $6.3 a barrel in FY06, and analysts were taking firm refining margins for granted.

Although margins may be averaging $4.5 for the second quarter, they are currently hovering slightly over the $3 level. For marketing companies like Hindustan Petroleum, Bharat Petroleum and IndianOil, reduced under-recoveries on diesel, LPG and kerosene, and the oil bonds issued during the quarter could offset the effect of reduced refining profits and help them get back in the green. However, earnings will be under pressure for independent refiners like Kochi Refineries, Chennai Petro and MRPL. Going by the past record, Reliance Industries has been the least vulnerable to refining margin changes owing its diversified product basket and the premium it commands by virtue of its higher complexity.

Educomp: Robust growth

Educomp Solutions, which is engaged in the education outsourcing business, announced on Friday that it would provide computer education in 70 more schools in UP, taking the total to 101 schools in the state. Earlier this week, it also decided to raise up to $25 million through FCCBs.

The e-learning company has a three-pronged approach to impart better education in the classroom. Its professional development business trained 50,000 teachers in the June 2006 quarter and contributed 38 per cent to the company's quarterly revenue. Its ICT (information, communication and technology) solutions division, which accounted for 28 per cent of Q1 revenues, imparts computer education to state government-run schools in several states, which are typically BOOT projects over five years. The Smart Class division (25 per cent of Q1 revenues) has developed over 12,000 multimedia content modules for the school curriculum through kindergarten to class XII, which it taught in 102 private schools at the end of Q1.

The company has grown rapidly "" its top line grew 75 per cent and operating profit increased 98 per cent, y-o-y, in FY06. Even in the June quarter, total income jumped 75 per cent, y-o-y, though its operating profit slumped 39.5 per cent, as the company made investments in the business. The stock has appreciated 38 per cent in the last seven trading sessions. The company, which floated its maiden public offer last December at Rs 125, has gained a whopping 450 per cent in the past two years, making it the top performing public issue in that period. The recent run-up has made valuations rich "" the company will trade at 40 times its estimated FY07 earnings and 20 times its FY08 earnings, if it doubles its net profit this year as well as next year.

TNPL: Expansion plans

Tamil Nadu Newsprint & Papers (TNPL) is expanding capacities and bringing down its costs via enhanced in-house production of key inputs such as pulp. The company is currently implementing a Rs 565-crore expansion plan, which should be completed by March 2007. It will help annual captive supplies of pulp rise to 2,60,000 tonne from the current 1,70,000 tonne.

TNPL is also increasing its capacity for the higher margin value copier segment. The company's installed production capacity (newsprint and paper) amounted to 2,30,000 tonne at the end of FY06. This expansion is being funded through internal accruals and debt. Its cash flow in FY06 stood to Rs 143 crore.

With the company's pulp requirement pegged at 2,20,000 tonne, it is expected to sell the surplus 40,000 tonne. In addition, TNPL will also install a new paper machine, which will take its production capacity to 3,65,000 tonne by FY10. It already has captive power supplies. Meanwhile, other players in the paper industry like Ballarpur and JK Paper are also leveraging strong demand conditions through capacity expansions.

Analysts say given the steps being taken by TNPL to bring down costs, it should be able to withstand the enhanced competition from other players in the industry. Its operating profit margins grew by 420 basis points, y-o-y, to 24.3 per cent in the June quarter. The stock appears reasonably priced at six times estimated FY07 earnings, given the company's growth plans.

With contributions from N Mahalakshmi and Amriteshwar Mathur.