Moser Baer: Price pressure point proved

A drastic decline in realisation has hurt Moser Baer

Moser Baer reported a drastic 47 per cent drop in profit before tax on a sequential basis last quarter. This was on the back of a 20.6 per cent fall in revenue, which was hit not only by a 16.4 per cent decline in average realisation, but also a drop in shipments.

To be fair to the company, it had mentioned in its March earnings release that pricing pressure would continue till the end of Q1, FY05, as OEM customers, distributors and retailers were bringing down inventory levels.

But the extent of the impact has been a surprise "" the fall in average realisation to 16.4 per cent was much more than the 5.1 per cent drop seen in the March quarter. This obviously had a disastrous effect on profitability "" operating margin slumped almost 500 basis points.

What made things worse for the company last quarter was that most manufacturers made substantial increases in DVDR capacity, leading to price pressure even in that segment (17 per cent of the company's revenues in Q4).

But short-term spikes in capacity will continue, given that demand for DVDRs is expected to grow 10-fold, from 700 million units in CY2003 to 7 billion units by the end of CY2007.

The company, in fact, expects much of its growth going forward to come from this segment. It is spending $135 million to expand its capacity to 2.4 billion units, and much of the increase in capacity is for DVDRs.

The markets, however, seem to be waiting for actual proof that the higher expected demand for DVDRs will result in higher profit for the company. The Moser Baer stock has been flat since mid-May, compared to a 18 per cent increase for the S&P CNX 500 index.

ACC

Cement companies have enjoyed a significantly better operating environment in the June quarter, and this is reflected in ACC's results.

The takeaway from ACC's results is that price realisations are approximately 15 - 17 per cent higher year-on-year, enough to offset increases in raw material costs like coal. As a result, ACC's profit before tax and exceptional items has grown by 54 per cent to Rs 111.86 crore in the June quarter.

While ACC is no doubt an all-India player, it has been laying increasing emphasis on expanding its production and distribution strategy in the rapidly growing and more profitable markets of Eastern India.

As part of that strategy, it had recently purchased Bargarh Cement (formerly IDCOL Cement), and is implementing a modernisation of its Chaibasa plant.

This strategy has helped improve cement segment revenues by 15 per cent to Rs 844.62 crore in the June quarter. In addition, segment profitability has also risen by 74.2 per cent to Rs 151.04 crore.

The refractory division has performed better due to a surge in demand from the industrial sector ""- as a result, segment revenues have grown by 28.9 per cent to Rs 49.11 crore in the June quarter. Also segment profitability has grown by 73 per cent to Rs 7.68 crore.

And with the monsoons reviving in many parts of the country over the last few days, cement demand is expected to remain strong in the second half of FY05.

Refining margins prop for IOC

Thanks to strong gross refining margins (GRMs), which have been in the region of $6.87/bbl, IOC's net profit for Q105 has jumped up 55 per cent to Rs 1472 crore.

The refinery throughput which was 8.54 million tonne in Q1FY04, went up to 10.34 million tonne this year. This, coupled with strong GRMs drove EBITDA to Rs 2,664 crore, up from Rs 1,680 crore, and EBITDA margins to 7.4 per cent from 5.3 per cent.

While the under-recovery of subsidies in Q1 at Rs 1,295 crore doubled from Rs 627 crore last year, this was offset by the benefit from inventory gains of Rs 300 crore as against a loss of Rs 750 crore last year, a swing of Rs 1,000 crore.

IOC's market volumes have improved by 9 per cent to 12.85 million tonne (including exports of 0.48 million tonne), which again contributed to the good performance.

However, these gains could not be capitalised upon thanks to a steep fall in auto fuel marketing margins. Retail price increases were postponed despite oil prices moving up till July. With the government allowing marketing companies the autonomy to raise prices within a band, some of the pressure should ease.

Going forward, refinery throughput will not go up significantly from these levels, while the average GRMs should remain at around $6.5 and $7/bbl.

High oil prices will remain a dampener for the stock since under-recoveries on account of subsidies will only go up. At the current price of Rs 415, the stock trades at about 7.8X FY05 expected earnings of Rs 54. The stock appears to be fairly valued though it does offer a dividend yield of 5.5 per cent.

With contributions from Mobis Philipose, Amriteshwar Mathur and Shobhana Subramaniam