Price hike not a healing touch

LPG and kerosene remain thorn in the flesh

The vociferous opposition from within the UPA for large hikes in petroleum product prices has made it difficult for the government to effectively solve the problems of the petroleum sector.

In the case of kerosene and LPG, little has been done to deal with the problem of surging under-recoveries, given their utility of the masses.

Losses on account of these products alone was estimated at Rs 26,000-27,000 crore in FY 06, say analysts.

But the government has reduced the custom duty on petrol and diesel to 7.5 per cent from 10 per cent, and also maintained the 5 per cent duty for crude.

What this implies is that the government is attempting to partially reduce the burden of under-recoveries in auto fuels for oil marketing companies (OMCs), but this would hurt the gross refining margins (GRMs) of refiners.

In addition, the government has also made the subsidy sharing mechanism more transparent, as compared to the ad hoc decisions prior to the end of each quarter.

Of course, this policy imposes a greater burden on upstream players.

The new trade parity pricing coupled with the hikes in auto fuels announced, would help OMCs to bring blended under-recoveries for auto fuels to about Rs 5.5 per litre, as compared to Rs 9-10 per litre prior to the recent hike.

Meanwhile, upstream players will share nearly Rs 24,000 crore of under-recoveries, while the government's oil bonds will take up Rs 28,000 crore, say analysts.

Now, under-recoveries for OMCs are projected at Rs 6,000 crore in FY07 as compared to Rs 9,500 crore a year earlier.

Analysts are not changing their EPS forecasts for OMCs, as a reduction in under-recoveries for petroleum products is expected to be offset by lower GRMs. Stocks in the oil sector ended in the red on Tuesday, given the broad selloff witnessed on the bourses.

Titan Industries: On an upswing

It's been a good year for watch and jewellery-maker Titan with sales up a sparkling 31 per cent y-o-y at Rs 1,440 crore and the operating profit higher by 30 per cent y-o-y at Rs 154 crore.

For the first time, jewellery sales have overtaken sales of watches, though the latter remains more profitable.

However, much of the shine has come off the numbers because of the flat operating margins, which were a dull 10.6 per cent. In fact, margins in the March quarter crashed 600 basis points thanks to raw material pressures, despite the topline growing by an excellent 33 per cent.

The bottomline for FY06 has seen a dramatic improvement: at Rs 73.62 crore, the profit after tax was up nearly 200 per cent. What has helped are the lower provisions for bad debts and lower expenses on interest.

The good news is that both Titan and Tanishq grew faster than they did in FY05, a sign of the brand equity that they have achieved.

With higher sales, tipped to grow at a compounded 24 per cent in the next couple of years, economies of scale should begin to kick in, leading to better margins of over 11 per cent.

The sales-to-capital employed ratios for both the divisions have been continuously improving: in FY06 it increased to twice from 1.55 times for watches, while for jewellery it increased from 5.31 to 5.77 times.

Titan's strategy in the jewellery space has been to straddle all segments and it is well poised to cash in on the huge opportunity, estimated at Rs 55,000 crore. It has entered smaller towns in a bid to capture the investment demand for gold.

The company has recently introduced high-end watches and one of its biggest strengths lies in the huge retail network that it has built.

At the current price of Rs 645, the stock trades at 27 times estimated FY07 earnings and 20 times FY08 estimates and while it may seem a trifle expensive, it is a good play on the growing demand for branded products.

Praj Industries emerges stronger

Praj Industries has reported a substantially improved March 2006 quarter numbers as its business momentum has taken off.

For Q4 FY06, Praj's sales improved 33 per cent, with operating profit margin growing 111 per cent.

For FY06, Praj posted a 22.4 per cent improvement in its operating profit while sales grew 13.71 per cent. Operating profit margin went up by 88 basis points to 12.35 per cent.

With ethanol emerging as an environment-friendly option, demand for Praj's ethanol plants has been on the rise, both in India and abroad.

The company has an order book of Rs 450 crore, which will be executed over the next 12-18 months.

According to the management, as the proportion of international orders will increase, the margin will improve.

The Praj stock has risen more than 200 per cent in the past year and at a trailing 12-month P/E of 55, most of the growth opportunities are factored in the price.

With contributions from Shobhana Subramanian and Amriteshwar Mathur