Profitable access

Lower ADC should lower tariffs and boost volumes

Lower access deficit charges (ADC) announced by the Trai today, will pull down tariffs for customers and should ultimately translate into higher volumes in the long run.

Besides, telecom players will shell out less subsidy, approximately Rs 2,800 crore less, to BSNL because of lower charges and the new revenue sharing agreement in place of the earlier duration-based charge for domestic traffic. Bharti, Hutch and Reliance should be passing on benefits and, thereby, gaining volumes.

Lower charges on incoming and outgoing international calls should reduce grey market traffic and increase volumes.

The routing of international traffic through grey market was owing to higher ADC on incoming calls.

However, the arbitrage is still significant for the grey market to exist, so VSNL may not be an immediate gainer.

The ceiling on domestic long distance carriage charges at 65 paise should mean cheaper NLD calls for distances beyond 50 km, once again boosting volumes.

MTNL which received ADC for it's wireline business will be a marginal loser on this count.

Moser: Rising Sun?

If Moser Baer was mitigating the risk of falling prices of its removable data storage media products thus far by diversifying in the domestic market, it is now diversifying into manufacturing solar cells and modules.

The nature of its media products""comprising mainly of CDR/RW and DVDR/RW""is that prices keep dropping over time.

Though removable storage media products face obsolescence risk, Moser Baer has remained in step with changing technologies.

CDR/RW lost their dominance in Q4 FY05, though DVD demand is solid. While volume growth is healthy along with rising top line, it is difficult for Moser Baer to maintain consistency in profitability.

For example, FY04 was an exceptionally good year but the next year, its operating profit fell almost 42 per cent.

Thus far, the nine-month results this year have been worse than those of last year's at both operating profit and net profit levels. Moser Baer's December quarter results were average with 5.44 per cent q-o-q rise in operating profit, though net sales went up 9.4 per cent.

Moser Baer's will set up the photo voltaic cell unit through the SEZ route at a cost of about Rs 260 crore, which will have a capacity of 80 mw by 2007.

The global market for photo voltaic power was at 1,195 mw in 2004, and as costs are expected to drop, this renewable energy source may see demand rising.

Till the solar energy project takes off, the company will continue to be affected by the vagaries in storage media prices.

Esab: Riding the capex boom

Esab India has reported 52.66 per cent y-o-y growth in its operating profit to Rs 53.19 crore in CY05. Clearly, the expansion in civil engineering and gas pipeline projects, has ensured strong demand for its welding solutions. In addition, the company benefited once again from customers' shift toward automatic welding methods.

As a result, operating profit margin grew 382 basis points y-o-y to 22.33 per cent in CY05.

However, in the December 2005 quarter, the company saw its operating profit margin dip 457 basis points y-o-y to 16.24 per cent, mainly owing to a fall in segment profit at its equipment division.

Meanwhile, in CY05, improved demand from user industries such as automobiles and civil engineering for Esab's welding electrodes and welding fluxes helped segment profit of the key consumable business rise 26.77 per cent y-o-y to Rs 48.3 crore.

Also, in CY05, the equipment division saw segment profit rise 131 per cent y-o-y to Rs 9.38 crore.

The improved operating environment has resulted in the stock gaining 115 per cent over the past six months compared with 44 per cent rise in the Sensex. The key growth driver for Esab will be the buoyancy in the capex cycle.

As a result, this scrip still appears reasonably valued at about 18.8 times trailing 12-month earnings.

With contributions from Shobhana Subramaniam and Amriteshwar Mathur