SCI: In choppy waters

SCI's expansion comes at a time when the shipping cycle appears to have peaked

The Centre is expected to offer 4.23 crore shares of Shipping Corporation of India (SCI) through its planned divestment. Assuming the current price of Rs 158, the offer is valued at Rs 668 crore.

The stock is currently traded at a multiple of 13.5 times estimated FY06 earnings compared with competitors whose stocks are discounted about 6-7 times forward earnings.

It is understood that employee quota would amount to about two-thirds of the planned 15 per cent government stake that would go on the block. At the end of the September quarter, the government held 80.12 per cent, while institutional investors had 11.81 per cent.

SCI has earmarked Rs 1,000 crore for its capex plan in this financial year. This expansion is, however, taking place at a time when the shipping cycle appears to have peaked.

For instance, in key tanker segments such as VLCC (ships used to transport crude oil from the Middle East to refiners in the West), current spot freight rates are hovering at about $79,165 a day.

No doubt, there has been a sharp recovery in freight rates in the VLCC segment from the lows witnessed in the September 2005 quarter, thanks to strong demand for heating oil in the Northern hemisphere, but freight rates are still about 35 per cent lower on a y-o-y basis.

Similarly, the Baltic Dry Index, which is hovering at 2935 levels, is about 42 per cent lower on a y-o-y basis. Senior company officials, however, emphasised on the long term nature of their investment strategy.

HPCL eyes stake in Shell LNG unit

Hindustan Petroleum Corporation (HPCL) is believed to have completed due diligence of Shell's liquefied natural gas (LNG) plant in Hazira and is understood to be looking at a stake in the unit.

As the company's chairman and managing director has observed, it will be a good opportunity for HPCL since it has no presence in the LNG segment. Since several users of naphtha and fuel oil are likely to switch to LNG, a less polluting and cheaper option in the future, there is little doubt that it is a good business to be in.

That way HPCL will not lose its customers to whom it is currently supplying naphtha and fuel oil, and can earn marketing revenues. The business is, however, not an easy one since it involves long-term contracts with suppliers and buyers. Spot buying and selling may not work and could entail price risk.

The model, which has been successful in India and the one that will work better, is the one adopted by Petronet LNG. Petronet has back-to-back contracts at both ends with suppliers and customers.

HPCL should, before taking a stake, ensure that it chalks out the right strategy. The demand side should be easier to handle""at a reasonable price there should be adequate demand.

Shell's re-gassification plant has a capacity of 2.5 million tonne and the capacity utilisation needs to be maximised if HPCL is to make money on its equity investment. The gas can be transported through GAIL's pipelines. In fact, the GAIL chief too has said the company was interested in picking up a stake in the unit.

BSE sectoral indices

Even though the Sensex is still about 200 points away from its all-time high high on October 4, four sectoral indices of the BSE have crossed their previous time highs. The euphoria does not seem out of place as these sectors are doing well.

The BSE IT and the BSE TECk indices are at new highs mainly because the technology sector is doing well.

The results have been good and the depreciating rupee will bring higher earnings. The IT Index is up owing to entry of TCS, which made its all-time high on November 16.

Even Infosys and Satyam were at their new 52-week highs. In the information technology, media and telecom index BSE TECk, the gain was mainly due to the IT stocks.

Investors have been lapping up India's infrastructure story and the corporate sector's capacity expansion. The BSE Capital Goods Index had already touched a new high on November 11, as L&T and ABB touched their all-time highs.

The BSE Consumer Durable Index has risen to a new high as Blue Star, which has the second largest weightage, touched its all-time high on Wednesday. Even the index heavyweight, Titan Industries, is close to its high.

The BSE FMCG, BSE Metals, BSE Mid-cap and BSE Small-cap had peaked a few days before October 4. Though mid-caps and small-caps are lagging at present, these four indices could be leading indicators for a new Sensex high.

With contributions from Amriteshwar Mathur and Shobhana Subramanian