Shipping: Losing steam

Freight rates, except for VLCCs, have weakened in July

Spot freight rates have shown a divergent trend in July. For instance, in the case of very large crude carriers (VLCC), the average spot rate in July is $ 34,379 per day compared with Q1 FY06's average of $26, 519 a day.

In the case of other tanker segments such as Suezmax, the average spot freight rates of $24, 066 a day, are about 18.8 per cent lower than the previous quarter.

Similarly, the average Baltic Dry Bulk index was 2249 in July, about 37.56 per cent lower than the June quarter. Also, average freight rates in the June quarter were well below the March quarter's average.

What factors have led to this divergent trend in July? Oil refiners, especially those in North America, do their annual maintenance in mid Q1 FY06. In July, once the refiners are back on stream, there was a surge in demand to transport crude oil from the Middle East to refiners in North America.

VLCCs are used to transport products for such long distances and it led to a pick-up in spot freight rates in this segment. On the other hand, Suezmax carriers are used to transport products for relatively shorter journeys. Given the demand preference witnessed in July, however, it led to sluggish rates in the Suezmax segment.

Meanwhile, weakness in the dry bulk segment is being attributed to the growing capacity coming on stream ""analysts estimate that an additional 20.6 deadweight ton capacity will come on stream in CY 2005 and in CY 2006, a further 18 million deadweight ton.

In a bid to counteract these weaker rates, senior officials from shipping companies highlighted that they have entered into contracts at higher rates than those prevailing in the spot market.

LIC Housing Finance

LIC Housing Finance's results for the first quarter of FY06 are better than those in the previous quarter. In the June quarter, gross profits were up 14.9 per cent compared with the same period of FY05, in sharp contrast to the March quarter, when gross profits fell 17.6 per cent on a year-on-year (y-o-y) basis.

The primary reason for the improvement was the fact that net interest income was higher by around 6 per cent in Q1, FY06 compared with Q1, FY05.

Other expenses too were lower, since these included Rs 5.85 crore towards diminution of investments in Q1, FY 04. Earnings per share growth, y-o-y, has been 5.7 per cent.

A closer look, however, shows that the main reason for the dismal performance in the last quarter of FY05 was a hefty rise in "Other expenses", thanks to higher provisions.

In the June quarter, these expenses have been lower. The flip side of that, however, is that non-performing assets (NPAs) have gone up. Gross and net NPAs as at end-June were 4.69 per cent and 3.05 per cent compared with 4.4 per cent and 2.79 per cent respectively as on end-March.

LIC Housing increased its sanctions of individual housing loans by 14 per cent in the June quarter, and disbursements by 6 per cent.

While stepping up loan growth is imperative, the company seems to be unable to ensure quality. No wonder that the stock has not been going anywhere.

VSNL

Videsh Sanchar Nigam Ltd (VSNL) has rung in the current fiscal with a fairly good set of numbers. The turnaround which started in Q405, when it reversed a three-year trend by posting higher revenues and profits, continues in the June quarter.

While revenues are up a strong 15 per cent y-o-y, what's more commendable is that revenues have grown 1.5 per cent sequentially on a strong Q405.

Also, the operating profit is up a decent 9.7 per cent y-o-y and 2 per cent q-o-q. The benefits of scale are evidently kicking in since network costs as a percentage of revenues is down 500 basis points y-o-y.

A sharp increase in other expenses has, however, resulted in EBITDA margins falling in the June quarter by about 150 basis points y-o-y, though they are up by about 450 basis points sequentially.

The enterprise business appears to be gaining momentum and since operating margins in this segment typically average 37-38 per cent, the pressures from reducing tariffs in ILD business have to some extent been offset.

With two global acquisitions""Tyco and Teleglobe""under its belt, the company's business model will change dramatically. VSNL will also be launching its broadband services in 10 cities this year though severe competition is likely to restrict growth. The stock has had a very strong run in the past month and at the current price trades at an expensive 27 times FY06 earnings.

While the re-rating is probably justified since VSNL is now truly a global player and it's turnover in FY07 could touch Rs10,000 crore, it will be a while before the new businesses contribute to the bottomline.

With contributions from Amriteshwar Mathur and Shobhana Subramanian