Shourie scare

Flood of paper hitting the market is an invitation to short-sellers

At the IPCL roadshow in Mumbai last week, Disinvestment Minister Arun Shourie confidently declared that the government had full confidence in the market and the market had full faith in the government.

It took less than ten days for that confidence to evaporate. Opinion in the market is divided on operators short selling to push down the floor price.

With Rs 15,000 crore worth of new paper hitting the market in one month, shorting the market is a rather obvious play. But there is near unanimity on one issue""-that the minister's public airing of his concerns would only scare away retail investors.

As one fund manager put it, "The minister was ill-advised on what to say and how to say it". The housewife trying to put a bit of her money in the ONGC issue (and there are many of them) would very likely be alarmed at these stories of rigged markets.

Unfortunately, the government's bad planning in rushing through the issues and not going to the overseas markets has pushed into the background the intrinsic worth of many of the companies on offer.

Both GAIL and ONGC are being offloaded at a price-earnings multiple of around 8 or 9, which is very low if we compare them to their Asian peers.

For instance, Chinese upstream player CNOOC (China National Offshore Oil Corporation) is quoted in Hong Kong at a PE of around 15. China National Petroleum Corporation is quoted at 17.7 times earnings, although CNPC has both upstream and downstream operations.

Compare GAIL's PE of around 9 with Petrochina's (Chinese oil and gas producer) PE of 16. Malaysian gas distributor PetGas quotes at a PE of 21. Similarly, IPCL's PE of around 18 is well in line with Sinopec's 18 and Thailand's National Petro's PE of 27.

Petronet may sail through

With a spate of oil and gas companies flooding the capital market with equity offerings, would smaller issues from this sector be able to attract sufficient investor interest?

Petronet LNG Ltd ( PLL) a new entrant to this sector, is approaching investors with its IPO worth Rs 260 crore, minuscule when compared with ONGC and IBP, but it has the potential to grab investors' attention.

PLL has a first mover advantage in the liquefied natural gas (LNG) industry, it is promoted by BPCL, GAIL, IOC and ONGC, and it has an assured market for its product, as the first three promoters shall buy the entire output of the company. LNG consumption in the country is set to grow rapidly in the next few years.

Analysts said LNG is approximately 30-35 per cent cheaper than rival fuel naphtha. This price differential is set to widen further in the medium term, as naphtha prices are linked to Brent, and crude prices have been rising on international exchanges.

Apart from the price differential, LNG causes minimal environmental pollution and this attribute has led fertiliser and power utilities to undertake techno-feasibility studies on the viability of shifting to LNG. To meet this potential growth in demand, PLL is planning to expand its LNG capacity at Dahej to 10 million tonne.

Substantial capital expenditure has already been incurred at PLL and it is crucial that financing costs are kept under control. As part of that strategy, the company plans to raise $ 115 million from local bond markets in May-June to lower its borrowing costs.

As PLL is currently ramping up its operations, there are no prior financial results that could be analysed. In spite of nervous markets, the issue is expected to get a satisfactory response from investors, given the strong position of the company in its product segment.

Gillette's smooth numbers

Gillette's sales gained further momentum in the December quarter - sales of continuing businesses grew 35 per cent last quarter, compared with a growth of 23 per cent in the nine month period ended September 2003.

Growth continued to be led by the core grooming business (blades, razors and toiletries), which grew 22 per cent last quarter. Besides, sales of the oral care business jumped 86 per cent to Rs 11 crore or 12.3 per cent of sales.

The higher sales last quarter was partly on account of the launch of Vector Plus, its new twin-blade shaving system. But the new brand launch also hit margins because of the initial promotional and brand building exercise. Operating margin fell 770 basis points last quarter, owing to a 174 per cent jump in ad spend to Rs 24.44 crore.

Advertisement and sales promotion spend accounted for 27.3 per cent of sales last quarter, compared to just 9.7 per cent in the year ago quarter.

Excluding ad spend, the company managed cost savings of almost 10 percentage points at the operating level. These huge savings were mainly on account of a better product portfolio - thanks to the company's restructuring, most low-margin business including the portable power business have been divested.

The portable power business accounted for 9.5 per cent of sales last year, compared to 27 per cent in 2002. Besides, since Gillette imports around 40 per cent of its products, both the reduction in customs duty and the appreciation of the rupee helped.

Going forward, the outlook is good for the company - penetration levels for the company's main product, twin-blade shaving systems, is believed to be 10 per cent, compared to 25 per cent in China and over 95 per cent in developed markets.

The new Vector Plus, with its attractive pricing, could trigger a shift to twin-blade systems. This could be the hope behind the Gillette stock's premium pricing of 46 times 2003 earnings.

With contributions from Amriteshwar Mathur and Mobis Philipose