Swaraj Mazda: Time to drive out

With the battle for control of Swaraj Mazda over, it's time to exit

Sumitomo Corporation will soon have a 41.03 per cent stake in Swaraj Mazda, as it has proposed to acquire the 15.62 per cent stake held by Mazda Motor Corporation.

Only about a month ago, Sumitomo had a 10.41 per cent stake in the light commercial vehicle company. Before the Mazda stake purchase, it had acquired a 15 per cent stake from the Indian partner, Punjab Tractors.

Actis, another major shareholder, raised its direct stake in the company to 17.45 per cent from virtually zero a little over a year ago.

Its total stake is higher at about 21.5 per cent, if one were to add its indirect stake in the company through its holding in Punjab Tractors. While Sumitomo has come on top in the battle with Actis for control of Swaraj Mazda, minority shareholders in the company have also been winners.

The Swaraj Mazda stock has doubled in the past 14 months or so, thanks mainly to the battle for control.

After announcing an open offer at Rs 315 a share for a 25 per cent stake in the company late last year, Actis hiked the offer price to Rs 400. The response wasn't great, with the company getting only a 7.74 per cent stake through the open offer.

Shareholders, who didn't tender shares in the offer haven't lost much, the stock has traded in the Rs 380 to 400 band lately.

But with Sumitomo seated comfortably with a majority stake, the performance of the Swaraj Mazda stock should now be driven by fundamentals.

The stock now looks expensive at 16.6 times trailing earnings, considering that Tata Motors gets a valuation of only 14.5 times FY05 earnings.

It's also important to note that Sumitomo has purchased Mazda's stake at Rs 303 per share, a 20 per cent discount compared to current levels. That's a strong hint for minority shareholders to exit.

Steel prices

The steel industry is optimistic that hot-rolled coil (HRC) prices could move upwards by about Rs 700-Rs 1000 a tonne in the next few weeks thanks to a recovery in product prices in several western markets.

The prices of steel stocks have moved up as a result. After his company's second-quarter results, however, global steel magnate L N Mittal has forecast "difficult " conditions for the September quarter.

So who is right? MEPS, a global steel research organisation, says that its world average flat product transaction price has been falling for four consecutive months, but an appreciation of Asian currencies has helped to get a small rise in HRC prices in the region. Analysts point out that the operating environment in the US steel market is slowly improving, as inventories have started to come down.

The problem is that any bounce back in HRC prices later this year could once again scale back production cuts announced by global players such as ThyssenKrupp and Arcelor.

The biggest impact on steel prices, however, will be Chinese production, and analysts say that about 35-40 million tonne flat products capacity is scheduled to come on stream over 8 to 12 months in China. Putting it simply, Chinese overproduction is expected to more than offset the impact of European cutbacks and rising US demand.

China for the first time is expected to become a net supplier of HRC on an annual basis in calendar 2005. The solution""-Chinese producers need to have more "discipline" and the government needs to take more stringent fiscal measures to limit output and keep a tight check on its steel exports.

Bharati Shipyard: in calm waters

The Bharati Shipyard stock touched a 52-week high on Thursday, thanks to the buoyant operating environment for the company. The well documented upturn in the global offshore oil exploration business has translated into strong demand for the company's offshore vessels and anchor handling tugs.

In addition, the International Maritime Organisation ( IMO) mandate to phase out all double hull vessels by 2010 has also led to improved demand conditions for the company.

The stock trades at about 22 times trailing 12-month earnings compared with a discounting of 12 times for its peers. Analysts said the company was expected to grow faster than its peers over the next few years "" its order book amounted to Rs 434.2 crore at the end of the last quarter.

The company is expected to execute this order book by end of FY07, implying that the company should be able to grow its top line by over 40 per cent this fiscal and the next one. In FY05, the company had grown its net sales by 58.6 per cent to Rs 192.6 crore.

The company is expanding its Ratnagiri Yard to leverage on better demand conditions and to finance its growth plans, Bharati had earlier raised approximately Rs 161.68 crore via its initial public offer. Nevertheless, the underlying concern is that the shipbuilding subsidy received by the company accounted for about 50 per cent of EBITDA in FY05. But analysts say the draft maritime policy, which is expected to be announced shortly, is likely to confirm this subsidy beyond 2007.

With contributions from Mobis Philipose and Amriteshwar Mathur