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Saturday, February 10, 2007

Money Times

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Capital Market - Sector Watch


Concrete surge in profit

Spurt on growing demand as capacity additions and consolidation lag

The cement industry reported another quarter of stellar

performance. High cement prices from a year-ago period continued

to be a key factor contributing to the buoyancy in the financials of

cement companies. The rising share of blended cement, improving demand and cost-control measures,

too, added to the growth in profit.

Generally, construction gathers momentum post-monsoon — from October, reaching the peak in April-

May, and entering a lean period by June. To prevent a further rise in cement prices from the current levels

in the ensuing busy construction season and to curb the overall inflation prevailing in the economy, the

Union government removed the custom duties on OPC and blended cement on 22 January 2007, from

12.5% earlier. But the cut is not applicable to cement clinkers, white cement or specialised cements like

aluminous cements, sagol, ashmoh, and high alumina refractory cement.

Being a bulky item, the cost of transporting cement is high. Hence, we do not expect any fall in domestic

cement prices despite the scrapping of customs duties. In fact, the landed cost of imports, even at nil

customs duty, is about 15% higher than the current relatively high cement prices. Nevertheless, the

government has sent strong signals by the duty cut that rise in cement prices from the current levels will

not be tolerated.

Between November 2004 and March 2005, cement prices in Mumbai went up by over 12% to Rs 170.77

per 50 kg bag. The pace of increase surged nearly 20% to Rs 207.38 between November 2005 and March

2006. But, during the current fiscal, cement prices remained at the Rs 226 level, touched in November

2006, till January 2007. Indications are that the rise in prices from the current level will be difficult. To

this extent, the government seemed to have made its intentions loud and clear.

Though prices of cement in Mumbai have remained flat on a sequential basis since November 2006, there

are reports that players in north India have increased prices by about Rs 5 a bag. The price per bag of

cement were Rs 217 in Delhi, Rs 204 in Jaipur, and Rs 220 in Ghaiziabd. Industry players are of the

opinion that prices will sustain at the current level in near term at the current level of demand. If demand

accelerates from the current level, there may be further increase in prices. But the scope for significant

increase in prices from current level is limited, despite heightened construction activity and consequent

robust demand growth. Our pessimism stems from the possible direct and indirect measures that the

government can resort to control inflation.

The landed cost of imported cement may act as a cap in to the level to which cement prices can

appreciate. However, the high cost of transportation by road will make it uneconomical to import cement

in land-locked markets. Thus, players in the northern and central regions will be better off than others.

Even for players operating in the costal region, the cut in custom duty is not a major negative as it will not

be easy to import cement due to the infrastructure bottlenecks associated with the packing and unloading

of imported cement. Also, there would be very few large end-users who can consume minimum viable

quantity required to import. Industry players say that only 20% of the cement produced in China is of

international standard. The balance 80% is for internal consumption.

The 24 listed cement companies reported a revenue growth of 57% to Rs 7727 crore in the quarter ended

December 2006. North Indian companies contributed 80% of the total revenue of the industry and south

Indian companies the balance 20%. Dispatches were up 9% to 38.51 million tonnes over the December

2005 quarter.

Movement in the Wholesale Price Index (WPI) of cement indicates that average realisation of the industry

improved 20% in the quarter. The average cement price in Mumbai was Rs 224 a bag — up 29%. Thus,

on account of improvement in cement realisation of players, operating profit margin (OPM) improved

sharply, from 16% to 31%. The growth in revenue coupled with improvement in margin led to a 198%

jump to Rs 2408 crore in operating profit (OP).

Other income (OI) increased 35% to Rs 217 crore and interest expenses declined 24% to Rs 131 crore,

though provision for depreciation was 18% more to Rs 336 crore. Profit before tax (PBT) stood at Rs 2157

crore — up by a whopping 322%. Despite provision for tax shooting up 368% to Rs 549 crore, net profit

skyrocketed by 308% to Rs 1608 crore. North India companies contributed 82% of the profit, and south

India companies 18%.

Net profit restricted

ACC's standalone net sales grew 50% to Rs 1619.9 crore. OPM improved by a massive 1,340 bps to

28.9%. PBT before extraordinary (EO) was up by a whopping 309% to Rs 445.35 crore. Due to decline in

EO income by 84% Rs 15.25 crore, the growth in net profit was restricted to 107% at Rs 358.46 crore,

which itself is quite impressive. On a consolidated basis, ACC sold 18.86 million tonne of cement

compared with 17.50 million tonnes in 2005 — an increase of 7.8%. Average realisation was 33% higher

to Rs2914 a tonne in calendar year 2006.

Ambuja Cement Eastern was merged with Gujarat Ambuja Cements on 1 January 2006. The financials of

Gujarat Ambuja Cements in the December 2006 quarter, this are not strictly comparable with the

December 2005 quarter.

Net sales of Gujarat Ambuja Cements surged a 72% growth to Rs 1329.1 crore. The company sold 4.12

million tonnes of cement in the December 2006 quarter as against 3.42 million tonnes in the December

2005 quarter— an increase of 20%. Average realisation was up 43% to Rs 32256 crore. OPM improved

36%, from 26.1%. The company had a positive OI of Rs 32.77 crore compared with a negative OI of Rs

7.56 crore in the December 2005. The turnaround in OI was on account of forex gain of Rs 16.54 crore

compared with forex loss of Rs 13.62 crore in the December 2005 quarter.

PBT before EO skyrocketed 261% to Rs 450.13 crore. EO income of Rs 7.49 crore represented profit on

sale of subsidiaries / joint ventures / associate as against nil in the December 2005 quarter. Net profit was

up by 284% to Rs 337.76 crore.

Gujarat Ambuja Cements plans to increase the cement capacity in phases, from the current 16 million

tonnes to 22 million tones, through brownfield expansion by 2009. The company is setting up a one

million-tonne cement grinding unit at Farakka in West Bengal, which is likely to be commissioned in the

March 2007 quarter. Another one million-tonne cement grinding unit at Roorkee in Uttaranchal will be up

and about by April 2007.The upgradation of the cement plant at Rabriyawas in Rajasthan is progressing

and is likely to be completed by July 2007. As a result, its clinkering capacity will go up to two million

tonnes, from 1.5 million tonnes currently. Meanwhile, the company has started implementing the second

clinkering plant in Chattisgarh, which may go on stream by the first quarter of 2009.

Gujarat Ambuja Cements also proposes to set up a new clinkering plant in Himachal Pradesh along with

two grinding stations in Uttar Pradesh and Haryana with a combined cement capacity of three million


Shree Cement reported a robust growth in revenue of 153% to Rs 364.54 crore backed by an 80%

increase in dispatches and 41% improvement in realisation. Strong growth in volume was on account of

capacity addition. OPM improved to 43.9%, from 37.7% in the December 2005 quarter. Net profit

increased sharply by 272% to Rs 104.13 crore. The growth in bottom line was not only fuelled by higher

volume and realisation and improvement in margin, but also by lower base in the December 2005 quarter.

In FY 2006, the company's plant was shut down for 18 days for upgradation. It also incurred an expense

of Rs 11.26 crore in increasing productivity in the December 2005 quarter. However, the growth in the

bottom line has been partly held back due to the sharp increase in provision for tax.

Shree Cement plans to increase its captive power capacity to 99 MW, from 45 MW, to meet the power

requirement of its expanded cement capacity. All the power plants of the company will be pet coke-based.

The extended power capacity will be sufficient to meet the full power requirement post the new cement

capacity. Currently, all the power requirement is met from its captive power plant. The current installed

grinding capacity is 4.5 million tonnes. By March 2007, unit-lV, with a capacity of 1.5 million tonnes, will

start commercial production. Section-wise trial-run of unit IV has started.

Revenue of Ultra Tech Cement spurted 60% to Rs 1260.45 crore on increase in sales volumes: 15% to

44.96 lakh tonnes and improved domestic sales realisation: around 50%. As a result, OPM improved

drastically to 30.2%, from 14%. Net profit soared 790% to Rs 212.46 crore.

Net sales of India Cements rose 36% to Rs 472.41crore on a 4% increase in cement dispatches to 17.49

lakh tonnes and 27% improvement in gross realisation to Rs 3099 per tonne compared with the December

2005 quarter. Thus, OPM improved to 28.2%, from 13.5%. Despite EO income of Rs 6.65 crore in the

December 2005 quarter, net profit zoomed to Rs 79.78 crore compared with Rs 7.22 crore in the

December 2005 quarter.

India Cements's expansion is proceeding as per schedule with the conversion of the Sankaridurg unit in

Tamil Nadu into a modern state-of-the-art dry-process plant along with upgradation in other locations.

This will add two million tonnes of cement capacity in FY 2008. All the upgradation and conversion are

being funded from the proceeds of the foreign currency convertible bonds (FCCBs) issued in May 2006.

Being a diversified company, financials of Grasim Industries are not included in the aggregates. The

company's cement business posted a revenue growth of 48% to Rs 1344.36 crore. Capacity utilisation

stood at 112% compared with 106% in the December 2005 quarter. Sales volumes of grey cement

increased 5% to 3.72 million tonnes, while realisation improved 49% to Rs 2918 per tonne. Sales volume

of white cement was up 3% 9357 a tonne, while realisation rose 6% to Rs 6456 a tonne. Profit before

interest and tax (PBIT) of the division increased 181% to Rs 376.37 crore.

The fundamentals of the cement sector still appear to be strong. With industry capacity utilisation

reaching 98% in December 2006 and consumption growing double digit (10% in the first nine months of

FY 2007), a short-term deficit in the first half of calendar year 2007 is likely. This could have a favourable

impact on prices and, thereby, profit. Players whose capacity is likely to come on stream in the near term

will be able to derive the most benefit form this situation. Some of the big capacities that are likely to

come on stream are 1.5 million tonnes from Shree Cement, and 1.5 million tonnes from Kesoram

Industries. However, about 75 million-tonne planned capacity addition continues to be a major long-term

risk for the industry.


With the removal of customs duty on cement, sentiments in the market turned negative towards cement

stocks. But the results for the quarter ending March 2007 will be quite robust considering the rise in prices

over the March 2006 quarter. On the flip side, the growth in dispatches in January 2007 has been quite

weak. But in the cement sector, rise in prices matters more than the growth in dispatches.

The government's anticipated shift of cement from specific excise duty (Rs 408 per tonne, inclusive of

education surcharge) to ad valorem (which is in terms of percentage) in the Union Budget 2007-08 will be

a negative for the sector. In the current high-price scenario, effective excise duty had come down due to

the specific excise-duty regime. For instance, ACC's excise incidence declined from 18.8% in FY 20004 to

17% in calendar year 2005 and to a mere 12.9% in 2006.

So, whether the ensuing budget will add to the negative sentiments or boost positive sentiments through

greater thrust on infrastructure remains to be seen.



Volume growth drives profit

Higher demand and prices blunt the impact of rising input costs

The automobile sector registered a healthy performance in the

quarter ended December 2006 over the December 2005 quarter

largely on account of decent growth in domestic and export sales

and selective upward revision in vehicle prices.

The combined net sales of 84 auto and auto ancillary companies increased 25% to Rs 28322 crore in

this period. Good performance of frontline auto manufacturers — Mahindra and Mahindra (M&M),

Ashok Leyland (ALL), and Bajaj Auto (BAL) — drove the sales growth.

However, the auto sector is witnessing rising input costs and pressure on operating profit margin

(OPM). Though OPM for the industry fell by just 80 basis points (bps), the fall in OPM of two-wheeler

companies was a severe 350 bps to 10.8% in the quarter ended December 2006, from 14.3% in the

corresponding previous quarter. OPM of BAL, Hero Honda and other companies remained under

pressure due to increase in prices of raw material like rubber, aluminum, nickel and others.

Increase volume and vehicle prices by select players, however, helped the sector to report a decent

growth in operating profit (OP), despite pressure on OPM. As a result, despite modest slippages in

margin, the auto sector succeeded in increasing OP by 18% to Rs 3327 crore in the quarter ended

December 2006.

Other income (OI) of the sector jumped 29% at Rs 521 crore. However, OI of Maruti Udyog (MUL)

rose 20% to Rs 128.43 crore, which accounted for about 24% of the total OI of the sector.

Net interest expenses increased 20% to Rs 219 crore. The increase in interest costs would have been

lower but for net interest income of Rs 16.76 crore recorded by M&M in the December 2006 quarter

as against net income of Rs 2.11 crore in the December 2005 quarter.

Profit before interest, depreciation and tax (PBIDT) went up by 19% to Rs 3629 crore. But provision

for depreciation rose by just 9% to Rs 650 crore, facilitating a relatively better rise in profit before tax

(PBT) by 21% to Rs 2979 crore.

Provision for taxes (including deferred tax) increased 25% to Rs 858 crore in the quarter. MUL, Tata

Motors and ALL were some of the companies, which increased their tax provisioning compared with

the December 2005 quarter. In the end, the aggregate profit after tax (PAT) grew by a decent 20% to

Rs 2121 crore.

Within the auto segment, two-wheelers underperformed the industry's growth in sales, OPM and net

profit. In particular, the motorcycle segment's OPM increased just 13% to Rs 3631 crore. OPM of the

two-wheeler segment was the worst at 10.8%. Hectic competition among players prevented them

from fully passing on the rise in costs, denting their margin.

The passenger-car segment's sales were up 19% — much below the auto industry sales growth rate.

Also, these players' OPM eased by 90 bps to 13.1%. Interest costs zoomed 245% to Rs 21 crore,

while provision for depreciation grew 11% to Rs 82 crore. As a result, PBT was up a mere 10% to Rs

530 crore, Fortunately, the provision for tax grew a mere 2%, facilitating the segment to report better

net profit — a rise of 14% to Rs 363 crore.

Standing out

The commercial-vehicle (CV) segment remained an impressive outperformer in the Indian auto

sector. CV sales spurted 36% to Rs 9632 crore. There has been consistent improvement in OPM, from

8.8% in the nine months ended September 2005 to 9% in the nine months ended September 2006,

and surging to 11.8% in the quarter ended December 2006. PBT jumped 67% to Rs 875 crore. But in

view of the spike in provision for tax by 142% to Rs 252 crore, the growth in net profit was muted,

though impressive, at 48% to Rs 623 crore.

The tractor sector's sales went up 20% to Rs 3424 crore. This was marginally below the sales growth

of the entire auto industry. With an 80-bp fall in OPM and a 3% decline in depreciation, the tractor

sector's net profit surged 35%. The growth would have been much higher but for the 35% increase in

provision for tax.

The auto ancillary segment also reported a healthy growth of 25% to Rs 5173 crore in sales.

However, OPM continued to remain under pressure, falling from 12.9% to 12.7. But interest cost was

by 26% to Rs 88 crore, while provision for depreciation advanced 15% to Rs 183 crore. As a result,

the growth in net profit jumped 28% to Rs 339 crore —quite impressive given the kind of pressure on

the players to pass on greater share of the operational gains by original equipment manufacturing


The improved financial performance for MUL comes on growth in sales, better operational efficiency,

reduction in cost and a favorable macro-economic environment. The company's net sales increased

18% to Rs 3679.47 and PAT by 11% to Rs 376.41 crore. It launched the diesel version of Swift. MUL

will expand its diesel engine manufacturing capacity to 300,000 from 100,000. This would entail an

outlay of Rs 2500 crore. The company commissioned its diesel engine manufacturing line in

September 2006 to make a 1.6-litre engine for which it has sourced technology from Fiat.

New foray, new launches

Tata Motors reported revenue (net of excise) of Rs 6956.84 crore — an increase of 37% from Rs

5074.86 crore in the December 2005 quarter. PAT increased 12% to Rs 513.17 crore. The company

will foray into the Pakistan market through its fully-owned subsidiary, Tata Daewoo Commercial

Vehicle Co (TDCV). It has started a truck and bus assembly unit in Karachi. Afzal Motors of Pakistan

will assemble trucks and buses from the TDCV stable under a joint venture technical assistance


BAL's revenue rose impressively by 28% to 2568.23 crore. Motorcycle sales continued to outgrow the

industry's sales growth of 13% by 28% to 6,52,406 units. It continued to gain market share – 34% in

the December 2006 quarter as against 31% in the December 2005 quarter. The company, continuing

its focus on higher-end motorcycles, will launch three new motorcycles in the next few months. The

new upgrades of Bajaj Pulsar DTS-i twins were introduced in December 2006. The products have

been well received and have raised the bar in the "premium" segment. The all-new Pulsar 220 DTS-Fi,

to be unveiled shortly, which will further consolidate BAL's dominance in the segment.

Hero Honda failed to demonstrate its mixed performance, posting a sales growth of just 15% to Rs

2666.05 crore. OPM continued to be under immense pressure at 11.3%. PAT declined 20% at Rs

209.18 crore. The company is scouting for a partner for its proposed foray into the four-wheeler

segment. The details of the venture are under wraps. It is not clear whether it will enter the CV or the

passenger-car segment.

TVS Motor Company (TVS), enjoying one of the lowest margin in the industry at 3.2%, reported a 7%

increase in sales of Rs 935.41 crore. Net profit declined 63% to Rs 11.46 crore owing to rise in the

interest cost to Rs 8.62 crore. The company has received favourable response to the recently

launched StaR City ES. This motorcycle, attractively priced, is India's first and only electric start

motorcycle in the 100-cc segment.

Sales of utility vehicle major M&M jumped 17% to Rs 2576.06 crore. OPM fell marginally from 12.9%

to 12%. PAT was up 4% to Rs 241.68 crore. The company signed a memorandum of understanding

with Renault to establish a long-term strategic partnership for creating a greenfield site with capacity

of 500,000 units per year within five years for offering innovative products to customers in India.

M&M is likely to export its Scorpio and Scorpio pick-up truck to the US by 2008. The pick-up truck, is

currently sold in Italy, Spain and South Africa is not available in the Indian market

On the back of a 54% growth in sales volume, ALL reported a 48% increase in sales value to Rs

1777.59 crore. Enhanced production capacity coupled with better fund management have helped the

company. The better performance is most prominent in the multi-axle vehicle segment, where it has a

strong presence. ALL has signed an agreement with Brehon Energy, Australia, for the use of

ecologically superior Hythane gas in CNG engines. It has announced plans to set up a vehiclemanufacturing

unit in Uttaranchal. An investment of over Rs 1000 crore would create a vehicle

assembly and cab facility to produce 25,000 vehicles annually, which will be upped to 40,000 units



The annual contract for inputs has been signed at higher rates than the expired contracts. Also, input

prices have increased quite significantly in recent times. These factors have led to pressure on

margin. To address the issue, select passenger-vehicle manufacturers hiked vehicle prices in January

/ February 2007.

Fortunately, demand growth remains strong. But competition among players, particularly twowheelers,

is intensifying, As a result, passing on the rise in costs to consumer, specially by twowheeler

players, is becoming different. Also, rising capex, huge expenditure on research and

development, new product / variant development, and rising ad spend are adding to costs.

The automobile industry is heading into an interesting phase with many new launches lined up. It is

hoping that the lower 16% excise duty on small cars is extended to other cars as well. On the other

hand, small car manufacturers are seeking a further cut in excise duties to about 8%. Also, the

reduction in customs duties effected in non-ferrous metals and alloy steel will benefit the auto sector.

Possibly, slashing of peak customs duties from the present 12.5% will further bring cost savings.

The sector is becoming increasingly competitive on the global scale, but the buoyant domestic market

is its primary target. But the auto ancillary sector, in contrast, is looking to accelerate the pace of

growth in exports.

The two-wheeler segment continues to lag behind, while the CV segment remains a star performer.

The passenger-vehicle segment can benefit from price hikes, possible fiscal benefits and the sustained

rise in demand.

Overall, the auto sector continues to accelerate its pace of growth and is expected to improve its

performance in the quarter ending March 2007 over the March 2006 quarter as well.


Telecom Services

Robust subscriber gains

Expansion by wireless operators, infrastructure sharing and favourable regulatory regime

provide connectivity

The Indian telecom market (including GSM and CDMA) is one of

the fastest growing in the world, adding nearly six million

subscribers a month. Subscriber addition is driven by falling

handset costs, attractive tariffs offered by different service providers and deeper penetration.

Despite declining tariffs, frontline companies have maintained their average revenue per unit

(ARPU). Increasing teledensity in the semi-urban and rural markets and better affordability,

however, will be required to sustain the momentum.

As per the Telecom Regulatory Authority of India (TRAI), total wireline subscribers were 40.43

millions and wireless (GSM, CDMA and WLL-F) 149.50 million end December 2006. The gross

telephony subscribers reached 189.93 million as compared with 124.78 million end December 2005.

The overall tele-density almost doubled to 17.16% in December 2006 compared with 8.62% end

December 2005. The tele-density in December 2005 was 11.43. Thus, there has been a steep

growth in tele-density in 2006.

Broadband connections have also continued to gallop since beginning of 2006. Total broadband

connections touched 2.10 million end December 2006, with an addition of 0.1 million in December


The revenue of the telecom services sector showed a sustained growth of 9% to Rs 10513.11 crore

in the quarter ended December 2006, over the September 2006 quarter with improvement in the

operating profit margin by 320 basis points (bps) to 35.8%. Net profit showed outstanding

performance: 40% growth to Rs 2091.42 crore from the sequential previous quarter.

The aggregates of the telecom services sector include the financial performance of six frontline

telecom services providers: Bharti Airtel (Bharti), Reliance Communications (RCom), VSNL, MTNL,

Tata Teleservices Maharashtra (TTML) and HFCL Infotel.

Due to the sustained growth in the subscriber base with more than six million subscriber addition in

each month in the December 2006 quarter, the performance of all the players has improved

significantly. The telecom sector achieved about 20 million wireless customers in the quarter ended

December 2006. The turnover of the sector increased by 9% to Rs 10513.11 crore against Rs

9603.82 crore in the September 2006 quarter. At Rs 4914.09 crore, the contributed revenue of

Bharti was the highest in the sector. The consolidated revenue of RCom was Rs 3755.30 crore. On

standalone basis, VSNL and MTNL reported net revenue of Rs 1066 and Rs 1260.25 crore,

respectively, while the revenue of TTML and HFCL Infotel stood at Rs 362.68 crore and Rs 68.41

crore, respectively.

OPM improves

Operating profit margin (OPM) improved by 320 basis points (bps) to 35.8%, from 32.6% in the

September 2006 quarter. At 41.0%, OPM of Bharti was the highest among the players. OPM of

RCOM, ranked second, was 40.7% against 34.2% in quarter ended September 2006. OPM of VSNL

and TTML was at the 22% level, while that of MTNL 18%.

The resulting operating profit (OP) improved 20% to Rs 3762.70 crore from the September 2006

quarter. Other income (OI) increased 30% to Rs 336.60 crore (Rs 258.61 crore) resulting in profit

before interest, depreciation and tax (PBIDT) jumping 21% to Rs 4099.30 crore. With 17% lower

interest cost (Rs 182.49 crore) and 5% higher depreciation cost (Rs 1501.62 crore), profit before tax

(PBT) increased 39% at Rs 2415.19 crore against Rs 1741.94 crore in the September 2006 quarter.

The provision for tax was Rs 323.77 crore (Rs 249.07 crore). The effective tax rate declined 90 bps

to 13.4%. The effective tax rate of RCom was very low, at around 1%-2%. However, the

management expects the company to fall in the minimum alternate tax (MAT). So, in the March

2007 quarter, the provision for tax for RCom is expected to be higher.

Net profit after tax (PAT) witnessed a sharp growth of 40% to Rs 2091.42 crore against Rs 1492.87

crore in the September 2006 quarter.

Bharti, the largest GSM-based wireless telecom operator, continued with the strong growth

momentum and achieved the highest-ever net addition of 50.19 lakh customers in the quarter. The

consolidated total revenue (as per Indian GAAP) grew 14% to Rs 4914 crore, and EBITDA 18% to Rs

2030 crore. Net profit was up 18% to Rs 1033.34 crore. End December 2006 quarter, the company

had an aggregate 33,711,837 customers (92% higher compared with the customer base in

December 2005) consisting of 31,974,038 GSM mobile customers on its network and 1,737,799

broadband and telephone customers. Bharti's Airtel accounted for a 21.8% market share of the all-

India mobile market.

On continuing strong PBIT growth across all business segments – wireless, global and enterprise —

Anil Dhirubhai Ambani group's telecom major RCom's revenue rose 7% to Rs 3755.30 crore in the

quarter ended December 2006, from the September 2006 quarter. The company's OPM jumped 650

bps to 40.7%. Profit was Rs 924.42 crore — up 198% from the December 2005 quarter and up 73%

from the September 2006 quarter. It had more than 30 million wireless customers on its network,

representing a market share of 20.5% of the all-India wireless market. A record four million wireless

customers (net) were added, taking RCom's share of net additions in wireless customers to 20.2%.

The shareholders of RCom approved a scheme of arrangement by way of demerger of the existing

wireless towers (CDMA and GSM) and related infrastructure of the company and Reliance Telecom

(RTL) to its subsidiary Reliance Telecom Infrastructure (RTIL). More than 12,000 towers will be

consolidated under RTIL.

Stiff competition

Despite stiff competition from other operators in both the basic as well as cellular segments, PSU

telecom major MTNL, operating only in Mumbai and Delhi, reported satisfactory performance. On a

standalone basis, the revenue were up 4% to Rs 1260.25 crore over the December 2005 quarter.

OPM improved 380 bps to 18.3% from the December 2005 quarter, and before prior-period

adjustments 41% to Rs 166.13 crore, from the December 2005 quarter. After considering priorperiod

adjustment of Rs 57.88 crore, PAT surged 91% to Rs 224.01 crore, from the December 2005

quarter. Cellular subscribers increased 6% to 24,24,533 end December 2006 against 23,25,570

subscribers end September 2006.

VSNL, India's largest international long-distance (ILD) operator, reported a 9% growth to Rs 1066

crore in revenue. On lower network cost and operating expense, OPM improved 290 bps to 23.8%.

However, despite the 30% surge in PBT before EO, the bottom line was 5% down to Rs 142 crore,

from the December 2005 quarter, as there was a net EO income of Rs 4 crore in the December 2006

quarter against net EO income of Rs 62 crore in the December 2005 quarter. If there were no EO in

the December 2006 quarter as well as in the corresponding previous quarter, the bottom line

numbers would have looked far better. Volumes in the wholesale voice and enterprise and carrier

data businesses continued to grow significantly and the integration of VSNL's global operations was

well underway.

While comparing the performance of telecom services providers over a year-ago period, we get

robust growth on all parameters. Revenue increased 90% to Rs 10513.11 crore and OPM 810 bps to

35.8%. On higher OPM, OP surged 145% to Rs 3762.70 crore. With OI at Rs 208.48 crore (61%

higher), interest cost at Rs 182.49 (up 36%), and depreciation cost Rs 1501.62 crore (98% rise),

PBT stood at Rs 2415.19 crore against Rs 848.35 crore in the December 2005 quarter. After

considering the net tax outgo of Rs 323.77 crore (Rs 186.99 crore), net profit surged 216% to Rs

2091.42 crore against 661.36 crore in the December 2005 quarter.

TRAI has ordered up to 56% reduction in domestic mobile roaming charges effective 15 February

2007. It has also scrapped all forms of rental, surcharge and other additional charges levied by

mobile operators for offering roaming services. This could have adverse financial impact of Rs 800

crore - Rs 900 crore and operators may be forced to increase local tariffs to balance out the impact

on their revenue.

In another move, the telecom regulator has decided to lower port charges (that allow cellular

operators to connect to BSNL and MTNL lines) by up to 29% from 1 April 2007. The revised port

charges will be in the range Rs 10500-Rs 39000 instead of the current charges of Rs 14000-Rs


Given the high sensitivity of tariff rates to subscriber base as well as usage, we expect the service

providers to pass the benefit of reduction in port charges to the consumers. This can trigger fresh

reduction in tariffs, and increase not only the minutes of usage of existing subscribers, but can

accelerate subscriber additions.


The wireless industry in India is in the prime of youth. The robust growth in subscriber gains is

expected to continue, given the multiple growth drivers that exist: increasing per capita GDP,

favourable demographics, lower handset prices, expansion of coverage by wireless operators,

strengthening handset distribution, infrastructure sharing and lower regulatory levies. These factors

facilitate India's wireless telephony to achieve growth at a pace even higher than that of China,

which is way ahead of India in terms of total subscriber base.

The sustained high growth and coverage of maximum possible area have demanded heavy network

investments over the last two to three years, resulting in most Indian telecom companies generating

negative free cash-flows (FCF) over this period. This is likely to increase over the next year.

The telecome services industry, nevertheless, has now vaulted into a second capital-spending cycle

of unprecedented proportion. Aggregate capital expenditure is expected to double in FY 2007.

But with robust and expanding subscriber base, players will get the benefit of scale. Expansion of

revenue across voice and voice streams can bolster revenue and a profit.


Oil & Refineries

Heating up

Subsidy burden falls on soft crude price

The benchmark WTI crude oil prices climbed to a peak of $77

per barrel in August 2006, but crashed subsequently. The

downfall continued in September. Prices settled below $60 per

barrel level in October 2006, and maintained the level even in November 2006. Prices rose by

around 5% to around $62-$63 levels in December 2006.

Thus, on an average, crude oil prices were nearly 15% lower in the quarter ended December 2006

compared with the average price in the quarter ended September 2006. This helped the Indian

petroleum industry immensely as the under-recoveries of petroleum marketing companies (OMCs)

came down sharply, easing the burden of upstream oil exploration and production (E&P) companies

such as ONGC as well as standalone refiners.

The fall in international crude oil prices pared ONGC's subsidy burden substantially, from Rs 5032

crore in the September 2006 quarter to Rs 2204 crore in the quarter ended December 2006 — 22%

lower compared with Rs 2843.17 crore in the December 2005 quarter. The government allowed the

refund of discount extended by standalone refineries to OMCs on sale of LPG and superior kerosene

oil (SKO) since April 2006. Similarly, the amount of oil bonds accounted for by OMCs came down

substantially to Rs 4694 crore, from Rs 13286 crore in the September 2006 quarter.

Oil bonds to the rescue

Oil bonds are issued by the government to the three public sector OMCs to partially compensate for

the under-recoveries suffered due to non-revision of the prices of petroleum products in line with

legal crude oil prices internationally. OMCs can account for them on receipt or accrual basis as part

of operating revenue and have to sell them in the open market to raise cash. The repayment of oil

bonds will be done by the government.

Seventeen companies in the Indian oil drilling, refining and marketing and allied services industries

reported net sales higher by 20% to Rs 153168 crore in the quarter ended December 2006.

However, public sector oil marketing companies (OMCs) — Indian Oil, HPCL and BPCL — accounted

for Rs 4694-crore revenue from special oil bonds issued to them by the government of India,

boosting the total aggregate operating revenue by 24% to Rs 157862 crore.

Operating profit margin (OPM) expanded smartly by 360 basis points (bps) to 10.7%, boosting

operating profit (OP) by 85% to Rs 16844 crore.

ONGC was the largest contributor to the aggregate OP of the sector: 52.9% of the total. Reliance

Industries (RIL) accounted for 28%. The three public sector OMCs contributed 15.9%, while three

standalone refiners — Mangalore Refineries & Petrochemicals (MRPL), Chennai Petroleum

Corporation (CPCL) and Bongaigaon Refineries & Petrochemicals (BRPL) — represented just 2.6% of

the sector's aggregate OP.

The Union government exempted standalone refineries from extending discounts to OMCs and

allowed a refund of discounts given in April-September 2006 period. MRPL got the highest amount of

Rs 142.88 crore, while CPCL Rs 119.29 crore and BRPL Rs 27.82 crore. These refunds were included

in the net revenue of these companies.

Other income (OI) increased 37% to Rs 2053 crore, led by the spurt in OI of Indian Oil (IOC) and

ONGC: 39% to Rs 781 crore and 25% to Rs 704 crore, respectively. Thus, the aggregate profit

before depreciation, interest and tax (PBDIT) of the industry was 79% higher at Rs 18897 crore.

The aggregate interest costs rose 35% to Rs 1035 crore. The interest cost of all three public sector

OMCs spurted as they were cash-starved. RIL's interest cost also jumped 51% to Rs 293 crore.

Depreciation charges moved up 25% to Rs 4907 crore, HPCL, CPCL, BRPL and MRPL reporting

stagnant depreciation provisions, while others posted substantial increases.

The resultant profit before tax (PBT) was up a substantial 120% to Rs 12955 crore. ONGC and RIL

reported healthy improvement in PBT while the three public sector OMCs reported positive PBT as

against loss in the, December 2005 quarter. Tax provision rose 49% to Rs 3502 crore.

Most of the companies provided higher tax in line with the rise in PBT, except for HPCL, which had a

substantial writeback of taxes of Rs 245 crore thanks to prior-period tax provisions.

The aggregate profit after tax (PAT) of oil refining, marketing, drilling and allied services industry

jumped a huge 168% to Rs 9453 crore. The major boost to the bottom line was provided by the

public sector OMCs, which had reported losses in the December 2005 quarter, but posted profit in

the December 2006 quarter thanks to the oil bonds. The total amount received by OMCs on account

of oil bonds stood at nearly half of the industry's total net profit for the December 2006 quarter.

The group of companies providing allied services to the offshore drilling business such as Aban

Offshore, Dolphin Offshore, Jindal Drilling and others made a tiny contribution to the overall

aggregate, representing just 0.2% of the revenue and 0.5% of the profit.

Another player joined the Indian petroleum industry in the December 2006 quarter. Essar Oil

commissioned its 10.5 million-tonne per annum (mtpa) refinery at Vadinar in Gujarat in November

2006. The refinery is expected to run at reduced rates of around 7.5 mtpa till March 2007 before

scaling up to full capacity. The company is presently considering delisting of its shares from the

Indian bourses.


The performance of the petroleum industry has improved with the fall in the international crude oil

prices in the quarter ended December 2006. Subsequently, January 2007 witnessed a further

meltdown of crude oil prices as the benchmark WTI prices dipped to a low of $50 per barrel before

beginning to move up. The prevailing conditions warrant crude oil prices to stabilise around $55-56

per barrel levels, which is significantly lower compared with $62-$63 per barrel in the corresponding

previous quarter ended March 2006. Thus, the overall performance of Indian petroleum industry is

likely to witness robust improvement in the quarter ending March 2007.


Capital Goods

Growing on higher base

Capacity and technology upgrades and new products boost bottom line

The capital goods industry experienced a strong growth

momentum in a traditionally weak first half of the fiscal. The

sector consolidated its gains in the quarter ended December

2006 without getting impacted by the high base effect of the December 2005 quarter. This is evident

from the buoyancy in revenue, operating margin and profit as reflected by the aggregate financials

of the BSE Capital Goods Index.

What were the contributing factors? Robust order book, high order intake due to the investment

splurge in the country and the strategic move of industry constituents in augmenting capacity,

upgrading technology, expanding product offering and moving up the value chain.

The aggregate earning of the 23 companies forming part of the BSE Capital Goods Index registered

a strong 46% growth to Rs 1947 crore in the quarter ended December 2006 over the December

2005 quarter. Sales were up 30% to Rs 17730 crore. Operating profit margin (OPM) improved by

140 basis points (bps) to 15%. Higher sales and expanded OPM pushed up operating profit (OP) by

42% to Rs 2651 crore.

Building on the good work at the operating level with higher other income (OI) and lower interest

cost, profit before tax (PBT) surged 52% to Rs 2833 crore. Interest earned on upfront advances on

new orders padded up the other income (OI) 71% to Rs 497 crore. Interest cost was lower by 18%

to Rs 74 crore on lower working capital requirement. Depreciation was up by a modest 18% to Rs

241 crore.

Limited momentum

However, the growth momentum in net profit was limited due to higher taxation, which surged 69%

to Rs 886 crore. Net profit after taxation was Rs 1947 crore — up 46%.

Sales of Bhel, the PSU electrical equipment major, increased 32% to Rs 4339.70 crore and net profit

by 58% to 667.70 crore. OP expanded 54% to Rs 929.20 crore on higher sales and a sharp jump in

OPM of 310 bps to 21.4% on better order mix. Higher OI and lower interest cost resulted in PBT

growing 60% to Rs 1036.50 crore. However, net profit — up 58% to Rs 667.70 crore — was

restricted by higher tax incidence.

Siemens, the infrastructure and industrial solutions major, started fiscal FY 2007 on a strong note.

Sales surged 91% to Rs 1626.90 crore. However, the pressure on OPM experienced continued from

the sequential previous quarter. OPM skid 100 bps to 7.2%, limiting the rise of OP to 67%. Spurred

by higher OI and interest income (net of outgo), the company could clock a net profit growth of

100% to Rs 98.06 crore.

Sterling OP saw Alstom Projects India, the MNC power equipment major, clocking a net profit growth

of 304% to Rs 31.75 crore on just 3% increase to Rs 297.70 crore in revenue. A sharp 460-bp jump

in OPM, higher OI and lower tax incidence was responsible for the strong bottomline growth.

Similarly, Areva, the transmission and distribution (T&D) power equipment major, also posted a

strong 109% jump to Rs 32.22 crore in net profit on good work at the operating profit level despite

a modest 16% rise to Rs 400.70 crore in sales on account of divestment of non-T&D business and

lack of contribution from that segment. OPM improved by a sharp 480 bps. The bottomline growth

was strengthened by higher OI (up 296% to Rs 3.06 crore) and extraordinary (EO) income (to Rs

1.18 crore against an expenditure of Rs 4.51 crore).

Crompton Greaves, the T&D equipment and consumer electrical durable major, recorded a strong

surge in revenue (up 25% to Rs 813.04 crore) and OPM (up 100 bps to 10.1%). Its bottom line was,

however, hurt by higher taxation on providing tax at normal rate as against earlier minimum

alternate tax (MAT). All three core businesses of the company — power systems, industrial systems

and consumer products — posted double-digit growth in revenue and profit.

Sales of Bharat Bijlee, a leading manufacturer of transformers and motors, advanced 29% to Rs

109.75 crore. OP spurred by 180 bps as OPM jumped 42% to Rs 22.21 crore. With no significant

damage or impetus coming from OI, interest and depreciation, the growth in net profit was higher

by 44% to Rs 13.37 crore.

Jyoti Structures (JSL) and Kalpataru Power Transmission (KPTL), the power transmission turnkey

solution providers, more than doubled their net profit to Rs 17.4 crore (up 132%) and to Rs 38.8

crore (up 139%), respectively. Sales of Jyoti Structures grew by a steady 29% to Rs 257.15 crore,

while those of KPTL were higher by 85% to Rs 393.53 crore. OPM expanded as orders under

execution were of higher margin compared with low margin of older orders. OPM of JSL was higher

by 340 bps to 13.9% and that of KPTL by 150 bps to 15.4%.

Net profit of Thermax, the energy and environment management major, soared 88% to Rs 55.45

crore on impressive sales growth of 55% to Rs 548.88 crore on a standalone basis. The strong

topline performance was backed by a 80-bp jump in OPM, higher OI and lower tax: net profit soared

88% to Rs 55.45 crore.

Similarly sales of Kirloskar Brothers moved up 17% to Rs 281.37 crore. But erosions in OPM (350

bps to 15.9%) and higher taxation dented net profit 17% to Rs 31.77 crore.

Sales of abrasive major Carborundum Universal was higher by 25% to Rs 118.87 crore. Its net profit

declined 71% on an inflated base arising from the inclusion of higher extraordinary (EO) income

amounting to Rs 32.39 crore in the quarter ended December 2005.

On the contrary, Praj Industries continued its sterling performance registered in the previous

sequential quarters. Sales sored 232% to Rs 177.87 crore. The good work in the top line was backed

by a strong 1,390-bp jump to 24.5% in OPM, thereby ballooning net profit to Rs 33.64 crore — a

rise of 809%.

Greaves Cotton clocked a net-profit growth of 66% to Rs 29.82 crore over a 38% jump in sales to Rs

323.33 crore. The strong growth at both ends was powered by the infrastructure business along with

steady double-digit growth of the engine business.

Revenue of construction major Gammon India increased 31% to Rs 440.07 crore. A 280-bp erosion

in OPM, however, limited the OP growth to 6%. But thanks to lower interest rate and tax, the

company ended with a net profit of Rs 31.60 crore — a rise of 51%.

Sales of Larsen & Toubro, the construction and engineering behemoth, moved up 12% to Rs

4118.42 crore and net profit 33% to Rs 34.3.90 crore. The strong growth in profit was facilitated by

expansion in OPM (up 280 bps to 10.1%), higher OI and lower interest cost over the steady revenue

growth. PAT excluding EO increased 46% to Rs 343.90 crore, while PAT including EO rose 33% to Rs

343.90 crore.

Firm trend in prices of metals, specially CRGO steel used in transformers and other steel products, is

a cause of concern for the capital good industry. However, with the presence of price variation

clause in most of the orders in the power sector, the margin of electrical equipment suppliers and

construction players are largely insular.

Similarly, copper prices have crashed from the peaks achieved in May 2006. But this will only benefit

contracts with fixed price and is not likely to translate into greater gain for most other contracts with

the price-variation clause.

Moreover, players such as Bhel and ABB have given long-term supply contracts for steel. Their

better bargaining power are bound to protect margin. Further, margin is also likely to improve with

fixed cost spread on a higher volume in a traditionally strong second half of the fiscal.


The capital goods sector is expected to continue its strong growth momentum, given the strong

order book and sustaining consumption-led demand growth in the Indian economy. The power

sector is likely to remain a strong demand driver along with development of other infrastructure


Strategic investment such as capacity and technology augmentation, either organically or

inorganically, and expansion to newer market have become common among home-grown majors.

Recent acquisitions by Crompton Greaves and Praj Industries are in that direction.

On the other hand, the Indian subsidiaries of MNC parents continue to thrive on strong domestic and

outsourcing demand. As capacity constraints have been addressed by major players, they are well

positioned to capitalise on the demand growth.

Overall, the robust order book assures strong revenue visibility over the next few quarters, while

players' penchant to move up the value chain and enrich their product and geographical mix can

sustain the strong revenue and earning growth of the capital goods sector.