Saturday, August 28, 2010

Canoro's PSC Terminated.

In what is being seen as a veiled threat to the Cairn-Vedanta deal, the Petroleum Ministry has, for the first time, terminated a production sharing contract (PSC) with an oil and gas producer for allegedly violating disclosure norms. Not just that, it has cited “national interests and government’s sovereign power on the national resources” as a reason.

The ministry today issued the PSC termination order to Canadian explorer Canoro Resources Ltd (CRL) for the discovered Amguri field in Assam saying it had violated PSC Article 29.2 by not seeking the government’s consent before making a “material change” in the shareholding of the company.

The order says that the “contract will stand terminated upon expiry of 90 days from the date of this ministry’s letter dated June 1, 2010, that is, August 29, 2010”.

CRL owned 60 per cent and is the block operator with Assam Company India Ltd holding the balance 40 per cent.


Saturday, August 21, 2010

Engineers India

The cash-rich public sector company, Engineers India, has been on fast track mode, whether in expanding profits or successfully completing a phase of divestment of shares in the market. Business Line caught up with Mr R.K.Grover, Director (Projects), Engineers India, to understand the company's prospects in India and abroad.

Excerpts from the interview:

Increased discovery of gas reserves, the national grid pipeline and private retailing being allowed all mean higher activity in the oil and gas sector. What do these convert into for Engineers India?

Once gas is discovered there is gas processing. A number of gas processing plants of ONGC and GAIL have all been put up by Engineers India. GSPC with gas-find in the east coast has also engaged EIL. So our experience is ensuring repeat orders.

After processing, gas has to be transported through pipelines. We have done most of the cross-country pipeline for GAIL; even currently, the Dabhol-Bangalore pipeline consultancy is being done by us. So expertise exists there as well.

After gas transportation comes city gas distribution. Only a couple of weeks ago, the Government announced seven or eight additional cities thrown open for city gas distribution. While we do not see much scope for consultancy services in city gas distribution, we will definitely look forward to joining hands with somebody or maybe going alone to bid for city gas distribution as an operator.

Next is our focus on gas-based fertiliser plants; where we are looking at a couple of options. Another use for gas is in gas-based power plants. Again these will be co-generation type of plants. All the captive power plants put up in hydro-carbon industry; whether it is refinery or petrochemical are also mostly co-generation. So we are trying to translate the know-how we have, to bigger power plants.

From revenues traditionally driven by consultancy, EIL has seen increasing contribution from lumpsum turnkey (LSTK) projects. Is there a conscious shift and would it not affect profit margins?

Our margin last year in consultancy was 40 per cent whereas it was 9-10 per cent in LSTK. When you talk of margins, you look at the percentage. One other way is to look at the actual value. Actual value is shooting up in LSTK. If I execute a Rs 1,000-crore project and make a 9-10 per cent margin then I have Rs 90-100 crore.

If the same project is given to me as a consultancy job then I will charge a fee may be in the range of 6-10 per cent. Even assuming a 10 per cent fee, I charge Rs 100 crore. Profit on that may be Rs 30-40 crore.

So in absolute terms, my profits are higher in LSTK. Whether I do a job on EPC management (EPCM) basis or LSTK basis, the technical man hours I spend is the same. If you look at the profit per man hour, it is higher under LSTK and lower under EPCM.

The most important factor in the business of companies such as EIL is that our manpower must remain engaged and they must book their man-hours on actual billable jobs. The moment this slows, overheads shoot up. So we cannot have manpower idle. We want to get back to fertilisers, balance of plant for nuclear power plants and so on, to keep our manpower engaged.

Has your overseas revenue declined as a result of slowdown in the Gulf?

The slowdown in overseas revenue did happen from 2008 but its impact was felt with a lag. But overseas hydrocarbon orders are picking up again. If you take Algeria, they are putting up some new refineries and we are talking to them. In Oman, we have made a good breakthrough in upgrading refineries. In Abu Dhabi, we have a small office exploring options. However, we do not restrict ourselves to one region or country. For instance, we were in Qatar for 3-4 years and then moved away. We have worked in Vietnam, Malaysia, Ghana and Kuwait. We move wherever opportunities arise.

Is there intense competition in the regions you mentioned?

The problem in the Middle-East is different altogether. Many of the companies in countries such as Saudi Arabia want our manpower, which we desist unless there is an assignment. But when it comes to awarding consultancy jobs, they go to European companies.

So does their (European companies) edge lie in pricing or technology?

It is not so much the technology nowadays. Many of the companies such as Shell for instance have some shareholding. So the preference is for these companies.

There have been a lot of Chinese and Korean companies coming to India in the power segment. How is the competition from these nations in your space?

For many of the grassroot projects, there is not much competition in the domestic arena as there are not too many players to take up such huge jobs and when someone comes from abroad they are not cost-effective. But when it comes to small projects like putting up a single processing unit, there is competition and we have to do some strategic pricing there. But again even in these small projects, when there is a revamp of existing units, most of the clients tend to come to us.

Refinery capacities are expected to be high and India is expected to be a net exporter. Does that mean lower opportunities for EIL?

Yes capacities that is being talked about is definitely high but I expect demand in India to keep growing, whether we look at our population or per capita income vis-à-vis other countries. Secondly, lot of coastal refineries will be focussing on export. As for the future market, I can tell you of the jobs I am aware of. HPCL has already announced a new refinery on the West Coast. That will be over 15 million tonnes and they have already asked us to start the preliminary work. HPCL Vizag is also thinking of expanding to 30 million tonnes and has asked us to go the configuration study. Cochin Refinery of BPCL is already out with tender for further expansion. We are also participating in that tender. CPCL is also talking of 10 million tonnes and we are in discussions. These are ones in which we are in talks. There are more existing refineries which will be expanding. For instance layers like Bina Refinery already have some infrastructure like a 1000 km pipeline. They only have to push more crude through that by adding more pumping stations. They even have land. So they will either move to petrochemicals or further expand refining capacities. Sitting in Central India with no refineries nearby gives them the option to expand. So I see no dearth of opportunities for us for the next 4-5 years.

Do you expect the proportion of private clients to increase?

It depends where the investment comes from. If you look at the history of Indian hydrocarbon industry, investment was only by PSUs. The private sector investment came only from MRPL, Essar and Reliance. We were there when the first two were put up. We have offered our services for Haldia Petrochemicals. As we diversify we may have more clients from the private sector.


Friday, August 20, 2010

RCOM's Growth Course.

Reliance Communications (RCOM) reported an unexpected fall in net profit during the June 2010 quarter. The disappointing performance was on account of declining minutes of usage on its wireless network and higher interest expenses. In the near term, operations of the second-largest publicly-listed wireless operator are expected to reel under competitive pressure. Its long-term prospects largely depend upon how well the company carries out its ongoing business structuring.

The company’s operating parameters were rather erratic during the June quarter, compared with the performance of its peers Bharti Airtel and Idea Cellular. These operators had earlier reported continued growth of 3-4% in the minutes of usage per user per month (MoU) on a sequential basis. RCOM on the other hand reported a sharp 7% drop in MoU. MoU reflects the extent of network capacity utilisation and a drop in this parameter means lower network efficiency.

RCOM’s management has cited the reduction of free minutes on its network as a reason behind lower MoU. The company had earlier offered such free minutes to attract customers. In the June quarter, it did away with over half of the free minutes and a further drop is expected in the coming quarters. RCOM’s wireless business president Syed Safawi thinks the reduction would improve the quality of revenue going ahead. It, however, needs to be seen whether the declining free minutes intensifies its subscriber churn, given the highly-competitive nature of wireless business. This may adversely impact future revenue from the segment.

Another concern for investors is the declining trend in its global business, which includes carrier voice, bandwidth, enterprise data and consumer voice services. Revenue from this segment fell by a sharp 30% sequentially during the June quarter. This can be attributed to the recessionary phase in the European zone. RCOM’s management has indicated that the duration of decision-making cycle in this region has nearly doubled to 7-8 months. The situation is not expected to change sooner given the continued economic troubles in the region. The global division constitutes one out of every four rupees of total revenue and hence a slack in its operation will significantly impact RCOM’s topline.

The company is in the process of restructuring its business. To sell its tower business, RCOM has struck a deal with telecom tower company GTL Infrastructure. It is also looking forward to raising funds by selling partial equity. These initiatives should help RCOM reduce its debt burden and also finance costs. At Friday’s closing stock price of Rs 168, RCOM’s enterprise value works out to be nine times its operating profit before depreciation. This comes at a discount to Bharti’s 13 times. Bharti’s higher premium reflects its better revenue visibility in the future given its overseas operations. For RCOM’s investors, the wait is long before the company may see a meaningful turnaround in its operations.


Tuesday, August 17, 2010

Assam Company Q2 net profit Rs. 100 million (10 Cr.)

Total Revenue for the quarter stood at Rs. 383.9 mn and total revenue for the first half of the year stood at Rs. 635.3 mn

Assam Company India Limited (Assam Co.), a Company engaged in Tea plantation, Oil & Gas exploration and production (E & P) and Infrastructure development today announced its results for the quarter and half year ended 30 June 2010.

Total Revenue for the quarter stood at Rs. 383.9 mn and total revenue for the first half of the year stood at Rs. 635.3 mn. Improved realizations in Tea and Oil & Gas contributed meaningfully to the top-line. Operating profit for the quarter stood was Rs. 120.8 mn.

Notional loss on foreign exchange fluctuation in H1 CY2010 was Rs. 33.1 mn as against exchange profit of Rs. 12.7 mn in H1 CY2009. Interest for the current quarter and 6 months has been contained due to improved financial management. Profit after Tax was Rs. 100.8 mn for Q2 CY2010 at a healthy margin of 26%

Performance overview of Q2 & H1 CY2010:

Oil & Gas production have increased following the completion of the dual operation in May 2010
1,700 BOE per day was achieved in June 2010 as compared to 1,200 BOE per day in Q2 CY2009

Realization for the quarter has also improved contributing substantially to overall performance of the Company. Gas Reinjection facility at the Amguri block is nearing completion and the commissioning is expected by September 2010. On commissioning, production is expected to ramp up progressively in the coming months. The 2P recoverable resource of the Amguri block is 60 mmbbls of oil and 229 bcf of gas as per the report received from Sproule International Limited, a recognized body for certifying resources from development blocks. Assam Co. has a 40% participating interest in the Block. Tea production for the quarter had suffered due to excessive and continuous rainfall resulting in lower temperature and unprecedented pest activities

Tea mosquito called “HELOPELTIS” had attacked most of the tea plantations in Assam in the month of May and June 2010. Tea Realization for Assam Co. during the quarter increased on a steady basis on the back of upgraded quality. Average Realization for quarter was at healthy Rs. 146 per kg taking average realization to Rs 127 for the first half of 2010. Higher realization compensated for the lower production in the quarter. Realization is expected to improve further, driven by demand for quality produce

Commenting on the performance of Q2 & H1 CY2010 A K Jajodia, Managing Director of Assam Company India Ltd said:“I am delighted to share that our efforts towards improving production in oil blocks is starting to yield results. Production in the last quarter has enhanced substantially following the completion of dual operation in March 2010. The Gas re-injection facility is also nearing completion and we expect the production to increase expressively after the commissioning of the plant.”Our performance in the tea for the quarter was satisfactory even after experiencing unfavorable climatic conditions in the last few months. We have been able to outperform the market by improved price realization driven by quality upgradation and intelligent marketing. Effects of the rain and the pest attack have worn off completely and production has now been ramped up to normal levels. We believe that we are firmly placed to significantly improve our profitability in the tea segment in coming quarters with better realizations and higher production.”


Sunday, August 15, 2010

Varun Shipping: SELL

Recommendation rationale:
`The operational performance of Varun Shipping Co (Varun Shipping) has been under pressure for the last one year as all segments in which it operates i.e. LPG, crude and AHTS have witnessed a softening of freight rates. Due to the oversupply of LPG carriers combined with subdued demand, LPG freight rates are expected to remain sluggish, going forward, while crude tanker rates are expected to marginally rise impacting the company`s performance. Significantly high debt levels would also add to the pressure on the bottom-line, going ahead.`

`Varun Shipping operates a diversified fleet and has a dominating presence in the Indian LPG space combined with strong management capabilities. However, the steep correction in freight rates and high leverage has had a cascading effect on the company's operational performance. Varun Shipping is likely to need at least another couple of years to register a significant recovery and post a positive bottom-line from operations. Keeping the above factors in perspective, we have valued Varun Shipping at 0.80x FY12E P/BV to arrive at a price target of Rs 36. We maintain our SELL recommendation on the stock.`


Sunday, August 1, 2010

Feeling Gloomy? Maybe It’s Time to Buy

BEFORE a market sell-off can reverse course, investor sentiment must plummet — not soar. That may sound counterintuitive, but the accepted wisdom on Wall Street is that it’s only after investors give up on stocks that prices can start to climb again.

The question is, have investors reached that point?

After a market peak on April 23, the Standard & Poor’s 500-stock index slumped as much as 16 percent, a slide classified as a correction but not a bear market, which is typically defined as a decline of 20 percent or more. After last week’s gains, the index was 9 percent below its April peak.

Yet market strategists note that recent surveys of investor sentiment point to an unusually swift eruption of bearishness ever since fears of another economic downturn started pressuring stock prices in late April. On July 14, the Investors Intelligence adviser sentiment survey — a widely followed gauge of the opinions of more than 100 independent investment newsletters — found that for the first time since April 2009, there were more bears than bulls among newsletter advisers. The July 21 survey showed equal numbers of bears and bulls.

A similar study, released on July 8 by the American Association of Individual Investors, found that the percentage of individuals who classified themselves as bearish had jumped to more than 57 percent, up from 42 percent in the previous week.

Though this figure sank back to 45 percent last week, the July 8 reading represented the highest degrees of pessimism among investors since March 2009.

“Given how awful the situation actually was early last year, it is amazing that sentiment is as negative now as it was back then,” said Edward Yardeni, president of Yardeni Research.

But is bearishness such a bad thing? Actually, no.

James B. Stack, editor of the InvesTech Market Analyst newsletter, based in Whitefish, Mont., pointed out that the July 8 study showed that the ratio of bears to bulls was greater than 2.7 to 1.

Historically, when the bear-to-bull ratio has risen above this level, the Dow Jones industrial average has posted gains of 5.4 percent and 11.4 percent, respectively, after three and six months, he noted in a recent report. To be sure, not all sentiment gauges are signaling that investors are throwing in the towel on stocks.

For example, in late 2008, at the height of the financial panic, the Chicago Board Options Exchange Volatility Index, or VIX — which measures investor expectations for market volatility — rose to a record level of more than 80. But it is far from such heights today. In fact, it is now at 23, after a climb to 45 in late May.

And while investors in 401(k) retirement plans have signaled skittishness by reducing their equity allocations, their risk aversion isn’t close to where it was when the market bottomed in March 2009. Still, many market strategists regard the market mood as being at extreme lows.

Perhaps what’s most surprising isn’t that stocks have climbed in periods of pessimism. Rather, it’s worth noting the types of stocks that have thrived.

BRIAN G. BELSKI, chief investment strategist at Oppenheimer, studied how various sectors of the market have performed in glum times over the past 20 years. Looking at the investor association’s survey and using a different ratio — that of bulls to bears — he found that 12 months after that ratio declines a certain point below the historical average, the markets tend to take on a split personality.

On the one hand, a couple of traditionally defensive areas of the market — health care and consumer staples companies, which aren’t terribly dependent on a strong economy — have traditionally done well 12 months after extreme pessimism sets in.

But two economically cyclical sectors of the market — specifically, technology, and consumer discretionary l stocks — have actually done better. Tech stocks in the S.& P. 500, for instance, have historically been up more than 14 percent one year after market pessimism has sunk to extreme lows.

Since market volatility began to soar in late April, the defensive areas of the market have lost the least. But if history is a guide, market bearishness may be telling investors not to just bet on stocks, but to broaden their strategy by investing in economically sensitive shares as well.