16th March 2009
CORPORTE ROUND-UP
Positive Vibes
Amid the overall economic gloom, the month of February sprung a pleasant surprise. For the first time in many months, carmakers reported a positive growth in their domestic sales. This coupled with a revival in two-wheeler sales, prompted talk of an imminent economic recovery in Indian even if a mild one. According to monthly figures released by the Society of Indian Automobile Manufacturers (SIAM), domestic shipments of passenger cars grew by a strong 22% in the month of February 2009 over the corresponding month last year. Two-wheeler sales on the other hand were up by 16% yo-y during the month. So can this surge be described as the start of an economic and industrial recovery in India?
The answer is far from affirmative. This is because passenger cars and two-wheelers are consumer goods and their demand dynamics is not directly related to industrial activity in the economy. The current year witnessed many (household) income-boosting initiatives by the government, including generous pay hikes to government and public sector employees under the sixth pay-commission awards and farm loan waivers to farmers. Besides, almost the entire country is now covered under the rural employment guarantee scheme, which acts as a safety net for the poor and unemployed. The latest auto numbers may reflect the positive outcomes of these government measures. In contrast, the offtake of commercial vehicles and multi-utility vehicles (a bulk of which are used as taxis) and cargo three-wheelers continues to be in the doldrums. The demand for commercial vehicles, especially trucks, is directly dependent on the cargo availability in the economy, which in turn, depends on industrial production and the growth in India’s foreign trade. According to SIAM figures, while commercial vehicle sales were down by 32% y-o-y in February, the sales of medium and heavy goods carriers plunged by 56% during the month. M&HCVs are mostly used on inter-state routes linking various production centres with consuming centres. The continued slide in their offtake presents a sobering picture of the economic activity in India right now.
In The Pipeline
The award of a contract for laying 550 km of pipeline worth Rs 385 crore provides Kalpataru Power an opportunity to shore up its revenues and improve profits in a dwindling market. This is the second big order for the company this month, after securing a power transmission order worth Rs 373 crore from Power Grid. The client for this order is the high profile Hindustan Mittal Energy, a JV between HPCL and the L N Mittal group, and related to their upcoming refinery in Bhatinda. The order is to be executed in 18 months and does not include cost of material, which shall be supplied by the client. The orders is more than twice the trailing four quarters’ revenue for Kalpataru from this segment and would help shore it up, which has seen a decline over the last few quarters. The company has been a beneficiary of a number of domestic orders which have been awarded this month.
Kalpataru, which is mainly in the transmission and distribution (T&D) business with total revenue of Rs 1,748 crore in FY08, derives about 10% of its revenues from the pipeline and infrastructure segment, which is quite lucrative mainly because of low investment in fixed assets or working capital, as all the material is provided by the client. This is reflected in the operating profit margin level, which stood at about 17% for the pipeline and infrastructure segment against about 12% for its core T&D segment in FY08. However, for FY09 so far, margins have been nearly the same for both segments, owing to changed market conditions. The company has been in the pipeline and infrastructure segment for the last few years, and has already completed some medium-size orders. It has also moved from executing smaller size pipelines of 8” diameter to 30” diameter and now is executing this order with size upto 48” diameter. The bigger size does not really pose any constraint, except for mobilisation of heavier equipments on site, for handling and laying the pipes. Even though it has an order backlog worth about Rs 625 crore from this segment, this is by far the largest order being executed by it.
Bullish Sentiment
The International Energy Agency (IEA) further cut its global petroleum demand forecast for 2009 to 84.4 million barrels per day (mbpd) - 1.5% or 1.3 mbpd lower compared to 2008 - in its latest monthly report published on 13 March 2009. According to the energy policy advisor representing 28 countries, the world was consuming 86 million barrels of crude oil every day in 2007, which fell to 85.7 mbpd in 2008.
The major highlight of the report is the visible reduction in the global supply of crude oil down 1 mbpd from January 2009 to 83.9 mbpd in February 2009. The crude oil production of 12 members of the Organisation Of Petroleum Exporting Countries (OPEC) stood at 28 mbpd in February indicating nearly 80% compliance by the member countries with the agreed production quotas. Since September 2008, OPEC has cut the production of crude oil by 4.2 mbpd and now the current production level is 1.6 mbpd below what IEA estimates OPEC to produce on an average in 2009. OPEC itself in its latest monthly report has estimated a need to produce an average 29.1 mbpd of oil in 2009.The high compliance level of OPEC spreads bullish sentiments in the crude oil market, particularly when the OPEC is set to meet on Sunday, 15 March 2009 to take stock of the situation and discuss the production strategy. The speculation about another production cut propelled crude oil prices 11.7% in the last couple of trading sessions to $47.3 per barrel - a level last seen in the first week of January 2009. Considering OPEC’s present production level, it now has a spare capacity of around 4.5 mbpd, substantially higher than the average of 1.5 mbpd during 2004 to 2008. This cushion along with the weakening demand for petroleum products is likely to keep the crude oil prices soft in near future. If OPEC goes ahead with another round of production cuts on 15 March, we may see a short rally in crude oil prices.
(Contributed by Krishna Kant, Ashishkumar Agrawal and Ramkrishna Kashelkar)
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