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Indian Petrochemicals Corporation Limited

 Issue Summary
  • Type
    		•  Offer for sale by the book building route.
  • Min. subscription
    		•  35 shares
  • Size
    		•  Rs 10.1 bn (As per the floor price)
  • Lead Managers
    		•  Kotak Mahindra Capital Company Ltd., SBI Capital Markets Ltd., J M Morgan Stanley Pvt. Ltd.
  • Price
    		•  Floor Price of Rs 170
  • Listing
    		•  Bombay and the National Stock Exchange.
  • Face value
    		•  Rs 10 per share
  • Promoters
    		•  Reliance Petroinvestments Limited.
  • Shares on offer
    		• 59.4 m shares (could be enhanced upto 71.85 m shares if strategic partner does not exercise option to acquire 5%).
  • Promoters post
        issue holding
    		•  No change* (subject to the company not exercising its option to take up another 5% being offered to it). However, in case the option is exercised, the holding shall go up to 51%.
  • Issue Opens
    		•  February 20, 2004.
    		  
  • Issue Closes
    		• February 27, 2004
    		  

     Issue structure

     Background
     
  •  
    		•

    Indian Petrochemicals Corporation Limited (IPCL) is an erstwhile PSU and is currently owned by Reliance Petroinvestments (46% stake), a wholly owned subsidiary of Reliance Industries. IPCL is a leading integrated manufacturer of petrochemical products with one naphtha-based complex located at Vadodara and two gas-based complexes at Gandhar and Nagothane with a total combined installed capacity of 830,000 tonnes per annum of ethylene. IPCL is the second largest petrochemicals company in India, next only to Reliance Industries. Along with Reliance, it controls approximately 68% of the polymers capacity in the country. Polymers constitute around 70% of sales revenue for the company.

     
  •  
    		• Business
     

    The primary products manufactured by IPCL are polymers, fibres, fibre intermediaries and chemicals. It derives 70% of its revenues from its polymers business (polyethylene, polyvinyl chloride, polypropylene, agrifilms) and has an installed capacity of 940,000 tonnes per annum, second only to Reliance. IPCL has a 28% market share in the polymers business in India. Looking at the table below, it is apparent that the company derives a major chunk of its business from the polyethylene segment (LDPE, LLDPE and HDPE) and polyvinyl chloride (PVC).

    Revenue Break Up % of revenues Market share (%)
    Polymers 70 27.5
    Fibres and Fibre Intermediates 14 27
    Chemicals 14 11
    Other products 2 NA
    Total 100  
    Polymer products % market share
    Low Density Polyethylene (LDPE) 100
    Linear Low Density polyethylene (LLDPE) 33
    High Density polyethylene (HDPE) 26
    Polyvinyl Chloride (PVC) 27

     

    Polymers are a major driving source for a petrochemicals business, as these products find their application in every economic activity ranging from automobiles to footwear. The following are the major uses of polymer products.

    Polymer Products and the uses
    Product Uses
    LDPE/LLDPE Consumer packaging/film, extrusion wires, cable coatings
    HDPE Fertilizers, household packaging, woven sacks, cartons, crates, luggage, pipes
    Polypropylene (PP) Cement packaging, monofilament yarn, ropes
    PVC Water pipe, electrical wires, cables, sheets
    Polybutadeine Rubber (PBR) Automotive tyres and tubes, conveyor belts and footwear
     
  		• Promoters
     

    IPCL was incorporated in March 1969 and was a GOI undertaking until June 2002, when Reliance Petroinvestments (RPiL) acquired a 26% stake in the company through a competitive bidding process under the Government of India's disinvestment programme. Reliance Petroinvestments acquired another 20% through a mandatory open offer. In the current offer for sale, the GOI is offloading its 24% stake to the public while reserving 5% for RPiL. In case the latter decides to exercise its option to acquire the additional 5% stake, its holding shall go up to 51%.

     
  		• Sector
     

    The petrochemical industry is highly capital and technology intensive. To put things in perspective, a minimum economic size of an integrated petrochemical plant of around 1 MTPA requires an investment of Rs 100 bn, thereby restricting entry. The demand for the petrochemical products is cyclical in nature. Over a period of time, it has been noticed that the demand for petrochemical products is related to the economic growth, pricing of the feedstock, international prices and competing products.

    Feedstock, namely naphtha and gas liquids, account for 60% to 70% of raw material costs for petrochemical producers. In India, most of the petrochemicals complexes utilize naphtha as the feedstock. Naphtha, a by-product of an oil refinery, is usually linked to crude prices and is an expensive source. Recently, gas discoveries in domestic waters and the GOI's initiatives on the import of LNG have brought about some hope of substituting naphtha with such cheaper fuels, which in turn could lower raw material costs.

    In India, the primary products of the petrochemical sector are polymers, fibres, fibre intermediaries and chemicals. Polymers such as ethylenes, polyvinyl chloride and polypropylene account for a major chunk of the domestic production capacity with IPCL and Reliance accounting for nearly 70% of the capacity.

    Polymers
    TPA Capacity (2001-02)
    HDPE 1,057,500
    LDPE 160,000
    LLDPE 517,500
    PP 1,380,000
    PVC 788,000
    PS 353,000
    ABS 46,000
    PBR 50,000
    SBR 55,400
    Total 4,407,400
    Source: IPCL Offer Document
    Chemicals
    TPA Capacity (2001-02)
    Ethylene 2,375,000
    Propylene 1,568,460
    Butadiene 119,150
    Benzene 789,770
    Toluene 181,997
    Source: IPCL Offer Document

    The domestic polymer industry comprises of few large players accounting for nearly 85% of the capacity, viz., Reliance, IPCL and Haldia Petrochemicals (HPL) along with comparatively smaller players such as Chemplast, DCW and Finolex to name a few. Polymers contribute to a major portion of revenues, finding application in all major economic spheres ranging from automobiles to footwear, cement, telecom, construction and infrastructure. With GAIL already creating a small foothold in this business and IOC all set to venture into the petrochemicals sector, competition is likely to intensify.

     Reasons to apply

  • Consumption pattern:  In India, the per capita consumption of plastics is 4 kgs as compared to a world average of 20 kgs. This leaves enormous scope of the market for the domestic players to capture. Further, spending by chemical companies on R&D activities is around 2% of sales as against the international average of 18%. R&D is required in basic chemicals to improve efficiencies and in specialities to develop new products. Currently, India has a chemicals trade deficit of about US$ 1.5 bn a year. As a result, there are ample investment opportunities in the petrochemicals industry.

     
  		•

    Synergies with the Reliance group:  The Reliance group is the leader in the petrochemicals industry in India and IPCL shall benefit from the financial, managerial and technical expertise that Reliance brings along with it. Further, the products of IPCL shall have a wider spectrum of the market to cater to with Reliance's marketing and distribution network. IPCL shall further benefit in terms of the availability of feedstock, especially naphtha, which it currently sources from Reliance's Jamnagar refinery. To put things in perspective, the consumption of imported raw materials has already reduced from 52% in FY02 to 31% in FY03.

     
  		•

    Uptrend likely to continue:  Historically, the petrochemicals industry has been trailing economic growth. Petrochemical prices have been on the uptrend for almost one and a half years now. This is likely to continue in the next two years in light of public spending by the GOI on infrastructure and construction activities, thereby propping up demand for the petrochemical products such as polymers and fibres. Telecom, auto, construction and robust agricultural produce have led to an increase in the demand for wires/cables, plastics and packaging products. This augurs well for the petrochemicals industry in general and IPCL in particular.

     Reasons not to apply

  • Low bargaining power vis-à-vis suppliers:  IPCL has two gas-based and one naphtha-based petrochemicals complexes and is heavily dependent on external sources such as GAIL and ONGC for the supply of raw materials (mainly natural gas). The feedstock accounts for around 50% to 60% of raw materials costs. Currently, natural gas prices are regulated. However, given that the Government is planning to deregulate gas prices, natural gas shall become costly and consequently affect the company's margins negatively.

     
  		•

    Low bargaining power vis-à-vis consumers:  If inputs costs were to rise significantly, as we mentioned earlier the company may not be in a position to pass on the cost to customers, as the prices are influenced by other factors such as international prices and supply.

     
  		•

    Reduction in import duties:  IPCL derives a major source of its revenues from the domestic market. In FY03, the domestic sales accounted for 92% of the topline revenues. Historically, the domestic industry has been protected from overseas competition by high import duties imposed by the GOI. Import duties on polymers, IPCL's largest product group, has been steadily reducing and is currently at 20%. As part of its commitment to various multilateral and bilateral trade agreements, India shall gradually eliminate tariff and non-tariff barriers on petrochemical products. In the long run, IPCL shall face stiff competition from global majors Exxon-Mobil, Dow Chemical and Royal Dutch/Shell.

     
  		•

    Threat of high capex:  The petrochemicals industry is highly capital intensive and technologically driven. The business is dependent on operability and productivity of the plants and equipments, which might become economically unviable due to age, size or technological advancements. IPCL's smaller and older plants at Vadodara, which started commercial operations in 1973, shall therefore, no longer be operationally or economically viable, thereby requiring high capex to replace them or shut them down. The company has earlier, shut down some of its plants for reasons of economic viability.

     
  		•

    Growing competition:  Indian Oil Corporation (IOC) is all set to foray into the petrochemicals business. IOC is scheduled to complete projects worth Rs 64 bn by FY06. The company is setting up a petrochemical complex at Panipat for Linear Alkaline Benzene, which is scheduled to be complete by the next financial year. Thus, IPCL shall face stiff competition from PSU majors like GAIL and IOC in the long term.

     
  		•

    Contingent liability:  IPCL has huge contingent liabilities, which, if materialize, shall have a major dent in the financials of the company. The company is a defendant in claims from various central and state authorities such as customs and excise, income tax and sales tax authorities.

     Financial Performance

     Shareholding

     Comparative valuations and comments

  • Petrochemical stocks have historically traded at a Price to Book Value (P/BV) range of 0.5 times to 1.2 times, depending on the petrochemicals cycle. As mentioned earlier, the petrochemical prices have been on an uptrend over the past one and a half years. IPCL currently trades at a P/BV of 1.9x FY04 estimated numbers, which is already on the higher side. Also, reduction of import duties and growing competition are a major cause of concerns. Operating profit margins, for instance, has declined from 35% in FY97 (the peak of the cycle) to 15% currently. Even if the petrochemical cycle remains favorable for the near-term, operating margins are unlikely to reach previous peak levels considering the change in competitive landscape. From this perspective, the risk profile of the stock is on the higher side.

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