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IPCL: Decent operating show! - Views on News from Equitymaster
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IPCL: Decent operating show!
Jan 16, 2007

Performance summary
IPCL, a Reliance group company and a petrochemical major, has declared its results for 3QFY07 and nine months ended December 2006. Topline registered a growth of 9% YoY for the quarter and 14% YoY for 9mFY07. Margins witnessed expansion on account of lower other expenditure, which helped in offsetting higher raw material prices. Increase in other income coupled with decent operating performance led to 40% YoY growth in profit after tax in 3QFY07.

Financial snapshot…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 28,000 30,560 9.1% 80,090 91,220 13.9%
Expenditure 22,680 23,750 4.7% 65,490 72,450 10.6%
Operating profit (EBDITA) 5,320 6,810 28.0% 14,600 18,770 28.6%
EBITDA margin (%) 19.0% 22.3%   18.2% 20.6%  
Other income 360 740 105.6% 1,100 2,540 130.9%
Interest 290 320 10.3% 1,050 1,200 14.3%
Depreciation 1,430 1,440 0.7% 4,260 4,110 -3.5%
Profit before tax 3,960 5,790 46.2% 10,390 16,000 54.0%
Extraordinary income/(expenses) - -   1,200 -  
Tax 1,070 1,740 62.6% 3,160 5,860 85.4%
Profit after tax/(loss) 2,890 4,050 40.1% 8,430 10,140 20.3%
Net profit margin (%) 10.3% 13.3%   10.5% 11.1%  
No. of shares (m) 302 302   302 302  
Diluted earnings per share (Rs) 9.6 13.4   27.9 33.6  
Price to earnings ratio (x)*         6.46  
* Based on annualised earnings for 9mFY07.
Note:
To make figures comparable, the merged performance is considered.

What is company’s business?
IPCL is the second largest producer of polymer products (PP, PVC and PE) and has a market share of 27%. Polymers form a major portion of the topline (70%) and are expected to remain the same in the future. The company has been increasing its production of polymers on the back of strong prices and domestic demand. Together with RIL, which has a 46% stake, the company accounts for 70% of the petrochemicals capacity in the country.

What has driven performance in 1HFY07?
Realisations kicker: Here, in accordance with the company presentation, we will analyse 9mFY07 performance in greater detail. Net turnover during 9mFY07 increased by 14% driven by 4% increase in volumes and 10% increase in realisations. The increase in price was on account of higher selling prices of polymers and fibre intermediates. Domestic sales (accounting for 87% of the net turnover) grew by 19%, while exports decreased by 15% YoY. IPCL has recently concluded the merger of 6 polyester manufacturing companies with itself, resulting in forward integration. These subsidiaries are manufacturers of polyester staple fibre (PSF) and polyester filament yarn (PFY) which have feedstock in the form of Mono Ethylene Glycol (MEG). IPCL is a manufacturer of MEG and considering the global demand-supply dynamics of MEG; it is advantageous to convert MEG into higher value products rather than selling it off at intermediate level. Thus, captive consumption of MEG led to significant reduction in exports. On the product front, the prices of polymer products, MEG, benzene and LAB remained strong. Domestic demand for polymers registered a decent growth of 7%, while polyester and MEG registered a growth of 8% and 16%, primarily on the back of robust growth in Indian economy along with lower sales in the previous quarters. Production volumes during the nine months period decreased from 4.49 m tonnes to 4.29 m tonnes primarily due to limited availability of gas feedstock on account of floods in Gujarat in August 2006.

Lower provisioning boosts margins: Consumption of raw material in 3QFY07, increased by 11 % YoY, as prices of propane, ethane-propane mix (C2-C3), semi rich gas and purified terapthalic acid (PTA) increased over the period. Also, the prices of APM gas were increased from 3.86 per MMBTU (million metric British thermal units) to US$ 4.75 per MMBTU with effect from the current financial year. However, the cost of input in the quarter has declined as compared to 2QFY07. Employee costs registered a growth of 14% YoY in 9mFY07 due to increase of dearness allowance and retiral benefits. However, the reduction in other expenditure (6%) was seen due to lower provision for excise duty on finished goods due to depletion of stock. Thus, lower provisioning helped offset the effect of higher raw material prices and helped the margins to improve.

Expenditure break-up…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Consumption of raw materials 14,250 15,830 11.1% 40,740 48,460 18.9%
as % of sales 50.9% 51.8%   50.9% 53.1%  
Staff cost 1,140 1,260 10.5% 3,400 3,860 13.5%
as % of sales 4.1% 4.1%   4.2% 4.2%  
Other expenditure 7,290 6,660 -8.6% 21,350 20,130 -5.7%
as % of sales 26.0% 21.8%   26.7% 22.1%  

Bottomline: Other income for the company increased by 131% during the nine months ended December 2006. However, the interest cost was on the higher side due to adverse exchange difference. Thus, improved operating performance due to lower other expenditure coupled with increase in other income led to significant growth in profit before tax. However, higher tax provisioning had a negative impact on bottomline growth and along with extraordinary income in the previous year restricts the comparison at the net profit level.

Performance over the recent past…
(YoY) 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07
Net sales growth 9.6% 12.4% 11.2% -13.1% 21.8% 17.8% 9.1%
Operating profit growth 27.5% 13.3% 7.6% -7.9% 22.7% 38.2% 28.0%
Net profit growth 82.9% 119.6% 20.6% -25.9% 29.3% 9.0% 40.1%
Operating profit margin 21.3% 20.4% 19.8% 21.2% 21.4% 20.9% 22.3%
Net profit margin 11.3% 14.8% 10.6% 10.8% 12.0% 11.5% 13.3%

What to expect?
At the current price of Rs 289, the stock trades at 6.4 times its diluted annualised 9mFY07 earnings. Post merger with its 6 subsidiaries, company has started to captively use its MEG production. This is going to increase the value-chain presence and improve the business mix in the long term. Softening of the prices of crude and its derivates are bound to help the company as the input cost form 53% of the net realisation.

The demand scenario for the petrochemical and polyester products is expected to be strong as the decline in input cost will lower prices of the ultimate products, thereby boosting demand. Operating rates of ethylene crackers continued to be high across the globe on account of sustained demand and lack of new capacities. Newer capacities coming up in the Middle East are witnessing execution problems, thus keeping the prices firm. However, we believe, post middle east capacities coming onstream, the operating rates as well as margins are expected to soften. IPCL has been operating almost at full capacity, thus benefits from further increase in volumes is limited.

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