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IPCL: 'Interest'ing numbers...

Jan 20, 2005

Introduction to results
IPCL, a group company of Reliance Industries, has posted mixed 3QFY05 results with the topline showing a dip of over 30% YoY, while the bottomline has increased sharply by over 133% YoY. As for 9mFY05, the company has been able to increase the topline marginally by over 1% while the bottomline witnessed a strong growth of nearly 159% YoY.

What is the company's business?
Indian Petrochemicals Corporation Ltd. (IPCL) is a leading integrated manufacturer of polymer, fiber and other intermediaries, and chemical products from the hydrocarbons feedstock. The company has one naphtha-based complex located at Vadodara and two gas-based complexes at Gandhar and Nagothane. Along with its parent, Reliance Industries, it controls over 70% of the production capacity in the domestic markets. In FY04 polymers accounted for nearly 70% of the company's revenues.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 27,780 19,270 -30.6% 54,780 55,560 1.4%
Expenditure 24,630 15,330 -37.8% 46,370 44,620 -3.8%
Operating profit (EBDITA) 3,150 3,940 25.1% 8,410 10,940 30.1%
EBDITA margin (%) 11.3% 20.4%   15.4% 19.7%  
Other income 370 370 0.0% 790 930 17.7%
Interest 820 340 -58.5% 2,490 1,330 -46.6%
Depreciation 1,140 1,150 0.9% 3,510 3,400 -3.1%
Profit before tax 1,560 2,820 80.8% 3,200 7,140 123.1%
Extraordinary items 130 -   1,440 -  
Tax 620 930 50.0% 20 2,640 13100.0%
Profit after tax/(loss) 810 1,890 133.3% 1,740 4,500 158.6%
Net profit margin (%) 2.9% 9.8%   3.2% 8.1%  
No. of shares (m) 249.0 249.0   249.0 249.0  
Diluted earnings per share (Rs)* 13.0 30.4   9.3 24.1  
Price to earnings ratio (x)   5.6     7.1  
(* annualised)            

What has affected performance in 9mFY05?
Absent traded goods:  The company has been able to increase its revenues by a meager 1% YoY in 9mFY05. The lacklustre activity is largely due to lower traded goods components as compared to the previous fiscal. During 9mFY05, the company witnessed a 29% growth in realizations in respect of manufactured goods. This could be attributed largely to the rise in product prices, although volumes increased by 9% YoY. Lack of any capacity buildup in the global market, coupled with increasing demand resulted in higher product prices on the back of narrowing demand-supply gap. As a result of strong demand, the company witnessed robust growth of 117% in export earnings despite the appreciating rupee.

Expenditure Table
(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 63.5% 40.6% 53.9% 41.7%
Staff cost 3.5% 5.9% 5.4% 5.9%
Other expenditure 21.7% 33.0% 25.3% 32.7%

Lower traded goods help improve margins:  IPCL has been successful in increasing its operating margins by 430 basis points. This could largely be attributed to the fact that the company's raw materials consumption/purchase costs (which account for over 50% of expenditure) have declined by over 12% YoY during 9mFY05. But for an increase in other expenditure and staff costs, the operating margins would have been better.

Lower debt helps prop up bottomline:  IPCL has witnessed a strong bottomline growth of nearly 159% YoY. The company has been able to reduce its interest outgo by over 46% on the back of reduced debt component. Further, other income has improved by nearly 18% further aiding bottomline growth.

What to expect?
At Rs 171, the stock is trading at a price to earnings multiple of 7.1 times annualized 9mFY05 earnings. IPCL has been able to ride the uptrend in the petrochemicals business and this is likely to continue in the medium term. With no new significant capacities being added in the near term, the company is likely to witness robust business activity. However, reduction in duties, as has been anticipated in the upcoming budget, would lead to lower duty protection and in the long-term invite competition from imports. Also, IOC and ONGC have lined up long-term plans in the petrochemicals sector.

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