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Indo Gulf: Emerging Giant - Views on News from Equitymaster
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  • Jan 26, 2002

    Indo Gulf: Emerging Giant

    Last year marked a sharp change in the revenue mix of Indo Gulf. From a company primarily focused on fertilisers, Indo Gulf has gone on to capture a lionís share in the domestic copper market. The company is integrating operations, pruning costs, rapidly expanding capacity and successfully penetrating into the highly competitive export market.

    From a meager 2% share in FY98 the company has captured a 45% market share of the domestic copper business. This very well explains the ramp up in capacity undertaken by the company in a short time frame. And thereís more to come. Indo Gulf currently has 1,50,000 tonnes of copper production capacity with plans for further expansion. Huge cash generation could facilitate both its organic as well as in-organic growth plans. Besides, additional capacity expansion in copper, the company is also contemplating vertically expanding its operations by buying copper mines.

    While the copper industry went through some of the most testing times in 2001, with a free fall of more than 25% in LME prices, the company has successfully maintained its operating margins. The secret of success has been large-scale economies of scale, vertical integration and exploring new markets for growth. Copper prices fell from a high of around US $ 1,850/ tonne in Janí01 to a low of US $ 1,360/ tonne in Octí01 primarily due to heavy slowdown in telecom infrastructure spending worldwide. Further, a sharp slide in optical cables prices also proved to be a strong substitute for the metal in telecom.

    Sensing expected overcapacity in the domestic market, Indo Gulf has successfully forayed into the export market for growth. In the global copper market, Asian countries (particularly China) are the fastest growing due to considerable infrastructure spending towards power and telecommunications. The company believes that it enjoys a cost advantage for exporting to Far East countries in terms of transportation cost as it is the nearest sourcing point for these markets. The company also boasts of its own jetty facility, which helps in reducing costs further. On an average the company expects to savings of US$ 15-16/tonne on this account.

    Indo Gulf: Exploring new opportunities
    Particulars FY01 1QFY02 2QFY02
    Copper Exports (In tonnes) 10,000 5,000 12,000

    While the company exported 10,000 tonnes of Copper for FY01, it has already achieved 17,000 tonnes of exports during the first half of the current year. Exports now contribute 40% of its revenues from the copper business.

    The Company uses a combination of Cash and forward contracts in the copper business. This helps in avoiding volatility and at the same time taking advantage of any opportunity in the cash market. Currently, the company follows a conservative ratio of 85:15 (Forward/spot).

    A combination of fertilisers (DAP) and copper business helps the company in reaping significant cost synergies as sulphuric acid which is raw material for DAP, is a by product of Copper production. Similarly, the recently commenced precious metal refinery operates on a waste product from copper ore. This facilitates higher margins for the company. As far as urea business is concerned any change in the fertiliser policy is expected to benefit Indo Gulf significantly, as it remains one of the most efficient producers of urea in the country.

    Considering that copper and allied business related to copper (DAP and Precious metal) contribute a chunk of the companyís revenue mix, the fortunes of the company are now directly linked to copper prices. Any recovery in copper prices could result in sharp spurt in the bottomline. Copper prices seem to have bottomed out and have staged a 10% recovery since Octí01.

    On the flip side however, Indo Gulf being a custom smelter, it works on conversion basis and earnings are dependent on treatment and refining charges (TC/RC). TC/RC generally reflect global copper prices trends with a time lag.

    Inspite of production cuts announced by various world majors, TC/RC have remained stagnant. Further, the companyís pricing power in the domestic market is also dependent on the duty differential between raw material and finished goods, which could be narrowed in the coming budget. This could negatively impact domestic pricing of the company.

    Comparative Valuations
    Particulars Indo Gulf Sterlite Ind
    Copper Prod Capacity (tonnes) 150,000 150,000
    CMP (Rs.) 36 113
    P/E- FY01 (x) 3.3 5.2
    Market Capitalisation (Rs. m) 8,100 6,672
    Mkt Cap/Sales (x) 0.37 0.21
    At the current market price of Rs 36, the stock trades on a P/e of 3.3x its FY02E earnings. Taking an average dividend payout (of Rs 2.6 per share), the dividend yield currently works out to be more than 8%.



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