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IPCL: Waiting for the disinvestment trigger

Feb 3, 2001

The largest ethylene producer in the country, Indian Petrochemical Corporation Ltd. (IPCL), is second only to Reliance Industries Ltd. (RIL) in the Indian petrochemical arena. The company is, however, primarily focused towards polymers. The revenue mix of IPCL is skewed in favour of polymers. In financial year 2000, the company's three major businesses, polymers, fibre and fibre intermediates and chemicals contributed 73 percent, 9 percent and 18 percent to the topline.

The operations of the company are spread over three plants located in the western region. The Baroda (Gujarat) unit is the oldest and operates a 130,000 tonne naphtha cracker. The other two units are gas crackers situated at Gandhar, Gujarat (300,000 tonnes) and Nagothane, Maharashtra (400,000 tonnes). The Gandhar unit is the company's latest additions and has stabilized operations only in financial year 2000.

With two gas based plants the company stands at a relative advantage to its competitors, as the operating expenses are lower for gas plants as compared to naphtha-based units. Further, margins of naphtha-based units are more volatile as naphtha prices move with price changes in the oil markets. However, gas plants have their own share of impediments, as access to a ready and cheap source of gas in the country is difficult. Further, importing of gas involves heavy freight charges, as transportation of gas is a challenging task.

Nevertheless, IPCL has been able to overcome roadblocks in the way of reporting improved results. For the quarter ended December 2000 the company has registered an impressive 52 percent growth in topline and a meteoric 118 percent growth in its bottomline. The improved results are largely due to the stabilization of its Gandhar unit, which is operating at levels higher than that of the previous year. Consequently, even on a nine month time frame the company has shown a topline growth of 37.4 percent.

(Rs m) 9m FY00 9m FY01 Change
Sales 26,908 36,964 37.4%
Other Income 643 892 38.7%
Expenditure 21,570 29,465 36.6%
Operating Profit (EBDIT) 5,338 7,499 40.5%
Operating Profit Margin (%) 19.8% 20.3%  
Interest 2,476 3,788 53.0%
Depreciation 2,374 3,105 30.8%
Profit before Tax 1,130 1,498 32.5%
Tax - -  
Profit after Tax/(Loss) 1,130 1,498 32.5%
Net profit margin (%) 4.2% 4.1%  
No. of Shares (eoy) 249 249  
Earnings per share* 5.7 7.5  
P/E Ratio   9.7  

This rise in turnover could be attributed to increased sale volumes, as margins in the industry have not shown any buoyancy. This is largely due to the fact that capacity additions in the industry have kept pace with the strong growth in demand. The fortunes are anticipated to change as all new capacities are expected to come onstream by end of year 2001.

The upswing, however, in the polymer cycle maybe jeopardized by the new capacities in the Middle East, who are the world's lowest cost producers of polymers. Being in proximity, India is a lucrative target market for Middle East exports. Currently, the threat from the Middle East producers maybe limited, as import tariffs on polymers are amongst the highest in the Asian region. This may provide some reprieve to the Indian producers but not for long. IPCL will need to tighten its belt as the WTO may pressurize the authorities to bring down artificial barriers. Rupee depreciation could, however, provide some succour to the margins of the company in these competitive times.

An important development for the company and the stock is the anticipated disinvestment by the Government. Fears of a monopoly on Reliance acquiring the Government's stake delayed the entire divestment proceedings. Consequently, several players in the fray including Sumitomo and Dow Chemicals dropped their bidding plans. Recently, the Government resumed the divestment process. Under the new plans IPCL will sell its Baroda unit to another public sector unit (PSU), Indian Oil Corporation (IOC). At a later date it will divest an expected 26 percent in a favour of a strategic investor. With the current sale IPCL will be left with its two new gas based plants. This, the Government believes will fetch them a higher valuation at the time of disinvestment.

However, with the Government vacillating on the disinvestment proceedings the stock of the company has undergone a roller coaster ride. The stock, which took off at the end of 1998 has come off its highs as the divestment news subsided to touch new 52-week lows.

Improved earnings over the last two years driven by capacity expansions, renewals in the disinvestment proceedings and an expected turn around in the polymer cycle have perked up the interest in the stock once again.

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