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IPCL: Swinging with the cycle

Feb 21, 2002

With the petrochemical commodity cycle weakening over much of FY02 the financial performance of IPCL has taken another beating. The company, over FY00 and FY01, had recovered from the East Asian crisis only to be faced with the global economic downturn, which has impacted global commodity cycles. With 84% of the turnover contributed by commodity plastics and polyester intermediates, the revenues are more susceptible to downturns.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Net Sales 11,678 10,727 -8.1% 36,964 33,710 -8.8%
Other Income 301 274 -8.9% 892 871 -2.3%
Expenditure 9,451 8,758 -7.3% 29,465 27,779 -5.7%
Operating Profit (EBDIT) 2,227 1,970 -11.5% 7,499 5,930 -20.9%
Operating Profit Margin (%)19.1%18.4%20.3%17.6%
Interest 1,262 967 -23.4% 3,788 2,944 -22.3%
Depreciation 1,033 1,064 3.0% 3,105 3,169 2.1%
Profit before Tax232212-8.4%1,498688-54.1%
Tax - 20 - 130
Profit after Tax/(Loss) 232 192 -17.0% 1,498 558 -62.7%
Net profit margin (%)2.0%1.8%4.1%1.7%
No. of Shares 249 249 249 249
Diluted Earnings per share*
P/E Ratio 26.2 27.1

Although sales growth has fallen into the red over the past two quarters, the YoY decline has reduced, as compared to the preceding quarter. The decline in the third quarter is similar to it's peer, Reliance Industries (RIL). The turnover is likely to have been impacted by lower realisations on products. Domestic prices of PE, PP and PVC have decreased by an estimated 13%, 8% and 19% respectively for the nine month period. With the slowdown coming into effect in 4QFY01 much of the YoY effect is likely to be nullified going forward.

The drop in realisations has impacted operating margins, which are down 70 and 270 basis points for the quarter and nine months ended December '01. This, along with lower sales has pulled down operating profits. The softening in oil markets YoY, has reflected downstream in naphtha prices, which are lower by an estimated 15% for 9mFY02. However, the decline in raw material costs has been marginal over the concerned period. This is likely to be due to the Gandhar and Nagothane crackers operating on gas as feedstock. Domestic gas users are subsidised at 75% of international prices or 2,850/ thousand standard cubic meters (tscm) not including transmission and other charges, whichever is lower. With gas prices skyrocketing last fiscal, the ceiling was hit in domestic markets. Although gas prices have cooled off, they have not declined substantially below ceiling prices. Domestic gas prices are estimated to be quoting close to ceiling levels.

Salary costs of the company are substantially lower for the concerned periods. In FY01, the company did reduce the workforce by 1%. The YoY effect is largely due to revision in officer level salaries with retrospective effect being accounted in FY01. In the fourth quarter, the YoY effect is likely to be nullified, as the company is likely to revise non-officer level staff salaries. On removing other income, IPCL shows a loss at pre-tax levels for the concerned periods, which indicates that declared earnings are not of high quality.

At Rs 81, the scrip is trading on a multiple of 27.1x 9mFY02 annualised earnings. This is significantly higher than the valuations the company is generally awarded, which is in the range of 5x-7x. RIL trades on an earnings multiple of 12x-15x. The Department of Disinvestment has included IPCL in the list of five companies to be put on the block before the fiscal end. Consequently, markets have ramped up the stock price. The book value at the end of FY01 was Rs 126 per share.

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