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IPCL: Reliance effect rubs off… - Views on News from Equitymaster
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  • Apr 28, 2003

    IPCL: Reliance effect rubs off…

    IPCL has recently declared its fourth quarter and full year performance for FY03. While the revenues have risen by 6%, the net profit has seen a heavy growth of 90%. The growth of the net profit was largely because of a significant improvement in operating margins. It seems that the Reliance effect has finally rubbed off on this former PSU.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net Sales 13,689 13,730 0.3% 47,399 50,290 6.1%
    Other Income 771 510 -33.8% 1,642 1,050 -36.1%
    Expenditure 12,174 10,790 -11.4% 39,953 39,910 -0.1%
    Operating Profit (EBDIT) 1,515 2,940 94.0% 7,446 10,380 39.4%
    Operating Profit Margin (%) 11.1% 21.4%   15.7% 20.6%  
    Interest 793 730 -7.9% 3,737 3,690 -1.3%
    Depreciation 1,075 1,170 8.9% 4,244 4,550 7.2%
    Profit before Tax 419 1,550 270.1% 1,107 3,190 188.2%
    Extraordinary items 0 -560   0 -560 0
    Tax (98) 90 -192.1% 32 590 -
    Profit after Tax/(Loss) 517 900 74.2% 1,075 2,040 89.8%
    Net profit margin (%) 3.8% 6.6%   2.3% 4.1%  
    No. of Shares 248.0 248.0   248.0 248.0  
    Diluted Earnings per share* 8.3 14.5   4.3 8.2  
    P/E Ratio   5.8     10.2  
    (* annualised)            

    The net turnover growth slowed down in 4QFY03, reflecting the sluggish state of the economy. This impacted the overall sales for FY03. Sales growth during the year was led by a mix of both higher product prices (up 6%) and higher volumes. During FY03, IPCL's production touched 4.4 m tonnes, up 18% YoY. Exports saw a strong 130% growth to Rs 4.2 bn. Consequently, export contribution to sales has doubled to 8% in FY03 (up from 4% in FY02).

    The post APM scenario has been very positive for all petrochemical companies and IPCL is no exception to this. But IPCL also had another advantage. On the one hand, product prices were tuned to market, on the other, IPCL got the advantage of a Reliance management, which improved cost efficiencies for the company and consequently, operating margins swung positively to touch nearly 21% in FY03.

    Petrochemicals accounted for over 98% of the company's revenues. This division saw its PBIT margins improve from 6% to over 10% in FY03. Now one can understand the reason for such encouraging bottomline growth. The Reliance effect is in full display in the comparison of 4Q numbers. If one looks at the 4QFY02 numbers (when IPCL was still a PSU), petrochemicals division PBIT margin was marginally negative, as compared to the PBIT margins of over 13% in 4QFY03 (under Reliance management).

    The 4QFY03 numbers are a reflection of a continued improvement in the companies efficiencies and productivity. While sales in the quarter were up marginally, greater cost controls saw operating margins zoom to over 21%. Consequently, IPCL reported over 74% bottomline growth. Continued improvement in efficiencies can be expected due to increased synergies between IPCL and other Reliance group companies.

    At Rs 84 the scrip is trading at a P/E multiple of 10.2x FY03 earnings. Though the valuations are on the higher side of the petrochem spectrum, expectations of continued improvement in efficiencies is likely to see the stock hold its ground.



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