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Indo Gulf: Good show

May 7, 2002

Indo Gulf has ended the year on an encouraging note. The company recorded a growth of 23% in net sales, mainly on the back of expansion in copper division. Profit before tax jumped more than 45% to Rs 4 bn. However, net profit growth was only 20% due to a sharp spurt in tax provision on the back of new accounting policy on deferred taxation. However, it may be noted that the company recorded a sharp dip in operating margins for the fourth quarter, in line with our expectations.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Sales 5,342 6,662 24.7% 21,988 27,062 23.1%
Other Income 204 320 56.7% 499 659 32.0%
Expenditure 3,981 5,560 39.7% 17,102 21,477 25.6%
Operating Profit (EBDIT) 1,361 1,102 -19.0% 4,887 5,585 14.3%
Operating Profit Margin (%)25.5%16.5%22.2%20.6%
Interest 383 84 -78.2% 1,453 1,024 -29.5%
Depreciation 303 294 -3.0% 1,176 1,208 2.7%
Profit before Tax 880 1,044 18.6% 2,757 4,012 45.5%
Other Adjustments - -
Tax 83 186 123.5% 240 988 311.5%
Profit after Tax/(Loss) 797 875 9.8% 2,517 3,024 20.2%
Net profit margin (%)14.9%13.1%11.4%11.2%
No. of Shares (eoy) (m) 225 225 225.2 225.2
Diluted Earnings per share 11.2 13.4
P/E (at current price) 4.1

The drop in operating margins was obviously on the back of drop in LME prices for copper. Copper business (including PMR and DAP business) now accounts for 84% of the revenues for the company. Copper prices did recover partially in the second half of FY02. However, the steep drop in margins in the fourth quarter could be due to the fact that the company enters into forward contracts and thus prices in the fourth quarter might be reflecting late 2001 LME prices. A 32% growth in the copper business was led by sharp ramp-up in volumes through expansion of capacity and sweating existing capacities.

Copper Statistics...
FY01FY02 Change
Copper production (In MT) 113,227 151,445 33.8%
Export Volmues (In MT) 10,271 42,879 317.5%
Export as % of total volumes9.1%28.3%
Copper Revenues (In m) 16,900 22,380 32.4%

The company has already made a successful entry into the export markets. Considering that the domestic demand growth for copper is expected to be lackluster, the company expects to further entrench into the export markets as it expands its capacity further. The margins in the export business does not compare favorably with that in the domestic markets (due to tariff protection). However, this is expected to be more than offset by considerable economies of scale after the ongoing expansion.

The DAP (Di-Ammonia Phosphate) and PMR (Precious Metal Refinery business) of the company also performed well with 212% and 47% jump in production respectively. Even in the PMR division, the company enters into forward contracts and hence financials are not reflective of the volatility in the precious metal prices in the last six months. The company earns handsome margins in these two businesses on account of its integration with the copper plant.

In the current year, margins are expected to remain under pressure on account of the reduction in customs duty on copper (from 35% to 25%), increasing share of copper exports and huge inventory build-up on the LME. (Read more on Copper ) On a conservative basis, we expect margins to dip further by 200 basis points.

To summarise, though the outlook for the company continues to remain challenging, considering the track record of the company, one would expect Indo Gulf to outperform in the coming fiscal as well . A fast track capacity expansion coupled with improvement in demand could turn fortunes for the company sharply. The second phase of copper expansion has commenced and we expect the expansion to be completed by the second half of the current year. Indo Gulf is eyeing to further integrate its operations by acquiring copper mines abroad. In the long run, this is expected to help the company in hedging the LME price volatility to a large extent. At the current market price of Rs 55, the stock trades at 4x its FY02 earnings.

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