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IPCL: Cycle pains

Jun 6, 2002

After two successive down quarters, Indian Petrochemicals Corporation Ltd. (IPCL) has managed to resuscitate topline growth in the quarter ended March '02. The performance is noteworthy considering Reliance Industries (RIL) reported a 4% decline in sales for the concerned period. IPCL's topline performance has come in ahead of our expectations of 7% decline for the full year. That said, IPCL had indicated turnover of Rs 64 bn for FY02. Lower realisations is likely to have led to the variance in performance.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net sales 13,096 13,689 4.5% 50,060 47,399 -5.3%
Other Income 786 771 -1.9% 1,677 1,642 -2.1%
Expenditure 10,493 12,174 16.0% 39,958 39,953 0.0%
Operating Profit (EBDIT) 2,603 1,516 -41.8% 10,102 7,446 -26.3%
Operating Profit Margin (%) 19.9% 11.1%   20.2% 15.7%  
Interest 1,122 793 -29.3% 4,910 3,737 -23.9%
Depreciation 1,044 1,075 2.9% 4,149 4,244 2.3%
Profit before Tax 1,223 419 -65.7% 2,720 1,107 -59.3%
Tax 231 (98)   231 32  
Profit after Tax/(Loss) 991 517 -47.9% 2,489 1,075 -56.8%
Net profit margin (%) 7.6% 3.8%   5.0% 2.3%  
No. of Shares 249.1 249.1   249.1 249.1  
Diluted Earnings per share* 15.9 8.3   10.0 4.3  
P/E Ratio         35.7  

Turnover in the fourth quarter seems to have been driven primarily through higher volumes. With the year end, it is likely the company was aggressive in pushing sales. Significant de-stocking points in the same direction. Also, prices of key products -- polymers and fibre intermediates -- although improving from the December '01 quarter continued to rule lower by 6%-15% compared to 4QFY01 prices. For the full year, volume sales of the company grew by a marginal 1.2% -- driven by 4Q -- as compared to 11% in FY01. The polymer industry is estimated to have grown by double digits during FY02, which suggests that IPCL is likely to have lost market share during this period. Ramp up in operating rates at Haldia Petrochemicals Ltd. and at Gail could have eaten into IPCL market share. Full year production is lower by an estimated 3.6% while sales are higher, which again suggest de-stocking.

Operating profits have been hit by lower sales and reduced margins. Despite de-stocking in 4QFY02, the company does not seem to have got any respite in margins, which are lower compared to the immediately preceding quarter. With oil prices plummeting in 3QFY02 to an estimated $16/ barrel, naphtha prices did soften, which is likely to have improved margins at the naphtha cracker. However, naphtha cracker capacity represents 16% of total capacity. Also, increased production during the quarter to support higher sales has held back margins. With no change in key gas prices -- primary feedstock -- and lower realisations margins contracted for 4Q and full year '02.

Adding to the pressure has been staff costs, which jumped considerably in 4QFY02. In our 3QFY02 report, we had indicated that staff costs are likely to rise, as the company undertakes revision of non-officer level staff salaries. That said, for full year, operating expenses have not shown any rise. In fact, other expenses have declined by 12% for the period. At start of FY02, IPCL had indicated that the company is likely to focus on business process improvement for future earnings growth. Emphasis was to be placed on improved operating efficiency, product quality and marketing costs. These initiatives seem to be generating results.

Interest costs declined in all quarters of FY02. At start of fiscal '02, IPCL indicated repayment plans of Rs 2.8 bn in high cost debt. Also, in March '02 foreign currency convertible bonds (FCCBs) amounting to $175 m (Rs 8.5 bn) matured. Improved working capital management could have also led to lower interest cost, as the company better utilised IT resources. Interest costs are likely to continue to slide in FY03 with the company not expected to undertake large capital expenditure and the new management improving operating efficiency.

At Rs 154 the scrip is trading on a multiple of 35.7x FY02 earnings. The high valuation is due to the expected open offer from Reliance Petroinvestments at Rs 231 per share. The stock has been stationary at these levels since announcement of the winning bid. Post open offer, one can expect valuations to revert to more realistic levels. RIL trades on a multiple of 10.3x FY02 earnings.

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