IPCL: Shifting to business process improvement - Views on News from Equitymaster

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IPCL: Shifting to business process improvement

Jun 12, 2001

Indian Petrochemicals Corporation Ltd. (IPCL) has registered an impressive topline growth for FY01. This is mainly due to the strong growth in the first three quarters of the concerned fiscal. In 4QFY01, sales have declined marginally. The improvement in sales is attributed to higher volumes and better realisations. The production of the company increased by 15% to 1.4 MMTPA from 1.2 MMTPA. Volume sales grew by 18% and were higher than production by 82,000 MT, which indicates lower inventory levels. Export volumes for FY01 were 117,000 metric tonnes (MT) and export income at Rs 2.9 bn, a growth of 70%.

The turnover growth has positively impacted operating profit growth. Also, the company has maintained vigil over costs. IPCL has attempted to streamline its supply chain to gain greater operating efficiencies. Transportation and storage costs have been brought under the magnifying glass to control marketing expenses. Consequently, the OPM has increased by 70 basis points in FY01 despite adverse market conditions.

The meteoric rise in oil prices in FY01 led to a significant jump in petrochemical feedstock prices, both naphtha and natural gas, which rose by an estimated 14% in Rupee terms. The higher raw material costs applied downward pressure on the OPM. The company's new plants at Gandhar and Nagothane operate on natural gas. The industry continues to reel under excess capacity. However, the company has done well to overcome these external challenges. IPCL achieved an operating rate of 90%.

India faces surplus petrochemical capacity. Also, new capacities are coming up in Asia. Gas rich countries, especially in the Middle East have raw material cost advantage leading to price competitiveness. Global ethylene capacity is expected to increase from 107 MMT in FY01 to 114 MMT in FY03. This could continue to impact realizations in the domestic market.

The company expects operating rates to rise over the next 2 years to an estimated 95%. For FY02, IPCL, estimates overall sales volume to increase by 3.3%. (Polymers-2%, Fibre & Fibre Intermediated-7.1% and Chemicals-6.7%).

The capacity augmentation phase of the company has been completed with two new plants set up in the nineties. Therefore, with existing high operating rates, future YoY growth could slow down. Company now enters 'business process improvement' phase. Bottomline growth will have to be extracted from increased sweating of assets (higher capacity utilization), benchmarking manufacturing practices -- operational efficiency, product quality and marketing.

The company is focusing on streamlining its supply chain to derive benefits of lower supply chain costs and better working capital efficiency. Initiatives include commissioning propane terminal at Dahej, increasing Pirpau - Nagothane propane pipeline capacity and commissioning Hazira-Dahej pipeline. Company has also entered into long-term supply and pricing contract with ONGC for gas at Dahej and Nagothane.

IPCL plans to further augment operational efficiency through higher captive production of power to minimize downtimes. Marketing function seems to be a focus area. Lower costs through optimization of logistics and packaging. Enhance visibility on demand and consequently production schedule through MoU with customers. Also, company seems to be moving towards customer relationship management (CRM) with online data sharing.

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