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Indo Gulf: 1QFY03 net up 35%

Jul 10, 2002

Indo Gulf has reported an encouraging performance for 1QFY03. The company recorded a growth of 23% in net sales, mainly on the back of expansion in copper division. A strong bounce back in copper prices also helped the company post a strong performance. Operating margins however, slipped 100 basis points reflecting copper price levels compared to the last year's levels. Net profit before tax jumped more than 35% to Rs 682 m. This being the second year of deferred taxation accounting, the spurt in taxation is actuals.

(Rs m)1QFY021QFY03Change
Sales 5,812 7,145 22.9%
Other Income 95 131 37.7%
Expenditure 4,604 5,728 24.4%
Operating Profit (EBDIT) 1,208 1,417 17.4%
Operating Profit Margin (%)20.8%19.8%
Interest 287 237 -17.4%
Depreciation 312 316 1.4%
Profit before Tax 705 996 41.3%
Other Adjustments - -
Tax 200 314 56.8%
Profit after Tax/(Loss) 505 682 35.2%
Net profit margin (%)8.7%9.6% 
No. of Shares (eoy) (m) 225 225 
Diluted Earnings per share  12  
P/E (at current price)  5.2  

It may be recalled that the company expanded its copper production capacity last year from 1 lakh tonnes to 1.5 lakh tonnes. Considering, a production of 45,498 tonnes, the capacity utilisation seems to be more than 115%. Copper prices showed signs of improvement in Oct' 01 and are currently quoting at US$ 1,648/ tonne. Domestic copper prices were impacted due to reduction in import duties announced in the recent budget (from 35% to 25%). Considering this backdrop, the performance seems to be remarkable. The company enters into forward contracts and thus margins are expected to improve in the coming quarters.

Copper Statistics...
 1QFY021QFY03 Change
Copper production (In MT) 25,411 45,498 79.0%
Export Volmues (In MT) 5,076 19,269 279.6%
Export as % of total volumes20.0%42.4%
Copper Revenues (In m) 4,544 6,119 34.7%

The company is rapidly penetrating the exports market. 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 even more. The margins in the export business do 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. DAP production jumped 250% on the back of expansion in DAP capacity last year. As in the case of copper business, even in the PMR division, the company enters into forward contracts. Hence, a sharp rise in the precious metal prices in the last six months are expected to be reflected in the coming quarters. The company earns handsome margins in these two businesses on account of its integration with the copper plant. The copper business (including PMR and DAP business) now accounts for 85% of the revenues for the company.

Copper demand and consequently LME prices are expected to improve further in the current year. There is also a reduction in inventory build up on the LME, showing further indication of firm prices. However, this is expected to be somewhat negated on account of fall in the import duty. Also, the company's increasing focus on exports, where realisations would be comparatively lower could temper operating margin improvement.

Considering the first quarter performace, we expect the company to outperform our FY03 targets. We have estimated a 200 basis fall in operating margins for FY03. 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 63, the stock trades at 5x 1QFY03 annualised earnings.

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