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IPCL: Prudent provisioning saves the day

Jul 19, 2006

Performance summary
Petrochem and polymers major, IPCL, declared its results for 1QFY07 yesterday. Its topline grew 22% YoY on the back of increased volumes as well as increase in prices of petrochemical products. Operating profits registered a growth of 23% primarily on account of lower other expenditure, which helped offset higher raw material prices. Higher tax provisioning coupled with high interest outgo has restricted the bottomline growth to 29% despite a 50% rise in other income.

Financial snapshot...
(Rs m) 1QFY06 1QFY07 Change
Net sales 19,830 24,150 21.8%
Expenditure 15,610 18,970 21.5%
Operating profit (EBDITA) 4,220 5,180 22.7%
EBITDA margin (%) 21.3% 21.4%  
Other income 400 600 50.0%
Interest 290 450 55.2%
Depreciation 1,160 1,120 -3.4%
Profit before tax 3,170 4,210 32.8%
Tax 920 1,300 41.3%
Profit after tax/(loss) 2,250 2,910 29.3%
Net profit margin (%) 11.3% 12.0%  
No. of shares (m) 249 249  
Diluted earnings per share (Rs) 9.0 11.7  
Price to earnings ratio (x)*   5.6  
* Based on trailing twelve months.

What is the company's business?
IPCL is the second largest producer of polymer products (PP, PVC and PE) and has a market share of 27%. Polymers form a major portion of the topline (70%) and are expected to remain the same in the future. The company has been increasing its production of polymers on the back of strong prices and domestic demand. Together with RIL, which has a 46% stake, the company accounts for 70% of the petrochemicals capacity in the country.

What has driven performance in 1QFY07?
Robust domestic demand: Net turnover increased by 22% over the corresponding period of last year, which was on account of 14% higher volume sales and a 8% rise in realisations. Petrochemical prices remained strong, on the back of firm crude oil and naphtha prices along with strong domestic demand for polymers (up 14%), fibre intermediates (up 17%), MEG (up 20%) and LAB (up 13%), thus prices of all these products saw an increase during the quarter. As far as the sales composition is concerned, domestic sales (accounting 81% of the total sales) registered a growth of 22% to Rs. 19.59 bn. Export sales grew by 15% to Rs. 4.19 bn.

Flat margin growth: Consumption of raw material increased by 46% YoY as prices of gas, naphtha, and propane increased significantly. Input prices of semi rich gas and propane increased by 98% and 16% YoY. Employee's cost registered a 13% increase due to performance linked incentive payment to the employees. However, the reduction in other expenditure was seen due to lower provision for excise duty on finished goods due to depletion of stock. Thus, lower provisioning helped offset the effect of higher raw material prices and arrest the decline in operating margins.

Cost break up...
(Rs m) 1QFY06 1QFY07 Change
Consumption of raw materials 8,710.0 12,690.0 45.7%
as % of sales 43.9% 52.5%  
Staff cost 910.0 1,070.0 17.6%
as % of sales 4.6% 4.4%  
Other expenditure 5,990.0 5,210.0 -13.0%
as % of sales 30.2% 21.6%  

Bottomline: Net profits grew by 29% YoY during the quarter. Other income for the company increased by 50% during the quarter on the account of interest income on surplus funds. However, the interest cost was on the higher side due to adverse exchange difference. Higher tax provisioning also had a negative impact on bottomline growth.

Performance over last 4 quarters...
(YoY) 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Net sales growth 9.6% 12.4% 11.2% -13.1% 21.8%
Operating profit growth 27.5% 13.3% 7.6% -7.9% 22.7%
Net profit growth 82.9% 119.6% 20.6% -25.9% 29.3%
Operating profit margin 21.3% 20.4% -80.2% -78.8% 21.4%
Net profit margin 11.3% 14.8% 10.6% 10.8% 12.0%

What to expect?
At Rs 242, the stock is trading at a price to earnings multiple of 5.6 times trailing twelve months earnings. We believe that with feedstocks commanding higher prices, margins going forward would be under pressure. Demand for petrochemical products has also seen fluctuations over the past few quarters.

After the merger with its 6 subsidiaries, company's operations will be further integrated. These subsidiaries are manufacturers of polyester staple fibre (PSF) and polyester filament yarn (PFY) which have feedstock in the form of Mono Ethylene Glycol (MEG). IPCL is a manufacturer of MEG and considering the global demand-supply dynamics of MEG; it is advantageous to convert MEG into higher value products rather than selling it off at intermediate level. Thus the merger, which is approved by the shareholders, will further improve its operational efficiencies. Having said that, much will depend on how long the current high petrochemical prices will sustain themselves.

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