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IPCL: Cyclical upturn to benefit

Jul 21, 2003

The petrochemicals cycle is on an upturn and is expected to reach its peak by FY05. IPCL, being one of the companies dealing in petrochemicals, is likely to benefit from this cyclical upturn. Post Reliance's acquisition, the company will also benefit from various other factors. Lets take a look at its business. The company has three plants. One plant is at Vadodara having a 1.3 MTPA capacity of naphtha cracker, and other two at Nagothane (4 mtpa) and Gandhar (3 mtpa). The plant at Vadodara is naphtha based while the other two uses natural gas as its feedstock. The company has a range of petrochemicals, fiber and fiber intermediates and chemicals in its portfolio of products. On an overall basis, while polymers contribute to 70% of volumes, chemicals contribute to about 16% and fiber and fiber intermediates account for the remaining.

Due to global economic slowdown and an oversupply scenario observed in FY02, prices of various petrochemical products fell and hence IPCL saw a decline of about 57% in net profits in FY02. However the cyclical upturn started in FY03 and IPCL took advantage of favorable conditions. While the sales grew by 6% during FY03 as a result of increased prices and higher volumes, operational efficiency also improved (490 basis points improvement in operating margins) during the same period. This led to a significant growth in bottomline by 90% during FY03.

As far as growth prospects of the company is concerned, absence of any large polymer capacity additions globally and the rise in demand for petrochemicals augurs well for IPCL. With IPCL expanding the naphtha cracking facility by 30% at its Vadodara plant, we expect higher volume growth in FY05. While the production, selling and administrative expenses of Reliance's petrochemicals division is only about 20% of its net sales, that for IPCL is about 38%. Therefore, we expect that there is a lot of scope for improvement in overhead costs for IPCL.

At Rs 113, IPCL is trading at a P/E of 13.7x its FY03 multiples. The prices of petrochemicals have increased in the first three months of the current financial year. With Reliance taking control of IPCL in FY03, the combined entity account for 65%-70% of petrochemicals capacity in India. Therefore, the recovery in prices will benefit the company in a large way. This coupled with the increased synergies with Reliance are long-term positives for the company. Though the expected deregulation in natural gas prices may impact profitability, the cyclical upturn may rub off this negative effect.

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