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IPCL: Unpleasant surprise

Jul 29, 2002

Initial signs of improving global petrochemical cycle, domestic industrial recovery and Indian Petrochemicals Corporation Ltd. (IPCL) reporting higher YoY sales for 4QFY02, results for first quarter of FY03 have come in as a surprise and below expectations. Although early in the day, expectations from the new management on company performance are high. Could the results be a telltale for the group flagship results?

(Rs m) 1QFY02 1QFY03 Change
Net sales 18,080 16,010 -11.4%
Other Income 270 170 -37.0%
Expenditure 16,270 14,220 -12.6%
Operating Profit (EBDIT) 1,810 1,790 -1.1%
Operating Profit Margin (%) 10.0% 11.2%  
Interest 910 900 -1.1%
Depreciation 1,040 1,120 7.7%
Profit before Tax 130 -60  
Tax - -  
Profit after Tax/(Loss) 130 (60)  
Net profit margin (%) 0.7% -0.4%  
No. of Shares 249.1 249.1  
Diluted Earnings per share* 2.1 -1.0  
P/E Ratio      

Turnover growth of IPCL recovered in 4QFY02 after sliding YoY in the preceding two quarters. Recovery in turnover could have been due to canceling out of YoY effect and improving industry trends. However, there has been a volte-face in 1QFY03 performance. Income statement numbers have been restated to include inter-divisional transfers, which have increased by 13% YoY. Adjusting for the same, third-party sales have dropped by 27% YoY. The lower turnover could largely be due to decline in volume sales. A sharp rise in inventory levels seems to indicate the same.

That said, realisation in polymers and polyester intermediates are likely to have improved both QoQ and YoY, which has allowed expansion in margins. In 4QFY02, operating margins of IPCL were down sharply, as prices had not yet recovered to last year's levels. However, over the past quarter, prices have improved considerably. Also, in the corresponding period of the previous fiscal, commodity prices were on a downturn, which has accentuated the YoY effect. Operating margins on sales excluding inter-divisional transfers have jumped considerably, which could be due to better realisations and profitability improvement exercises initiated in FY02. Also, with softening in oil prices for the concerned period, the company could have benefited from lower naphtha costs.

Interest costs have declined for the past 6 consecutive quarters. This could be due to IPCL re-financing high cost debt amounting to an estimated Rs 2.8 bn and re-payment of foreign currency convertible bonds (FCCBs) amounting to $175 m (Rs 8.5 bn) in FY02. Also, improved working capital management could have also led to lower interest cost, as the company better utilised IT resources. We anticipate interest costs to decline in FY03, as insofar, the company is not expected to undertake large capital expenditure and the new management could further improve operating efficiency.

IPCL trading at Rs 151. The high valuation is due to the open offer from Reliance Petroinvestments at Rs 231 per share. Post open offer, one can expect valuations to revert to more realistic levels. Considering an upturn in global and domestic economic growth and improvement in the petrochemical cycle, one anticipated a better performance for FY03. We will put our estimates under watch.

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