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IPCL: Lower volumes, better margins - Views on News from Equitymaster
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IPCL: Lower volumes, better margins
Jul 31, 2007

Performance summary
  • Topline declined by 8.1% YoY in 1QFY08

  • Due to a relatively higher decline in expenditure at 10.5%, EBITDA grew by 2.1% over the corresponding quarter last year and margins were higher by 210 basis points

  • Bottomline registered a growth of 86.7%. Excluding exceptional items in 1QFY07, the increase is 12.8%

Financial snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 30,180 27,730 -8.1%
Expenditure 24,590 22,020 -10.5%
Operating profit (EBDITA) 5,590 5,710 2.1%
EBDITA margin (%) 18.5% 20.6%  
Other income 620 970 56.5%
Interest (net) 510 260 -49.0%
Depreciation 1,320 1,340 1.5%
Exceptional items (1,180) - NA
Profit before tax 3,200 5,080 58.8%
Tax 1,400 1,720 22.9%
Profit after tax/(loss) 1,800 3,360 86.7%
Net profit margin (%) 6.0% 12.1%  
No. of shares (m) 248 302  
Diluted earnings per share (Rs)* 23.8 44.5  
Price to earnings ratio (x)**   10.0  

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 47% stake, the company accounts for 70% of the petrochemicals capacity in the country.

What has driven performance in 1QFY08?
Decline in Volumes: Production was 1.39 MT (million tonnes) in the first quarter this fiscal as against 1.40 MT in 1QFY07, a marginal decline of 1%. Exports of products were also lower this quarter at Rs. 1 billion as compared to Rs. 4 billion corresponding previous quarter.

Realisations: Bottomline grew by a whopping 87%, but that was mainly on account of the charges in 1QFY07 on account of Voluntary Separation Scheme / Special Separation Scheme for the employees of Vadodara unit and provision for diminution in value of investments in Gujarat Chemicals Port Terminal Company Limited (GCPTCL) and Indian Vaccines Corporation Limited (IVCOL). Excluding the exceptional items, PAT grew by 13% and margins went up from 10% of sales in 1QFY07 to 12% of sales this quarter.

Costs: Raw materials (comprising of mostly natural gas and naphtha) constitute roughly 55% of the cost structure. A 9% decline in the raw materials went a long way in generating the higher operating profits, despite the dip in volumes.

Cost break-up
(Rs m) 1QFY07 1QFY08 Change
Raw materials 16,710 15,150 -9.3%
% sales 55.4% 54.6%  
Staff cost 1,390 1,240 -10.8%
% sales 4.6% 4.5%  
Other expenditure 6,490 5,630 -13.3%
% sales 21.5% 20.3%  
Total cost 24,590 22,020 -10.5%
% sales 81.5% 79.4%  

What to expect?
At the current price of Rs 366, the stock trades at 10 times its trailing 12 months earnings. Post merger with its 6 subsidiaries, company has started to use its MEG production captively. This is going to increase the value-chain efficiencies. However, strong crude prices and its derivates will adversely affect the company as the input cost form 53% of the net realisation.

Operating rates of ethylene crackers continued to be high across the globe on account of sustained demand and lack of new capacities. Newer capacities coming up in the Middle East are witnessing execution problems, thus keeping the prices firm. However, we believe, post middle east capacities coming onstream, the operating rates as well as margins are expected to soften. IPCL has been operating almost at full capacity, thus benefits from further increase in volumes is limited.

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