The weakening in the petrochemical cycle has led to a challenging operating environment for most of the domestic players. Indian Petrochemical Corporation Ltd. (IPCL) seems to have taken it on the chin. The scrip has lost 16.5% since start of the new fiscal (FY02) while the Sensex has lost 7.5% over the same period.
The underperformance of the scrip has been exacerbated by the poor show in 1QFY02 by the company. The topline of IPCL continued to remain under pressure in the first quarter of the new fiscal. In 4QFY01, the turnover of the company declined by 4.4%. The pricing environment has further deteriorated in 1QFY02 with a dip in the international polymer cycle. Adding to the woes is a slowing domestic economy and the penetration of fresh capacity into the market.
Recently, Reliance Ind. (RIL) reported a decline in market share for polymers, which could be attributed to the stabilisation of operations at Haldia Petrochemicals Ltd. (HPL) and aggressive selling by Gas Authority of India Ltd. (GAIL). Similarly, IPCL could also be facing pressure on its market share. Further, realizations of the industry could have come under pressure to ensure volume growth. Adverse developments in the polymer market could significantly impact the company's financial performance, as polymers constituted an estimated 73% of sales in FY01.
Consequently, the volatility in earnings is higher due to the dependence on a single commodity. The ramping up of utilisation at the Mitsubishi plant has also eaten into the polyester intermediates (PTA) market. Polyester intermediates contributed an estimated 4.1% to sales in FY01.
Although disinvestment is a trigger there is some bad taste in the month of the market, as the Government earlier vacillated on the issue. Under the first attempt, in FY99, the disinvestment plan fell through after completing the due diligence stage.
Consequently, over the next 12 months the scrip severely under-performed the benchmark indices, as valuation retracted to reflect fundamentals. Several investors burnt their fingers; consequently, although noises emanate from the North Block the market seems to be more cautious this time around.
In fact, IPCL disinvestment has run into rough weather with negotiations between the two parties, Indian Oil Corporation (IOC) and IPCL, reaching stalemate over valuations of the plant. Consequently, there runs a risk of the process being delayed again. As per media reports, the Government now intends to sell IPCL as a single block. This could affect valuations of the company due to the vintage and staffing problems of the Baroda unit. Consequently, the upside for shareholders maybe limited.
The first six months of calendar year 2001 have been difficult for IPCL. Earnings of the company have been boosted largely by other income. Although the company is consciously reducing its interest burden through better working capital management and reducing high cost debt. Nevertheless, it seems, FY02 will prove to be a challenging year for IPCL. A revival in the global and domestic economy is not expected before the last quarter of FY02. Consequently, a turnaround in the polymer cycle maybe expected only in FY03.