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IPCL - Will it break through? - Views on News from Equitymaster
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  • Sep 27, 2000

    IPCL - Will it break through?

    IPCL, the petrochemical major, has fallen from its peak of Rs 150, it saw last year primarily on the hopes of Government disinvestment. The delay in disinvestment has resulted in the market pulling the stock down to reflect fundamentals.

    The company is amongst the top petrochemical players in the country next only to Reliance Industries Ltd. (RIL). Polymers are IPCL's forte. It was the first to start manufacturing polymers in the country. Thus, over the years the company has built up significant business intelligence, which it can leverage on for future growth. The revenue mix consists of polymers, chemicals and fibres, which contribute 69%, 23% and 8% respectively.

    However, the public sector (PSU) lineage brings with it certain handicaps. Speed in decision-making leaves a lot to be desired. Failure to act is one of the reasons why IPCL lost out its polymer advantage to Reliance. Further, the company has not diversified along the value chain and this leaves it more susceptible to cyclical fluctuations.

    The past two years (FY98 & FY99) of downturn have taken its toll on the company. Being in the commodity business IPCL's fortunes are exposed to the cyclical nature of the industry. The tariff protection has been steadily reduced over the years and is expected to come down even further. Not to mention increased competition from the Middle East and South East Asia. Both these factors are expected to put additional pressure on prices and to survive the company will have to focus on remaining cost competitive.

    Crude oil prices have been on the rampage since beginning of FY00 and show no signs of softening in the near term. Consequently, naphtha (the main feedstock) prices are expected to remain firm. This will put added pressure on the company's margin. Further, domestic competition is expected to heat up with the entry of Haldia Petrochemicals, a JV between the West Bengal Government, Chatterjee group and the Tata's.

    Currently, the company is trading at 9.3 times first quarter FY01annualized earnings. The company has decided not to hold back its expansion plans despite the still pending disinvestment. IPCL plans to set up a new gas cracker and LDPE plant with respective capacities of 300,000 TPA and 160,000 TPA in Vadodara. It plans to augment the ethylene cracking capacity at Nagothane from 400,000 TPA to 500,000 TPA.

    In FY00, the company reported a much-improved performance with the petrochemical cycle coming out of the downtrend. An upturn in the petrochemical cycle could prove beneficial for the company. Further, polymer consumption levels in the country still remain very low on a per capita basis. This reflects significant growth opportunities for IPCL. Demand for polymers has received another impetus with the Government reducing excise duty rates from 24% to 16% in the current fiscal.

    The government has decided to go ahead with the strategic disinvestment of IPCL via the bidding route. It has proposed to give up management control in the company. IPCL will stand to benefit as a professional management is inducted. Divestment in favour of a MNC will give the company access to the latest technology, large resources and experience of operating in international markets.

    Disinvestments will remain the near term trigger but if the company can adopt processes to prevent erosion in earnings it can enjoy better valuations.

    IPCL FY98 FY99 FY00
    Gross sales 36,916 38,499 49,198
    Gross profit 8,088 7,550 9,207
    Gross profit margin 21.9% 19.6% 18.7%
    Profit after tax 2,438 308 1,879
    Net profit margin 6.6% 0.8% 3.8%
    EPS 10 1 8
    Book Value 119 119 119



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