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Indo Gulf: An Update

Oct 9, 2001

There has been a sea change in the business model of Indo-Gulf in the last three years. Indo Gulf has diversified from a company primarily focused on urea manufacturing to copper, DAP and precious metals. In about 2 years of its operations in copper, the company has gained a market share of more than 45% in the domestic market. Indo-Gulf now derives around 55% revenues from the copper business. A look at whatís in store for the company in each of its business divisions.

Indo Gulf achieved a capacity utilisation of more than 100% for its copper smelter in FY01. It is on the verge of increasing its copper capacity by 50% to 1.5 mtpa. The company is eyeing export markets for growth. However, copper prices have eroded drastically since the beginning of the calendar year from a high of US$ 1,850/ tonne in October last year to around US$ 1,360/tonne currently. The slide in copper prices was primarily due to heavy slowdown in telecom infrastructure spending worldwide and competition from optical cables.

In the domestic market, copper is normally sold at import parity price (i.e. LME price plus the custom duty). The domestic demand-supply situation for copper is currently slightly tilted towards demand as part of domestic consumption is imported. However, post commissioning of new capacity of Indo-Gulf there would be hardly any demand-supply mismatch.

The domestic demand is expected to remain mildly positive, growing at a rate of 7-9% over the next 4 years in the wake of demand from power sector. However, the biggest concern for the industry remains on narrowing import duty differentials.

To integrate its operations further, Indo Gulf recently commissioned a precious metal refinery for gold and silver extracted from the anode slime. Anode slime is a by-product from its copper plant and earlier the company used to sell it at scrap prices.

On the fertiliserís front, Indo Gulf remains one of the most efficient cost producers of Urea in the country. However, this business suffers from government policies. This was one of the primary reasons for the companyís diversification into other areas. The government re-assessed capacities of most of the fertiliser plants in Aprilí00 and directed them to restrict production for the domestic markets. The reassessment in capacity was followed by reduction of retention price. Indo Gulf had to curtail its production from 1.05 m tonne to .85 m tonne. The company is seeking export opportunities of Urea to ensure production beyond the limit capped by the government and to improve margins.

Indo Gulf also commissioned a 0.4 m tonne DAP plant in Sepí00. The outlook for DAP (phosphatic based fertiliser) is good considering international demand revival and upsurge in prices. Moreover, DAP is out of government control on fertilisers and hence the margins for efficient cost producers are high. However, DAP remains vulnerable to the threat of dumping.

Outlook
Copper is the most important division for Indo Gulf now and the fortunes of the company are directly linked to the copper prices. However, copper prices are not expected to pick up in the near term and therefore, are likely to considerably impact the companyís profitability. The performance of the urea business is expected to be more or less flat assuming that the government policies donít improve. However, the company could be a big beneficiary of urea de-controls as and when it happens.

At the current market price of Rs 30, the stock trades at 2.8x our projected earnings for FY02. In the last 4 years, average dividend yield of the company has been in the range of 6-8%.


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