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Indo Gulf : Valuation 'Blues' - Views on News from Equitymaster
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  • Oct 12, 2000

    Indo Gulf : Valuation 'Blues'

    Indo Gulf Corporation, a part of the Aditya Birla group, is engaged in the manufacture of ammonia and urea. The company has also diversified into manufacture of copper. It is also one of the co-promoters of the AT&T Birla Telecom JV which has received licences to operate cellular services in Maharashtra (except Mumbai) and Gujarat. The company has however indicated that urea and copper will be the main focus in the future.

    The current year is a tough year for urea manufacturers. (This division contributed 27% to the company’s turnover in FY00). Besides, there is uncertainty about the government policy with regard to the retention pricing scheme in the current year. This is accompanied by the fact that opening up of imports post April 2001 is likely to put pressure on the domestic fertiliser manufacturers in the coming year.

    The company’s diversification into copper two years back has helped the company to stabilise its earnings. FY99 marked the commissioning of Indo Gulf`s 100,000 tpa copper smelter at Dahej, Gujarat. The plant was set up in only 28 months at a cost of Rs 18.5 bn. The copper division - Birla Copper achieved 100% capacity utilisation within 11 months of its trial runs and has emerged as the market leader in the domestic copper industry. This division accounted for 64% of revenues in FY00. At the end of the fourth quarter of FY00, the company had 48% share of the domestic market. The steady prices of copper in the first quarter of the current year has helped Indo Gulf a 6.3% increase in net profits in the first quarter. With the jelly filled telecom cables (these account for 40% of the copper cathode rods consumption) demand expected to grow further in the current year too, this division is in for good times.

    In the current year the company is in the process of setting up a precious metal refinery which will refine gold and silver from the anode slime generated by the copper plant for sale in the domestic market. In addition the company is blending synergies of copper and fertilisers together by setting up a 400,000 tpa Di–Ammonium phosphate plant. The unit, which is slated to go on stream in October will utilise the phosphoric acid generated by the company.

    The stock quotes at Rs 32 which implies an earnings multiple of less than 3 times its FY01 earnings. A very heavy price to pay for being considered a part of the old economy!



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