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IPCL: Good show

Oct 13, 2003

Reliance controlled IPCL, one of the major players in the petrochemicals segment, declared its 2QFY04 results today. The company registered a 20% bottomline growth on the back of a 7% increase in topline. The results, however, are relatively subdued as compared to the last few quarters wherein IPCL managed to post impressive topline and bottomline growth.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Net sales 12,520 13,450 7.4% 21,080 27,000 28.1%
Other Income 190 210 10.5% 280 420 50.0%
Expenditure 10,000 10,430 4.3% 16,540 21,740 31.4%
Operating Profit (EBDIT) 2,520 3,020 19.8% 4,540 5,260 15.9%
Operating Profit Margin (%)20.1%22.5% 21.5%19.5% 
Interest 750 860 14.7% 1,800 1,670 -7.2%
Depreciation 1,120 1,240 10.7% 2,240 2,370 5.8%
Profit before Tax8401,13034.5%7801,640110.3%
Extraordinary expenses - 90   - 1,310  
Tax 390 500 28.2% 390 (600) 
Profit after Tax/(Loss) 450 540 20.0% 390 930 138.5%
Net profit margin (%)3.6%4.0% 1.9%3.4% 
No. of Shares 249.0 249.0   249.0 249.0  
Diluted Earnings per share*7.28.7 3.17.5 
P/E Ratio     24.6  

Let us first consider the 2QFY04 results in brief. The topline increase seems largely a factor of sales volume growth. However, it was the control over expenditure, which helped the company improve its operating margins by 240 basis points. While the raw material contribution as a percentage of sales increased, the management was able to control the staff costs and other administrative expenses. The reduction in staff costs was also due to the fact that over the last two quarters, around 1,600 employees of the company have opted for VRS. The effect of this is visible in the form of extraordinary expenses of Rs 1.3 bn, a part of which (Rs 90 m) has been put to effect in the September quarter. Without the VRS effect, the PAT growth for 2QFY04 would have been at 40%.

Now, as far as the performance of the company for the first half of the current fiscal is concerned, it has been splendid. It can be seen in the table above, the company’s bottomline surged 139% on the back of a 28% growth in topline. During this period, the company’s export of manufactured goods was higher by 44%. The other income component also increased by a hefty 50% on account of higher export benefits.

However, the operating margins of the company have taken a hit in 1HFY04 on account of unfavorable petrochemical product prices during the June 2003 quarter. It should be noted that overall realisations had declined by about 9% in 1QFY04. Increase in raw material prices also pressurised operating margins. However, for the first half of the current fiscal, the interest outgo of the company reduced by 7% signifying that the company’s efforts at reducing debt have been yielding results.

The company has informed that consequent to a change in the method of providing depreciation in respect of certain assets at the Vadodara Complex, the additional depreciation charge of Rs 2.1 bn has been written off against the general reserve. Further, the company has also stated that as per the new accounting standard (AS-26) regarding valuation of intangible assets, an amount of Rs 220 m, being the balance of unamortised miscellaneous expenditure, has been also written off against the general reserve. The effect of these adjustments would lead to a reduction in the book value of the stock.

At Rs 184, the stock is trading at P/E multiple of almost 25x its 1HFY04 annualised earnings. While the valuations are on the higher side of the petrochem spectrum, the outlook given by the management points to the current upturn in the petrochemical cycle sustaining, which would be beneficial for the company. Improved polymer prices and synergies with Reliance are likely to benefit IPCL in terms of cost rationalisation.

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