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IPCL: All round growth… - Views on News from Equitymaster
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  • Oct 18, 2004

    IPCL: All round growth…

    Introduction to results
    IPCL has reported another quarter of strong earnings with a topline growth of 35% YoY and the bottomline improving by nearly 156% YoY in 2QFY05. However, operating margins have declined by 220 basis points during the period.

    What is the company’s business?
    IPCL - a subsidiary of Reliance Industries, is engaged in the manufacture of petrochemicals. Along with Reliance, it controls nearly 70% of the polymers production capacity in the country. IPCL has a 28% market share in the polymers business. The company has recently stepped up its exports resulting from the strong overseas network of parent, Reliance Industries. Having said that, it is now eyeing the domestic markets for its polymers business, which contribute nearly 70% of the revenues.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 13,450 18,190 35.2% 27,000 36,290 34.4%
    Expenditure 10,430 14,500 39.0% 21,740 29,290 34.7%
    Operating profit (EBDITA) 3,020 3,690 22.2% 5,260 7,000 33.1%
    EBDITA margin (%) 22.5% 20.3%   19.5% 19.3%  
    Other income 210 330 57.1% 420 560 33.3%
    Interest 860 520 -39.5% 1,670 990 -40.7%
    Depreciation 1,240 1,130 -8.9% 2,370 2,250 -5.1%
    Profit before tax 1,130 2,370 109.7% 1,640 4,320 163.4%
    Extraordinary income/(expense) (90) -   (1,310) -  
    Tax 500 990 98.0% (600) 1,710 -385.0%
    Profit after tax/(loss) 540 1,380 155.6% 930 2,610 180.6%
    Net profit margin (%) 4.0% 7.6%   3.4% 7.2%  
    No. of shares (m) 249.0 249.0   249.0 249.0  
    Diluted earnings per share (Rs)* 8.7 22.2   7.5 21.0  
    Price to earnings ratio (x)   9.1     9.6  
    (* annualised)            

    What has driven performance in 2QFY05?
    Sales:  Topline growth of 35% comes largely as a result of strong product prices, as the demand from international markets remained firm. During the quarter, exports increased by 107% YoY due to high overseas demand, being fuelled mainly by the developing nations and a strong marketing network of Reliance Industries. The company witnessed production increase of nearly 13% during the quarter, as against corresponding period last fiscal.

      2QFY04 2QFY05 1HFY04 1HFY05
    Raw materials/Purchases 39.9% 39.4% 44.1% 42.3%
    Staff cost 7.1% 5.9% 7.4% 5.8%
    Other expenditure 30.6% 34.4% 29.0% 32.6%

    Operating margins:  Operating margins have witnessed a decline of 220 basis points during 2QFY05 as compared to the corresponding period last fiscal. This is due to the fact that although product prices increased, the company could not control raw material prices such as naphtha, which witnessed a major spike after the rise in crude oil prices. Having to pay import parity prices for naphtha (a major feedstock) led to a major dent in otherwise robust operating profits. However, the company has been successful in controlling costs towards traded goods, while other expenditure has witnessed a sharp increase.

    Net profit:  Strong realisations coupled with a 40% decline in interest obligations have resulted in a 156% improvement in the bottomline. Also, other income has witnessed a major surge of 57% during the quarter, which is a result of higher export benefits on the back of strong exports. Also, a drop of 9% in depreciation costs has helped the company post robust bottomline numbers.

    Over the last four quarters:  IPCL has witnessed a volatile business environment with a strong upturn in the bottomline during 1QFY05, as a result of a 42% decline in interest expenditure and also the fact that the company witnessed a relatively poor 1QFY04, when the petrochemicals cycle was just at the start of its uptrend. Also, traded goods helped the company improve margins and this has continued during 2QFY05.

    What to expect?
    The petrochemicals cycle is currently buoyant and in our view, is more likely at its peak. With signs of a slowing down by China, which has been a major driver of commodities uptrend in the current scenario, prices are likely to cool off and this might affect IPCL’s profitability, as it is a pure petrochemicals player. Also, polymers demand in the country continues to remain flat and this trend is likely to continue in the current fiscal. Having said that, the recent duty cuts on naphtha are likely to help the company reduce its raw material expenditure and as a result, provide some cushion to the margins. Going forward, competition from IOC and ONGC is likely to make the industry price competitive, as the growth potential is limited over the short term.



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