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Indo Gulf Fertilizers: Good times ahead - Views on News from Equitymaster
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  • Oct 22, 2003

    Indo Gulf Fertilizers: Good times ahead

    Indo Gulf Fertilizers (IGF) announced its 2QFY04 results yesterday. The company has reported a strong 38% growth in topline and a 31% rise in the bottomline in the September quarter on a YoY basis. For the 1HFY04, however, IGF has reported a marginal decline in net sales and a 29% increase in net profits. In this context, let us briefly evaluate the company’s performance.

    Results at a glance...
    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Net Sales 1,575 2,166 37.6% 2,601 2,570 -1.2%
    Other Income 41 55 34.3% 86 175 103.1%
    Expenditure 1,174 1,721 46.6% 1,987 1,968 -1.0%
    Operating Profit (EBDIT) 401 445 11.1% 614 601 -2.0%
    Operating Profit Margin (%) 25.5% 20.6%   23.6% 23.4%  
    Interest 3 3 7.9% 7 7 2.7%
    Depreciation 105 102 -3.2% 202 198 -1.8%
    Profit before Tax 334 395 18.5% 491 572 16.3%
    Tax 123 119 -3.4% 181 173 -4.7%
    Profit after Tax/(Loss) 211 277 31.3% 310 399 28.6%
    Net profit margin (%) 13.4% 12.8%   11.9% 15.5%  
    No. of Shares 45.1 45.1   45.1 45.1  
    Diluted Earnings per share* 18.7 24.5   13.8 17.7  
    P/E Ratio   3.3     4.5  

    The figures for 2QFY03 and 1HFY03 are of the fertilizer division of the erstwhile Indo Gulf Corporation and are comparable with that of corresponding periods of the current period.

    For the 2QFY04, good monsoons and value added services provided by the company to farmers have resulted in an increase in a strong increase in sales volumes of the company. The company managed to sell 3.66 lac MT of Urea in 2QFY04 as against 2.77 lac MT in 2QFY03. IGF has also benefited from concentration of its marketing efforts so that it coincides with the agricultural season. On the production front, IGF produced 1.9 lac MT as against 2.47 lac MT in 2QFY03. This was in view of the company’s planned annual shutdown taken in July 03 as it had a very high inventory level.

    While volumes went up, IGF’s margins suffered due to the implementation of the group concession scheme (GCS) of pricing. Under this scheme, IGF was classified with the pre-1992 gas based plants. However, since the company has to incur additional transportation cost for meeting its natural gas requirements as against some of the other plants in the group, which do not incur such cost, as they are located in the coastal regions, the margins were affected. The management has estimated this loss (due to implementation of GCS instead of retention price system) to be in the range of Rs 300 to Rs 400 per tonne. However, a 5% improvement in energy consumption coupled with the company’s strategy to sell at full price without allowing for rebates have pared some of the negative impact of GCS. Despite a drop in the operating margins, lower depreciation and taxation provisions and higher other income (treasury income) has helped IGF record a 31% growth in the bottomline.

    For the 1HFY04, although the company has reported a marginally negative topline growth (due to poor 1QFY04), operating efficiencies and various marketing initiatives undertaken have helped it record a 29% growth in the bottomline. Here again, the production was lower by 4% due to planned shutdown in 2QFY04.

    Going forward, in light of good monsoon reported across the country, agricultural production is expected to grow by 7.5%. The company is expecting the urea demand to grow by 4-5%. The fact that Government has asked urea manufacturers to increase production further substantiates the growth potential. Moreover, GCS has resulted in the closure of many smaller unviable units, thus giving growth opportunities to efficient units like IGF. In view of the various marketing and brand building initiatives undertaken by IGF, the company is likely to benefit immensely going forward. However, concerns remain in respect of clarity regarding the government policies. There is little clarity about the manner in which efficient plants like IGF will be rewarded during the second phase of GCS. Moreover, the issue of exclusion of transportation cost of input materials from total input cost also needs to be clarified.

    IGF has stated that it is exploring the possibility of expanding both organically (through brownfield expansion) as well as inorganically. The company sees growth opportunities in view of divestment of PSU fertilizer companies. At Rs 80, IGF is trading at a P/E of 4.5x its annualised 1HFY04 earnings. Given the positive outlook for the urea industry, in view of the good monsoons and the various marketing initiatives undertaken by the company, we remain optimist about the long-term prospects of the company. However, it is to be noted here that the company’s future performance will be significantly influenced by the vagaries of monsoon and government policies.



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