Indo Gulf : 2QFY02, above expectations

Indo Gulf, has declared excellent performance for 2QFY02. Both sales and net profits have jumped by 30%. Operating margins have remained stable at 22% inspite of a sharp fall in copper prices. Profit before tax leapfrogged 60%. However, thanks to new accounting policy on deferred taxation, net profits have risen by only 30%. Overall the performance of the company is much above expectations.

Of the total revenues of Rs 694 m, copper business accounted for more than 80% of the total revenues. The company commenced an additional 0.5 m tonne copper capacity in the second quarter, which has led to a sharp rise in volumes. However, what is surprising is that the company seems to have maintained its operating margins even in the backdrop of a sharp fall in copper prices (and TC/RC charges). Copper prices are currently hovering at around US$ 1,360/tonne against US$ 1,850 in October last year. The company seems to have smartly entered into forward contracts in the beginning of the year, sensing a slide in copper prices.

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. The revenues of this business seems to have been merged with the copper business.

On the fertilisers front, the company now has two revenue streams viz, Urea and DAP (Di-Ammonia phosphate). The profitability of Urea continues to be affected by arbitrary interim reduction of retention price by the government. Again the government has also restricted the production quantity of urea. However, the outlook for DAP is good considering international demand revival and stable prices. The company is exploring export opportunities for both Urea and DAP to increase profitability from the fertiliser division. The company remains most efficient producers of urea in the country and would be a big beneficiary of urea de-control as and when it happens.

The current performance of the company is par excellent. However, copper prices are not likely to pick up in the near term and therefore could considerably impact the company’s profitability. Though the company seems to have escaped the sharp slide in copper prices in the current quarter, the fortunes of the company going forward are now directly linked to revival in copper demand. At the current market price of Rs 33, the stock trades at 2.4x our projected earnings for FY02.