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IPCL: Small base affect - Views on News from Equitymaster

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IPCL: Small base affect

Oct 29, 2002

As mentioned in our earlier reports, with operating profits barely covering for fixed costs, pre-tax profits of Indian Petrochemical Corporation Ltd. (IPCL) tend to exhibit significant volatility with turn in operating performance and/or changes in fixed costs. Higher operating profits and lower interest expense has led to sharp jump in pre-tax profits. Having said that, the company has restated first quarter excise figures for both years leading to smaller YoY degrowth in 1HFY03 net sales.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net sales 11,980 12,520 4.5% 22,980 21,080 -8.3%
Other Income 180 190 5.6% 450 280 -37.8%
Expenditure 9,690 10,000 3.2% 18,880 16,690 -11.6%
Operating Profit (EBDIT) 2,290 2,520 10.0% 4,100 4,390 7.1%
Operating Profit Margin (%) 19.1% 20.1%   17.8% 20.8%  
Interest 1,070 750 -29.9% 1,980 1,650 -16.7%
Depreciation 1,060 1,120 5.7% 2,100 2,240 6.7%
Profit before Tax 340 840 147.1% 470 780 66.0%
Extraordinary items 10 -   10 -  
Tax 110 390 254.5% 110 390 254.5%
Profit after Tax/(Loss) 240 450 87.5% 370 390 5.4%
Net profit margin (%) 2.0% 3.6%   1.6% 1.9%  
No. of Shares 249.1 249.1   249.1 249.1  
Diluted Earnings per share* 3.9 7.2   3.0 3.1  
P/E Ratio         19.4  

Growth in net sales for 2QFY03 has been facilitated by reduction in effective excise duty rate, which is most likely to have declined due to sharp rise in export sales. Exports for half year ended September '02 are higher by 83% YoY. Excluding exports, net sales for half year '03 is lower by 11.8% YoY indicating a challenging domestic operating environment. The company has indicated that polymers, which constituted an estimated 73% of net sales in FY02, registered negative demand growth in 1HFY03. Therefore, sale volumes, similar to first quarter, are likely to have declined. However, production has increased across the board leading to build up in inventory.

Turnover during the concerned periods has received support from higher realisations. Polymer and fibre intermediate prices have been increasing since beginning of FY03. For 2QFY03, polypropylene (PP) and poly vinly chloride (PVC) prices -- as declared by Reliance Industries (RIL) -- are higher by 13% and 18% respectively. However, chemical prices are likely to have remained weak. Operating margins are likely to have been further lifted by control over costs. Low commercial value in-house hydrocarbons are being used as fuel. That said, staff costs have risen considerably in 1HFY03. Going foward, efficiency enhancing measures by adopting scientific operations management techniques could support margins.

Other income has been impacted with cash flows under strain in the previous fiscal. Re-financing of high cost debt has contributed to lower interest expense. Also, IPCL re-paid foreign currency convertible bonds (FCCBs) amounting to $175 m (Rs 8.5 bn) in FY02.

At Rs 61 the scrip is trading on a multiple of 19x 1HFY03 annualised earnings. Commodity prices started exhibiting some buoyancy from 4QFY02 onwards. We reckon, the benefits of higher realisation are likely to continue to accrue to IPCL over the next two quarters, leading to sharp growth in bottomline.

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