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IPCL: Other expenditure effect! - Views on News from Equitymaster

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IPCL: Other expenditure effect!

Nov 6, 2006

Performance summary
IPCL, a Reliance group company and petrochemical major, has declared its results for 2QFY07 and half year ended September 2006. Topline registered a growth of 18% YoY for the quarter and 17% YoY for 1HFY07. Margins witnessed expansions on account of lower other expenditure, which helped in offsetting higher raw material prices. Increase in other income coupled with decent operating performance led to 84% YoY growth in profit before tax in 2QFY07. However, higher tax outgo has restricted the bottomline growth to a modest 9% YoY. Further, during corresponding quarter previous year, there was a substantial extraordinary income to the tune of Rs 1.2 bn. If one were to exclude the same, then the bottomline performance improves by a significant 74% YoY.

Financial snapshot…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 25,880 30,480 17.8% 52,090 60,660 16.5%
Expenditure 21,270 24,110 13.4% 42,810 48,700 13.8%
Operating profit (EBDITA) 4,610 6,370 38.2% 9,280 11,960 28.9%
EBITDA margin (%) 17.8% 20.9%   17.8% 19.7%  
Other income 340 1,180 247.1% 740 1,800 143.2%
Interest 381 370 -2.9% 760 880 15.8%
Depreciation 1,400 1,350 -3.6% 2,830 2,670 -5.7%
Profit before tax 3,169 5,830 84.0% 6,430 10,210 58.8%
Extraordinary income/(expenses) 1,200 -   1,200 -  
Tax 1,150 2,320 101.7% 2,090 4,120 97.1%
Profit after tax/(loss) 3,219 3,510 9.0% 5,540 6,090 9.9%
Net profit margin (%) 12.4% 11.5%   10.6% 10.0%  
No. of shares (m) 301 301   301 301  
Diluted earnings per share (Rs) 10.7 11.6   18.4 20.2  
Price to earnings ratio (x)*         7.33  
* Based on annualised earnings for 1HFY07.
Note: To make figures comparable, the merged performance is considered.

What is company’s business?
IPCL is the second largest producer of polymer products (PP, PVC and PE) and has a market share of 27%. Polymers form a major portion of the topline (70%) and are expected to remain the same in the future. The company has been increasing its production of polymers on the back of strong prices and domestic demand. Together with RIL, which has a 46% stake, the company accounts for 70% of the petrochemicals capacity in the country.

What has driven performance in 1HFY07?
Volumes drove sales: Net turnover during 1HFY07 increased by 17%, driven by 10% increase in volumes and 7% increase in realisations. Domestic sales (accounting for 88% of the net turnover) grew by 17%, while exports registered a growth of 11% YoY. On the product front, the prices of polymers and fibre intermediate remained strong, while polyester product prices were lower. Domestic demand of polymers registered a meager growth of 1% on the back of high product prices. IPCL’s plant operated at full capacity during half year ended September 2006.

Lower provisioning boost margins: Consumption of raw material in 2QFY07 increased by 21% YoY as prices of gas, naphtha, and propane increased significantly. Also, the prices of APM gas were increased from US$ 3.86 per MMBTU (million metric British thermal units) to US$ 4.75 per MMBTU with effect from the current financial year. However, the cost of input in the quarter has declined compared to 1QFY07 prices. Employee’s cost registered a growth of 15% YoY in 1HFY07 due to performance linked incentive payment to the employees. However, the reduction in other expenditure was seen due to lower provisioning for excise duty on finished goods due to depletion of stock. Thus, lower provisioning helped offset the effect of higher raw material prices and helped the margins to improve.

Expenditure break-up…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Consumption of raw materials 13,120 15,930 21.4% 26,490 32,640 23.2%
as % of sales 50.7% 52.3%   50.9% 53.8%  
Staff cost 1,140 1,210 6.1% 2,260 2,600 15.0%
as % of sales 4.4% 4.0%   4.3% 4.3%  
Other expenditure 7,010 6,970 -0.6% 14,060 13,460 -4.3%
as % of sales 27.1% 22.9%   27.0% 22.2%  

Bottomline: Other income for the company increased by 247% during the quarter on account of interest income on surplus funds. However, the interest cost was on the higher side due to adverse exchange rate movements. Thus, improved operating performance due to lower other expenditure coupled with increase in other income led to significant growth in profit before tax. However, higher tax provisioning had a negative impact on bottomline growth. As mentioned earlier, in the corresponding quarter of the previous year, there was an extraordinary income to the tune of Rs 1.2 bn, which if excluded, will boost the net profit by 74% YoY.

(YoY) 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07
Net sales growth 9.6% 12.4% 11.2% -13.1% 21.8% 17.8%
Operating profit growth 27.5% 13.3% 7.6% -7.9% 22.7% 38.2%
Net profit growth 82.9% 119.6% 20.6% -25.9% 29.3% 9.0%
Operating profit margin 21.3% 20.4% -80.2% -78.8% 21.4% 20.9%
Net profit margin 11.3% 14.8% 10.6% 10.8% 12.0% 11.5%

What to expect?
At the current price of Rs 297, the stock trades at 7 times its diluted annualised 1HFY07 earnings. IPCL has recently concluded the merger of 6 polyester manufacturing companies with itself, resulting in forward integration. These subsidiaries are manufacturers of polyester staple fibre (PSF) and polyester filament yarn (PFY) which have feedstock in the form of Mono Ethylene Glycol (MEG). IPCL is a manufacturer of MEG and considering the global demand-supply dynamics of MEG; it is advantageous to convert MEG into higher value products rather than selling it off at an intermediate level. Softening of the prices of crude and its derivates are bound to help the company as the input cost formed 53% of net realisations in the current quarter. However, the softening of petrochemical prices will keep the margins in check. Any upside from volumes is also likely to be limited, as the plant currently seems to be operating at peak capacity.

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