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IPCL: Cyclicality blues - Views on News from Equitymaster

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IPCL: Cyclicality blues

Nov 8, 2001

The performance of Indian Petrochemicals Corporation Ltd. (IPCL), over the past three quarters, has been reflecting the steady deterioration in the health of the economy and more so that of the petrochemical sector. Performance for quarter ended September '01 has further weakened exhibiting the increased difficulty in operating environment.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Sales 14,610 11,991 -17.9% 25,286 22,983 -9.1%
Other Income 314 328 4.4% 591 597 1.0%
Expenditure 11,642 9,838 -15.5% 20,014 19,022 -5.0%
Operating Profit (EBDIT) 2,968 2,153 -27.5% 5,272 3,961 -24.9%
Operating Profit Margin (%) 20.3% 18.0%   20.9% 17.2%  
Interest 1,323 1,066 -19.4% 2,526 1,977 -21.7%
Depreciation 1,048 1,066 1.7% 2,072 2,105 1.6%
Profit before Tax 911 349 -61.7% 1,266 476 -62.4%
Tax - 110   - 110  
Profit after Tax/(Loss) 911 239 -73.7% 1,266 366 -71.1%
Net profit margin (%) 6.2% 2.0%   5.0% 1.6%  
No. of Shares (eoy) 249 249   249 249  
Diluted Earnings per share* 14.6 3.8   10.2 2.9  
P/E Ratio   10.6     13.8  

The reduction in sales YoY for 2QFY02 is largely due to an estimated 7.8% drop in volume and an 11% erosion in realisations. Sales in the first quarter of the current fiscal rose by 3% on the back of a 10% rise in sale volumes. For half-year fiscal '02, the damage is on account of poor realisations. Production and sale numbers of IPCL are concerning, as industry production growth of polymers for 1HFY02 was 16%. Demand too is estimated to have grown by a healthy 15% during this period. Key polymer product prices have decline by 6-16% YoY in 1HFY02.

Higher industry production reflects stabilisation of fresh capacity and the consequent ramping up in operating rates. Drop in IPCL sale volumes and a corresponding increase in industry demand indicates a loss in polymer marketshare. A large chunk, especially of the Eastern market, is likely to have been captured by Haldia Petrochemicals Ltd.

Also, reflecting lower production is the decline in operating expenses. Steady oil prices during quarter ended September '01 combined with a weakening global economic environment led to softening in naphtha and natural gas prices, the key petrochemical ingredients. Lower raw material costs has helped in taking some of the heat off operating margins. Raw material and other expenses constitute 87% of total expenditure. Nevertheless, a sharper fall in final product prices compared to feedstock prices and reduced volumes has eaten into operating margins. OPM is down by 230 and 370 basis points for the quarter and half year ended September '01. This has contributed to the sharp slide in operating profits.

Interest expense continues to decline, as the company executes its policy of re-financing high cost debt with low cost borrowings and re-payment of loans. At start of the fiscal, IPCL indicated repayment plans of Rs 2.8 bn in high cost debt. Also, at the end of FY02 convertible foreign commercial borrowings amounting to $175 m are to mature. There are not expected to be any conversions to equity due to the depressed stock price. The company will have to arrange for cash. This could be keeping any big-ticket capex on the back burner.

Tax provisioning includes deferred tax liability, which has further pulled down the bottomline. Upto last year the company was providing for tax at the end of the fiscal. Cumulative deferred tax liability will be provided at the end of the current financial year.

With the capacity augmentation phase completed the company plans to enters the 'business process improvement' phase. Bottomline growth is likely to be extracted from increased sweating of assets (higher capacity utilization), benchmarking manufacturing practices -- operational efficiency, product quality and marketing. In this respect, a Rs 1bn IT initiative is in the pipeline. The company had indicated earlier it's plans for streamlining the supply chain to derive better working capital efficiency.

At Rs 41 the IPCL stock is trading on a multiple of 13.8x 1HFY02 annualised earnings. Reliance Industries (RIL), the market leader, is trading on a multiple of 10.2x 1HFY02 annualised earnings. The rich valuations accorded to IPCL could be due to the expectations of disinvestment rising. In fact, as per latest reports, fresh bidding is likely to be invited for IPCL, which is to be approved by the Cabinet Committee on Disinvestment.

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