• OCTOBER 29, 2001

Indo Gulf: Analyst Meet Notes

Indo Gulf has declared excellent results for 2QFY02. The company, which beat all expectations, seems to have done most out of worst environment. The secret of the success has been large-scale economies of scale, vertical operational integration and exploring new business opportunities.

From a company pre-dominantly focused on the fertiliser business, the company has now become a giant in the domestic copper industry, with more 50% share in the domestic markets. Huge cash generation from its core business helps the company in actively exploring further new avenues for growth.

The company has clubbed its revenues from Precious Metal Refineries (PMR) and DAP (Di Ammonium Phosphate) production with its copper division. Together this division contributes around 80% of the total revenues. A 38% rise in sales from copper division was fuelled by 42% growth in volumes.

Though, copper prices are reaching unremunerative levels, the world copper production is expected to increase more than 4%. Presently TC/RC charges are hovering at around US c 15/ lb mark in the spot market. Copper prices are currently hovering at around US$ 1,350/tonne on the LME. According to the company, copper prices are not expected to show signs of recovery in the near term. This is due to the fact that the copper inventory levels are at its highest in last decade. A recovery in the copper prices is expected only after first half of the next year.

In spite of a steep reduction in copper prices, Indo Gulf has managed to maintain its margins from this division. This is account of following factors.

  • Economies of scale:  Indo Gulf expanded its copper capacity by 50% to 1.5 m tonnes in the last quarter. This has created larger economies of scale reducing its cost of production.

  • Export Markets:  The Company derived 40% of its revenues from the copper business from export markets, especially the Middle and Far East markets. This was in the backdrop of a marginal export sale in 1QFY01.

    Copper Exports (In tonnes)1,5113,3725,00012,000

    The company believes that it enjoys a cost advantage for exporting to Far East countries in terms of transportation cost as it is the nearest sourcing point for these countries. The company also boasts of its own jetty facility, which helps in reducing costs further. On an average the company expects to save US$ 15-16/tonne on account of this savings.

  • Forward Contracts:  The Company uses a combination of Cash and forward contracts for copper business. This helps in avoiding volatility and at the same time taking advantage of any opportunity in the cash market. Currently, the company follows a conservative ratio of 85:15 (Forward/spot).

  • DAP Production:  Commencement of DAP production also contributed to better performance. According to the management, combination of fertilisers and copper business helps the company in reaping significant cost synergies. The DAP plant of the company utilizes sulphuric acid, which is a waste for the copper division. The company’s DAP product ‘Shaktiman’ sells at 8-10% premium over other products.

  • Precious Metal Refinery:  The precious metal refinery also runs from a waste product from copper ore. Higher copper production translated into higher production of precious metals.

    (In tonnes)1QFY012QFY011QFY022QFY02
    Production of Precious Metals 1361,0781,5621,524

The company expects that the government could announce the new fertiliser policy as early as December this year. If that happens, Indo Gulf would be one of the biggest beneficiaries, as it remains one of the most efficient producers of urea in the world. Besides, the company’s product ‘Shaktiman’ also enjoys considerable brand equity.

The company informed that it is exploring both organic and in-organic growth opportunities in its core area of business. It might also consider further increasing its copper capacity. The company has also informed that it has expressed interest in Hindustan Copper and Hindustan Zinc, which are up for divestment on the government’s list.

The company has to a large extent managed to escape the slide in copper prices. However, going forward the fortunes of the company are directly linked to copper prices. The stock currently trades at Rs 33, discounting our projected earnings for FY02 by 2.4x. In last 5 years, the stock has given a dividend yield in the range of 6-8%.

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