Balmer Lawrie: Stable and Able

A cash-rich business with strong growth record makes Balmer Lawrie an interesting long-term investment idea

Beta 0.89
Institutional holding 18.65%
Dividend Yield 4.5%
P/E 6.7
M-Cap Rs 728.5 cr
CMP Rs 447.2

THE Rs 730-crore Balmer Lawrie (BLL), a staterun unit with mini-ratna status, is a mid-cap with long-term promise. Headquartered in Kolkata, BLL is a debt-free company with rising dividends every year. It has a healthy record of sales and profits growth, which makes it an ideal investment candidate for long-term investors.

Business:
BLL operates in eight distinct strategic business units including industrial packaging, greases & lubricants, logistics services, engineering & technology, logistics infrastructure, travels & tours, leather chemicals and tea. The company is India’s largest producer of metal drums used in packaging chemicals and lubricants. Travel & tours services bring in the major share of revenues, while the logistics services account for the highest profits. The company has a wholly-owned subsidiary in the UK carrying out logistics business. Balmer Lawrie Investments (BLIL), which is 59.67% owned by the government of India, holds a 65.7% stake in the company. It was created in 2001 with a view to divest the government’s stake in Balmer Lawrie. The new UPA government, which is considering selling stakes in profitmaking PSUs, may look at BLL as a divestment candidate as it is a non-core, but profitable, public sector firm.

Growth Drivers:
Balmer Lawrie is a debt-free, steadily growing company with strong presence in all the industries in which it operates. The company has plans to grow inorganically by acquisitions in the areas of travels & tours and logistics and has a budget of Rs 100 crore for this. During the past five years, the company has grown at a cumulative annual growth rate of 12.6% at topline to Rs 2,007 crore for the year ended March 2009, with the PAT growing at a CAGR of 28.8%. BLL has a strong track record of paying dividends, and during the period its dividend payout has increased at a CAGR of 41.7%

Financials:
The global financial slowdown hasn’t left Balmer Lawrie untouched. Its operating performance stagnated in FY09 and the net profit was propped up by a spurt in nonoperative income. Revenues went up 13.7% in FY09 at Rs 2,007 crore and profits grew by 9.3% to bring in Rs 109 crore. The services sector did well during the year with travels and tours posting 19% growth and logistics services growing at 21%. Both these businesses posted healthy improvement in profits as against a fall in profit for manufacturing businesses such as industrial packaging and lubricants. With established businesses and very low annual capex, the company has maintained its return on employed capital to beyond 40% for last four years.

Valuations:
The company’s current market capitalization of Rs 728.5 crore is just 6.7 times its annual profit of the year ended March 2009, out of which Rs 150 crore is represented by cash equivalent. The dividend yield works out to 4.5%. We expect the company to post an EPS of Rs 77 in FY10, which discounts the current market price by 5.7 times.

Green Shoots

In a bid to improve farm yield, the investment in agriculture has been on a steady rise globally reviving the fortunes of farm-input companies. ETIG’s Ramkrishna Kashelkar and Kiran Kabtta Somvanshi advise the long-term investors to add a few such stocks to their portfolio

“AGRICULTURE is the best, enterprise is acceptable, but being on a fixed wage is a strict no-no,” thus goes an old Indian proverb. odern India has turned that adage on its head, and in an economy that’s set to overtake China as the world’s fastest growing, a high fixed wage is acceptable, enterprise is preferred, and agriculture, well, seems eminently avoidable. However, a grain crisis that erupted in the last few years has reinforced how central food security is to an economy, developed or emerging. The reality has dawned on policy makers that high food prices will cripple every other sectors of the economy, as consumers, struggling to put food on the table, tighten their purse strings on every other non-essential product. The world is today consuming more than what it makes, and massive farm-to-fuel programmes are limiting the available farmland for foodgrains. This practice is now under review in many countries ranging from the corn belt of the US to the sugar cane farms of Brazil. Back home, the government’s investment in agriculture has grown steadily over the years and a boom in agri-commodity prices in the last couple of years means that the farmers are in a better position today to make long-term investments. For a long-term investor this is a good sign to invest in companies that supply key inputs to the agriculture industry. In view of this, ET Intelligence Group has cherry picked firms that could benefit from the rising demand for farm inputs and agricultural infrastructure. While the valuation of these stocks provides scope for appreciation, they could prove defensive bets in times of turmoil due to strong demand from agriculture segment. Food, after all, is a recession-proof business.

GROWING GOVERNMENT INVESTMENT
The direct government expenditure in agriculture has seen a sharp rise over last five years enabling better farm credit and creation of support infrastructure like irrigation (See chart). As a result, over last few years India has seen a spurt in the capital formation in the agriculture sector including initiatives such as irrigation projects, rural roads and communication infrastructure, sales and marketing infrastructure, production of fertilizers and pesticides, agricultural education, research and development of agricultural technology. Schemes like National Rural Employment Guarantee Scheme (NREGS) are also instrumental in improving the infrastructure in the rural areas.

THE GLOBAL SCENARIO IS CHANGING
Under the Renewable Energy Directive (RED) passed by the EU Parliament in January 2009, bio-fuel blending of 5.75% is envisaged by 2010 to be scaled up to 10% by 2020. In the US the ethanol consumption is set to quadruple to 36 billion gallons by 2022. In India also, the government has mandated a 5% ethanol blending to be raised to 10% next year. All this is necessitating the world to invest more in improving farm yields. This needs optimum usage of pesticides, farm nutrients including fertilizers, creation of infrastructure such as irrigation, warehousing and transportation and usage of automated processes from tilling to harvesting. Over the last few years, consumption of food grains has risen faster than the growth in supply. Although the higher foodgrain production in 2009 has assuaged the fears about immediate food scarcity, long-term worries remain. Most of the agrocommodities witnessed a sustained rise in prices in the last couple of years, which are currently at nearly double their 2001 prices. These factors reinforce a sustained rise in the demand for the farm inputs in the years to come. In fact, after a sluggish spell of five years, for the first time in FY09 the agrochemicals industry worldwide witnessed a robust double-digit growth. Similarly, India’s fertilizer industry, which was stagnating till FY04, has picked up growth in the last five years. India’s fertilizer consumption, which rose at a CAGR of just 0.6% from FY98 till FY04, jumped to a CAGR of 5.6% subsequently. For FY08, the country consumed over 20.9 million tonne of three major farm nutrients viz. nitrogen, phosphorous and potassium. Five years back, the corresponding figure was 17 million tonnes. The Potential Winners THESE visible trends are expected to benefit the following companies. Most of those in these industries viz. agrochemicals and fertilizers are trading at price-to-book-value multiple of around 2 and price-to-earnings multiple in a single digit figure. United Phosphorous is India’s largest pesticides manufacturer with over half its revenues coming from overseas markets. Over the last few years, the company has expanded its geographical footprint through a series of acquisitions, thereby safeguarding itself from the monsoon-led seasonal fluctuations in Indian market. Rallis India, which is part of the Tata Group, is another strong contender from the pesticide sector. It is one of the leading players in the domestic market and has seen turned around in the last 5 years and is now on a strong growth footing. The company is making targeted efforts to grow its exports, expand capacities and introduce new products periodically to sustain future growth. Tata Chemicals is one of India’s leading manufacturers of urea and di-ammonium phosphate (DAP), with nearly half of its revenues coming from fertilisers. The company has recently expanded its urea capacity by 25% through debottlenecking, which is fuelled by natural gas. Chambal Fertilisers is India’s largest urea producer in the private sector with a capacity of 1.73 million tonnes per annum. The company, which saw its profits wilt between FY05 and FY07, has recovered subsequently. Coromandel Fertilisers, which is part of the Murugappa group, is India’s leading manufacturer of phosphatic fertilisers. RCF, the government-owned fertiliser company, was stagnating between FY99 and FY04, but has picked up steam over last few years. The supply of natural gas is expected to keep it firmly on the growth path in the years to come. Although all the fertiliser companies in India today market micronutrients and water soluble fertilisers to the domestic farmers, Aries Agro is the only listed company fully focussed on this niche business. The demand for these essential soil-enriching products is expected to rise at a double-digit rate in India in coming years. Companies in the production of seeds, one of the key agri inputs, also have good prospects. Advanta India, which shares its parentage with United Phosphorous is India’s leading seeds producer, with global operations in seeds and leadership position in crops like sunflower, sorghum and sweet corn. This company, too, has been on an acquisition spree, acquiring Hyderabad based Unicorn Seeds and US based Garrison and Townsend in 2008 to expand product portfolio and geographical reach. One of the largest areas of public expenditure in agriculture is on irrigation projects. Companies like Patel Engineering and IVRCL Infrastructures and Projects have bagged some of the largest irrigation projects in the country. Any incremental spending in this area is likely to be positive for such companies. Companies like Jain Irrigation, the manufacturer of pipes, irrigation systems and such other farm equipment; Kirloskar Brothers, the manufacturers of pumps and pumping systems and Mahindra & Mahindra, one of the world’s largest tractor manufacturer are the obvious contenders to benefit once a boom sets in in the farm sector. DCM Shriram Consolidated with business interests in sugar, fertilizers & chemicals, seeds and rural retailing (through Hariyali kisan retail stores) is also a good bet due to its varied businesses being closely associated with the farm sector.

CONCLUSION
A widening demand-supply gap and consequent high prices are helping the agriculture industry the world over to hike its ability to investment in the future. In India, the government-lead efforts have provided the necessary impetus to the domestic agriculture industry. These trends are likely to strengthen in the years to come as the food demand continues to grow in line with the global economic growth. The struggle to extract more out of the same piece of land year after year is set to generate more demand for various types of farm inputs, which augurs well for the producing companies. Long-term investors must include these stocks in their portfolios.

ONGC: Fall in output, lower realisations hit profit

FALL in output and lower realisations dragged ONGC’s profit in the final three months of 2008-09 to its lowest level in the fiscal despite a sharply reduced subsidy burden.
India’s largest oil explorer turned in results, which were below market expectations, hurt also by a drop in other income and a one-time provision of Rs 860 crore towards a legal dispute with the government over sharing of revenue. The ONGC stock gained 2.5% to Rs 1,051 on the BSE on Wednesday, while the benchmark Sensex rose by 0.7%.
Net profit for the March quarter fell by 16% to Rs 2,207 crore on a 12% fall in net sales to Rs 13,834 crore. ONGC’s production for the quarter, including the output from joint ventures, was 6.8% lower at 6.48 MT. Discounted fuel sales to petroleum retailing companies fell substantially to Rs 852 crore. However, for the full fiscal, the subsidy burden was 28% higher at Rs 28,225 crore. ONGC continued to be India’s top profit-making listed company in FY09, posting a consolidated net profit of Rs 20,117 crore. After adjusting for minority interest, it was Rs 19,752 crore, only marginally higher than last year.
The company’s consolidated performance for the year was aided by its wholly owned overseas arm ONGC Videsh. The subsidiary, which has 40 projects in 16 countries, benefited from higher crude oil prices in the first half of the year. OVL’s profit for FY09 grew 19% to Rs 2,853 crore on sales growth of 9% to Rs 18,503 crore. OVL’s production for the year, however, stagnated at 8.8 million tonne of oil equivalent.
Although the state-run oil marketing companies raised their dividends in FY09, ONGC has maintained its payout at last year’s level of Rs 32 per share. This will amount to an outgo of Rs 6,844 crore and including the dividend distribution tax, it will take away half of ONGC’s standalone annual profit.

ONGC FY09 net may cross Rs 20k cr

Fall In Subsidy Burden & Weak Re To Lift Bottomline In Q4

INDIA’S largest petroleum producer ONGC is expected to post a substantial rise in profits for the fourth quarter of FY09 helped by a sharp fall in its subsidy burden and a weak rupee. The analysts expect the fourth quarter standalone profits to jump 45% to Rs 3,800 crore.
ONGC, which publishes its results on Wednesday, could emerge as the only listed Indian company to report over Rs 20,000 crore in consolidated annual profit in FY09. During the first nine months, ONGC’s net profit was 1.1% lower at Rs 13,920 crore compared with the year-ago period.
The company’s contribution to oil marketers, compensating them for selling fuel at subsidised rates, had more than doubled in the first nine months of 2008-09 to Rs 27,400 crore. This is expected to have come down by 90% to around Rs 850 crore in the January-March 2009 quarter. However, ONGC’s net realisation after subsidies in the fourth quarter is estimated at around $45 per barrel, 15% lower compared with the year-ago period.
But the 25% decline in the value of the rupee last fiscal year against the US dollar will help offset the impact of the dollar-denominated fall in ONGC’s net realisations.
“We expect ONGC’s consolidated net profit for FY09 to remain flat against last year. The company’s production is likely to fall and net realisation for the fourth quarter is estimated at $43.7 per barrel. Although we don’t expect any surprises in its subsidiary OVL’s numbers, the rupee depreciation during the year will prove to be a big positive for the company,” said Amitabh Chakraborty, president equity, Religare Capital Markets.
The company, which has been adding to its petroleum reserves through discoveries and an acquisition, has seen its production stagnate over the years. During the March 2009 quarter, ONGC’s crude oil production fell by 6.5% to 6.03 million tonne, although gas output improved by 3% to 5.5 billion cubic metre. For the whole year, ONGC’s standalone oil production is estimated 2.2% lower at 25.4 million tonne. Since the company has to sell its gas at a loss under administered prices, higher production of gas is unlikely to add to its profits. ONGC has since long been asking the government to revise upwards the price of natural gas it sells at a loss under administered prices.

FIGURE WATCH
Analysts expect Q4 standalone profits to jump 45% to Rs 3,800 cr For the first nine months, ONGC’s net profit was 1.1% lower at Rs 13,920 cr Co’s contribution to oil marketers had more than doubled in the first nine months to Rs 27,400 cr

Gail - Aiming higher

Although freed from the subsidy-sharing burden, Gail’s last quarter profits took a hit from a sudden spurt in exploration costs. India’s largest natural gas transporter reported a 13% reduction in its fourth quarter profit to Rs 630 crore after a 24% improvement in net sales to Rs 6,104 crore. The company wrote off Rs 126 crore during the quarter towards expenditure on dry wells in its exploration efforts. Although the drilling activity began at eight of its E&P (exploration and production) blocks during the year, only one discovery was made. For the whole year FY09, the company reported an 8% increase in its PAT to Rs 2,804 crore, on the back of a 32% increase in net sales at Rs 23,776 crore. The healthy performance was despite a 36% higher LPG subsidy of Rs 1,781 crore. The company has proposed a final dividend of Rs 3 per share for FY09 in addition to the interim dividend of Rs 4 per share already paid. In FY09, the company sold 14% more natural gas at 79.1 mmscmd (million metric standard cubic metres per day). The higher volumes as well as increased price helped it post a 45% jump in its revenues from the segment to Rs 18,308 crore. The segment’s profits jumped 70% to Rs 348 crore. Gail plans to improve its natural gas sales volumes by 5% to 83.2 mmscmd in FY10. The natural gas transmission business, which is the largest contributor to the company’s profits, grew 10% to Rs 2,482 crore in FY09 as the volumes transmitted rose 1.5% to 83.3 mmscmd. The profits from the segment were 8% higher at Rs 1,598 crore. The company plans a 14% jump in the natural gas volumes transported in FY10 to 94.8 mmscmd. Gail plans to invest Rs. 5,558 crore during FY10 with over 70% to be invested in pipeline projects. The company’s E&P projects would need around Rs 650 crore, Rs 285 crore will be invested in petrochemicals, Rs 130 crore in business development, Rs 250 crore in city gas projects, Rs 200 crore in Ratnagiri Power Company and the rest in telecom. Although the prospects appear bright for the company, the regulations issued by the Petroleum and Natural Gas Regulatory Board (PNGRB) could become a cause for concern. As per these regulations, the natural gas pipeline tariff being charged by the company for its pipeline networks in operation is subject to revision with retrospective effect. In case of a substantial revision, the company’s future profits could suffer.

The Trickle Down Effect

The spurt in crude oil prices may lead to a rise in costs for India Inc. But it is not always such a bad thing, says ETIG’s Ramkrishna Kashelkar

THE latest inflation numbers might have fallen below the ground zero, but that does not change reality. The prices of commodities, food articles and energy are on a steady rise. Obviously, you couldn’t expect to see a different picture after experiencing the roller coaster ride in crude oil prices. Within just four months, the crude oil prices have more than doubled from their lows of February 2009 – faster than even last year when the crude prices touched historic highs. While the crash in crude oil prices marked a plunge in consumer confidence and contraction of economic activity the world over, the reversal does indeed signal a change in mood. However, when a commodity like crude oil changes gears so fast, the impact goes far beyond just changing moods. Crude oil is the world’s largest traded commodity and almost everything used in modern day life from pin to piano can be traced back to it, some way or the other. In 2008, the crude oil averaged $100 per barrel, while the world consumed 85.8 million barrels every day. At this rate, the world’s total expenditure on crude oil was more than thrice India’s GDP in 2008. It is no wonder that the industry using crude oil as a direct input is always the one to take the first hit when the oil prices fluctuate so fast. The petroleum refining industry, which was making merry in the June 2008 quarter when oil prices were on a rise, incurred heavy losses in the September and December 2008 quarters as the prices crashed. The impact, however, goes even deeper to the further downstream industries such as petrochemicals and polymers.

THE CRUDE IMPACT

The rising crude oil prices affect companies in two ways. It increases thee fuel cost for some, while for others it simply raises the feedstock costs. Although the availability of natural gas is fast increasing in India, a number of companies use liquid fuels derived from crude oil for their energy needs, either due to lack of availability of natural gas or lack of connectivity. RCF’s liquid fuel consumption in FY2008 was Rs 1712 crore or nearly 4.3 times its operating profit for the year. The company has long been suffering from insufficient natural gas to run its plants at optimum level. It had consumed over half-a-million tonne of naphtha in FY08 alone. Although the company’s fuel consumption figures for FY09 are not available yet, it will save a chunk of that cost in FY2010 thanks to 3 MMSCMD of gas it is now getting from RIL. Several companies – particularly in southern India – are yet to find pipeline connectivity to avail natural gas in the near future. The spurt in crude oil prices will continue to haunt companies such as Tamilnadu Petroproducts, SPIC, Mangalore Chemicals and FACT.

LOGISTICS

For the logistics industry, the liquid fuels derived from petroleum crude oil form the basic raw material and they have very little scope of replacing it with natural gas. The players in this industry will be at the receiving end of a rise in petroleum prices. The fuel cost of Jet Airways jumped over two-and-a-half times in the first half of FY2009 to nearly Rs 3200 crore or half of its revenues for the period. With the crude oil prices falling subsequently, the company cut its fuel costs by around 25% in the second half. Still, for the whole year, the company’s fuel bill was a staggering Rs 5850 crore or 44% higher against last year. The shipping and courier industries also witnessed a similar trend in FY09. Other expenditure, where their fuel costs are accounted for, bulged in the first half and eased in the second. The slowdown in traffic, due to the global economic slowdown, added to the woes of this industry.

PETROLEUM AS A FEEDSTOCK

Apart from being a major source of fuel, crude oil also accounts for chemicals used in various colours, fragrances, plastics and yarns, and as additives to boost the characteristics of other materials. Since crude oil is the common factor, a rise in crude prices lends a natural push to the prices of the dependent industries. However, it would be wrong to assume that a fall in crude oil prices would help these industries — petrochemicals, manmade fibres, rubber and tyre, plastic products etc — by reducing their raw material costs. In fact, historical analysis shows that their operating margins improve when the crude oil prices move up. (See the adjoining Chart). When the crude oil prices were hitting their bottom in the December 2008 quarter, these players reported their worst ever performance for over 20 preceding quarters. Most of them wrote off hefty inventory losses. Turnover suffered as customers postponed purchases in view of falling prices. The movement in the prices of these downstream petrochemicals and polymers also depend on the demandsupply dynamics. For example, basic petrochemicals such as ethylene and propylene gained around 25% since February this year despite the crude oil price doubling. The polymers derived out of these chemicals such as polyethylene and polypropylene have gained around 40% during the same period.

PLASTIC PROCESSORS

The plastic processing industry is at a peculiar juncture. As a number of new polymer production facilities are added in West Asia and China, the availability of polymers is set to go beyond its demand. Most upcoming projects in the West Asia are based on natural gas as feedstock, which is available abundantly and cheap there.

HIGHER COST OR BETTER MARGINS

This could put the polymer prices under pressure in the years to come. At the same time, these low prices could induce replacement of metal products by plastic products. Thus, the plastic processing industry is likely to benefit both ways, by a reduction in raw material costs and a steady growth in demand over the next couple of years.

MARCH 2009 PERFORMANCE

The stability in crude oil prices helped Indian industries to recover in the March 2009 quarter from the debacle of December 2008 quarter. Our sample of 79 companies, representing petrochemicals, plastic products, rubber and tyre and synthetic fibres industries, showed a substantial improvement and this pushed the operating margins back to levels seen in good times. The petrochemical companies have displayed the best turnaround, while synthetic textiles industry experienced only a marginal improvement.

OUTLOOK

The reversal in crude oil prices has renewed the confidence among investors and is also likely to contribute to an improvement in the quarterly performance of India Inc. For one, the industry will not suffer any losses on inventories and the appreciation in rupee will prevent foreign exchange losses. The logistics industry should continue seeing pressure on margins before the traffic picks up. However, manufacturing companies from petrochemicals to plastics are likely to witness an improvement in performance when they announce their June 2009 quarter numbers.

Ruling won’t show on RNRL’s books yet

Benefits Seen Accruing Only In Four Years As Plant Will Take Time To Take Shape

WINNING the court case against Reliance Industries (RIL) has been a great positive for Reliance Natural Resources (RNRL) on the bourses. However, it is not yet clear as to when it will translate into revenues and profits for the company. Firstly, there is a high probability that the matter will be dragged to the Supreme Court. Further, RNRL — or its group companies for that matter — do not yet have a gas-based power plant in operation.
This means, even if it can get the gas at a discounted price, it can avail of the benefits only in the long run. Given the long gestation period of the power plant from conception to commissioning, this could well extend to four years.
The favourable verdict lends better visibility to Reliance Infra’s gas-based ultra mega power plant (UMPP) at Dadri, which is under construction. The plant, which was originally planned with a 3,750-mw capacity, was later scaled up to 7,450 mw. The first phase of the gas-based power project comprising 1,400 mw is likely to be operational by mid-2010.
The Dadri project, which was planned before the split of the Ambani brothers, has received most approvals, including an environmental clearance and water linkages. ADAG is also in possession of more than 2,000 acres at the project site. However, the lack of clarity on fuel supply had kept it from achieving a financial closure.
The 28 million metric cubic meters of natural gas per day (MMSCMD) from RIL will be sufficient to produce around 6,250 mw of power.
In January 2009, the empowered group of ministers (EGoM) had assured supply of natural gas for the Dadri project once it was ready to begin operations. “This is without prejudice to the court case and subject to availability of gas,” the government counsel had told the Bombay High Court during one of the hearings of RIL-RNRL case.
“This is a zero-sum game. The gains for ADAG group will be equal to RIL’s losses. On a full-year basis, RIL is set to lose around Rs 3,500 crore supplying 28 MMSCMD of gas at $2.34,” commented SP Tulsian, an independent equity advisor. “However, the clarity is lacking on when RIL is supposed to start supplying gas to RNRL,” he added. Thus, although the market is sharing the jubilant mood in the ADAG Group today, it is unclear when the ground reality will get any better

WAITING FOR A FRESH BREEZE

While oil marketing companies are back to selling fuel at a loss due to high crude prices, private oil companies appear to be better bets compared to their statecontrolled counterparts

WITH the recession pulling down oil demand, the petroleum refining industry globally has entered a cyclical downturn and is expected to remain depressed over next couple of years. Also, the oil marketing companies in India are once again selling fuel at a loss as crude prices have crossed $70 mark.
It is only the petroleum producers, who are making money. There again, Cairn’s oil production from Rajasthan fields is held up in uncertainty over pricing and taxation, while Reliance Industries’ gas continues to remain embroiled in court cases. The fate of the industry, which is investing heavily for its future growth, clearly depends on several policy decisions.

OIL MARKETING COMPANIES
State-controlled oil marketing companies Indian Oil, BPCL and HPCL, which were in a soup with over Rs 11,000 crore of accumulated losses in the first nine months of FY09, turned around in the fourth quarter.
Weak oil prices helped them not only wipe out the accumulated losses but also end the year in profit. A talk of the government allowing these firms some freedom in determining the retail prices of petroleum products has boosted their stock prices too.
But the companies are stressed. Lack of liquidity forced the three firms to borrow heavily last year and their annual interest cost jumped almost three times to more than Rs 8,700 crore.
One reason for this was delayed arrival of the special oil bonds from the government. In fact, the government is still to issue Rs 10,000 crore of bonds, out of the Rs 71,300 crore promised for FY09.
Despite the pressure on cash flows, the companies increased their dividend payouts over the last year by an average of 47%, further straining their cash position.

STANDALONE REFINERS
The standalone refiners witnessed huge jump in profits in the first quarter of FY09 due to a spurt in petroleum prices, only to see steep losses in the second and third quarters as the prices plummeted. The price stability in the fourth quarter returned the players to profits.
However, the accumulated losses of the previous quarters made Chennai Petroleum and Essar Oil close the year in red. India’s largest corporate Reliance Industries and ONGC’s subsidiary Mangalore Refinery (MRPL) reported profits for the year, which were lower on y-o-y
The boom phase for the refining industry, from FY04 to FY08, came to an end as industry entered a cyclical downturn. The refining margins in FY09 were lower for all the players.
With a number of new projects being
commissioned around the world and the demand remaining depressed due to the economic slowdown, the refinery margins are expected to be under pressure till a global recovery.
According to the latest estimates by International Energy Agency, the refinery utilisation in the member countries of the Organization for Economic Cooperation and Development (OECD) stood around 80% in March 2009 compared to 84% a year earlier.
India too, meanwhile, is adding to its refining capacity. Reliance commissioned its 580,000 barrels-per-day refinery in March. Other prominent projects include HPCL’s 180,000 bpd Bhatinda Refinery by 2011, BPCL’s 120,000 bpd refinery in Bina by 2010, Essar Oil’s plan to add 110,000 bpd capacity by end 2010, Indian Oil’s 300,000 bpd Paradip refinery by 2012 and ongoing expansions at other Indian Oil refineries and MRPL.

PETROLEUM UPSTREAM
ONGC, India’s largest petroleum producing company, is yet to publish its fourth quarter results. The discounts it had to extend on sale of crude oil to oil marketing companies have forced a drop in its profitability in the first nine months of the FY09.
The recovery in the crude oil prices since
April this year bodes well for the company, which has lined up big investments for the next five years in developing new fields and maintaining production from its ageing fields.
At the same time, the proposed petroleum sector reforms may make the subsidy sharing process transparent and may also raise the price at which ONGC sells natural gas. Both these developments would be positive for the petroleum behemoth.
Cairn India’s development work in its Rajasthan fields progressed well during the FY09 with the company readying the first train to begin production at 30,000 barrels per day (bpd). Another 50,000 bpd capacity will be added by end of 2009 to be augmented by a further 50,000 bpd by June 2010. With the construction of the fourth train in 2011, the company plans to achieve the plateau rate of 175,000 bpd. However, the company has so far not commissioned the production despite the facilities being in place. Although the customers for its crude have been identified, there are differences over pricing. Similarly, the payment of royalty and cess remains a point of contention between Cairn and ONGC, which owns 30% in the project. At the same time, since the pipeline to evacuate the crude oil is not in place, Cairn will have to spend $7-10 per barrel extra on trucking it to the Gujarat coast. In comparison, the other major exploration and production (E&P) project - Reliance’s D6 block in the KG basin - has done much better by starting production from April 2009, despite being embroiled in legal hassles. With the evacuation infrastructure in place, the natural gas from the east coast is now being shipped to various fertiliser and power producers. The production, which started at 15 million metric standard cubic meters per day (mmscmd), has been scaled up to around 26 mmscmd and will reach 40 mmscmd by end of June 2009, to be further raised to 80 mmscmd by end of the year.

CONCLUSION
The current valuations of most Indian petroleum companies appear expensive considering that the fate of the government-owned players remains strongly linked to policy changes. Amongst the lot, ONGC’s chances of obtaining a higher price for its gas appear bright. The long-term investors may, however, consider private companies in the sector, preferably on dips. The sale of natural gas and doubling of refining capacity are expected to improve Reliance’s profits substantially. Cairn and Essar Oil too will see their profits improving once their capitalintensive projects start paying off.

Cosmo Films: Synergy Gains

Cosmo Films (CFL) went on to complete the acquisition of US-based GBC Commercial Print Finishing, the thermal lamination division of ACCO Brands Inc for $17.1 million, which was announced in January ‘09. The company will be spending around $5 million more on its turnaround.
GBC has three plants in the US, Netherlands and Korea with a combined laminated film capacity of 15,000 tonnes per annum. With this acquisition, CFL’s laminated film capacity rises to 36,500 tpa and it emerges as the global leader in thermal laminates.
GBC’s turnover for ‘08 was around $100 million, however, without any operating profit. CFL will have to rationalise the manufacturing and cut down overheads to turn it around. The company currently exports from India identical products in same geographies as GBC, hence the acquisition will give it better synergies.
CFL, which is carrying around Rs 260 crore of debt, will raise another Rs 70 crore of debt to fund the acquisition. The company, which has recently added 35,000 tpa of BOPP film capacity, taking it to 91000 tpa, has plans to add another 35,000 tpa by early next year. This envisages an investment of Rs 120 crore. For the year ended March ‘09, CFL reported a consolidated net profit of Rs 74 crore on a turnover of Rs 633 crore. However, the net profit included a write-back on change in depreciation method, of Rs 45 crore. Excluding the tax impact on this extraordinary item, the net profit would be around 5% higher on year-on-year basis. At the current market price of Rs 95.80, the scrip is currently trading at 4.5 times its consolidated earnings for FY09.

Promise of dividend just not good enough for Gwalior Chem investors

INVESTORS are indeed fickle. When you show them profits they ask: “Where is the cash?” And when you offer them cash, they ask: “But where are the profits?” Cash may be king in their hands, but they refuse to value it when it lies with the company.
Gwalior Chemicals (GCL) is a case in point. When the company decided to sell off its entire business along with its debt to German specialty chemicals maker Lanxess at a steep premium, its shares were expected to hit the roof. But what happened was exactly the opposite. GCL’s shares lost over 17% in four trading sessions to close at Rs 88.8 on Friday from Monday’s close of Rs 107.3 when the deal was disclosed. The deal values the company’s equity at Rs 380 crore against the current market capitalisation of Rs 220 crore.
GCL’s promise to distribute Rs 100 crore among its shareholders on completion of the deal also failed to support the stock. A special dividend is expected to bring in at least Rs 35 per share to investors, after accounting for the dividend distribution tax.
Investors do not appear to be too enthused by the possibility of dividendstripping to manage their tax liabilities. With no business left and cash as its only asset, GCL’s stock price is set to fall once the dividend is paid out. If an investor buys the scrip three months prior to the record date of the special dividend and continues to hold it for at least three months after receiving the dividend, the investor will be entitled to tax-free dividends, on the one hand, and a short-term capital loss, on the other hand, which can be set off against any other capital profit.
However, doubts dog investor sentiment. “Buying GCL shares at today’s price can be justified only if they could be sold at Rs 55, after getting a dividend of Rs 35 per share. However, today even that is unclear,” explained a stockbroker who tracks the company.
The company is set to retain its Ankleshwar facility and may go for production of some other specialty chemicals. It also has plans to enter the power generation business. Company sources maintain they have identified some specialty chemicals, whose production could begin within weeks of the finalisation of the deal.

Hurricane may not hit oil output

US Sees Storm-Induced Production Cuts At A 5-Year Low; No Price Flare Up Seen

CRUDE OIL prices, which hit their highest level since October on Tuesday, are unlikely to rise much further in the coming months or find support from damaging storms during the June-November Atlantic hurricane season.
The US Energy Information Administration (EIA) has estimated hurricane-induced production outages at a 5-year low of 4.5 million barrels of oil and 36 billion cubic feet (bcf) of natural gas for 2009. The US Gulf coast, where the storms occur, account for a quarter of the country’s output. The estimates are based on the hurricane outlook of National Oceanic and Atmospheric Administration (NOAA) and are subject to change.
Crude oil prices crossed $70 per barrel on the New York Mercantile Exchange on Tuesday, ahead of the US inventory data. Expectations of a fall in the US crude oil inventories, a weak dollar and hopes of economic recovery have helped crude oil prices regain their October levels.
“The markets have run a bit ahead of themselves,” observed Vicky Sajnani, an associate with JM Financial.
“There has been no major positive event for the rally in crude oil prices and most of the minor positives such as the recovery in Chinese auto sales, the so-called ‘green shoots’ of recovery in the US economy or even the possible production disruption in the hurricane season appear fully discounted”, he added.
He expects crude oil prices to linger around $70-75 per barrel in the near future.
In 2005, hurricanes Katrina and Rita destroyed 113 offshore platforms and damaged another 52. The cumulative production losses due to these hurricanes was estimated at 166 million barrels of crude oil and 804 billion cubic feet (bcf) of natural gas — over a quarter of the region’s annual output. Katrina and Rita pushed global crude oil prices nearly 40% higher within just three months.
In September 2008, hurricanes Gustav and Ike hit the region within a few days of each other, halting output for several days and resulting in a production loss of 60 million barrels of oil and 335 bcf of natural gas. Pravin Singh, a research analyst at Sharekhan Commodities, is of the view that crude prices could move up to $76 per barrel on the back of dollar weakness and falling US inventories before it sees a correction of 20-30%.
“Although there are several indicators of economic recovery, the fundamentals appear little changed,” he said.
EIA expects petroleum consumption in the US to drop by 2.9% or 550,000 barrels per day (bpd) in 2009 due to the weak economy. But the consumption of gasoline could go up “as a result of the substantial declines in retail prices from last summer and stabilisation of real disposable income.”

Astral Poly Technik: Not Just A Pipe Dream

Expanded capacities and product acceptance provide stong visibility to Astral Polytechnik

IN VIEW of the growing acceptance for cheaper and better piping products, Astral Poly Technik’s expanded capacities are likely to boost its revenues and profits in coming years. Long-term investors should consider investing in this stock.

BUSINESS
Astral Poly Technik (APL) is an Ahmedabad-based company manufacturing CPVC (chlorinated polyvinyl chloride) pipes and fitting since 1999. APL is the first licensee of Lubrizol of the US (formerly known as BF Goodrich, a fortune 500 company) and has an equity joint venture with Specialty Process LLC of the US to manufacture and market the most advanced CPVC plumbing system for the first time in India.
The company’s products compete directly with galvanized iron (GI) pipes, but are cheaper and more durable. They not only gained rapid acceptance in new construction projects, but in the replacement market.
Starting from merely hot and cold water system, the company has expanded its product portfolio to include industrial piping, lead-free PVC plumbing, ABS pressure pipes, CPVC aluminium bendable pipes, sewage, waste and rain water management systems and underground drainage system, and is planning to launch CPVC-based fire sprinkler system shortly.
APL imports CPVC from Lubrizol, which is the leading manufacturer of this specialized polymer and controls over 80% of the global CPVC production. It has set up a plant in Himachal Pradesh to produce fittings and this facility enjoys full income tax exemption till the end of FY2010.

GROWTH DRIVERS
APL has continuously expanded its production capacity since inception. In the past five years alone, its capacity has gone up at a cumulative annual growth rate (CAGR) of 70.5% to 26000 TPA from 1800 TPA by end FY05. Thanks to strong demand in the past, the company could fully utilize its additional capacity in the subsequent year itself. The latest round of expansion is likely to allow the company to grow in the next two years without any additional capex.
The company is also expanding its distribution network in India, which currently stands at around 200 distributors and nearly 3000 dealers. It is setting up a joint venture in Kenya to enter the African market and has plans to set up another plant in southern India.

FINANCIALS
Over the last five years, the company’s net profits have grown at a CAGR of 45% as against a growth of 39% in its net sales. Despite the expansion spree, the company has improved its debtequity ratio over last five years from 1.48 in FY 2005 to 0.67 in FY 2009.
During FY 2009, APL achieved a 42% topline growth to Rs 193 crore. But its net profit was 17% lower at Rs 14.2 crore. The fall in rupee increased the company’s import costs and repayment liability on foreign currency buyer’s credit. Both put together, the company lost nearly Rs 13 crore during the year. The recent rupee strength is set to boost the company’s future performance.

VALUATIONS
At the current market price of Rs 120, the scrip of APL is trading at 9.5 times its earnings for past 12 months. Going forward, we expect the company to record an EPS of Rs 22.7 for FY2010, which discounts the current price at just 5.3 times.

Crude crash lifts oil marketing cos’ bottomlines

INDIA’S three public sector Fortune 500 oil marketing companies, Indian Oil, Bharat Petroleum and Hindustan Petroleum, made remarkable turnaround in the fourth quarter on the back of a crash in crude prices to end FY09 in the black, after wiping out combined accumulated losses of more than Rs 11,000 crore made in the first nine months.
The last quarter’s performance — coming despite a sharp reduction in the assistance from government and upstream oil companies — helped these companies end the year with a cumulative profit of Rs 4,260 crore.
The upstream discounts in the quarter fell over 90% year-on-year to Rs 948 crore and the special oil bonds by the government dipped by 31% to Rs 10,325 crore. After the fall in crude oil prices, however, these firms were selling fuels at prices higher than the cost for the better part of the quarter. Although the companies are celebrating with higher dividend payouts, they are unlikely to repeat this feat in the coming quarters in view of the rising crude oil prices.
While the marketing operations turned profit making, the refining operations of these oil companies slipped. Indian Oil’s gross refining margin in the March quarter was nearly half of that a year before, while BPCL’s GRM was 27% lower. HPCL could improve its GRMs for the quarter. However, all the three companies recorded lower profits for the whole year. Yet, they have substantially raised their annual dividends. Indian Oil’s dividend for FY09 at Rs 7.5 per share will be 36% higher than last year, while both BPCL and HPCL have raised their dividends by 75% from FY08.
The higher dividends will put further strain on the cashflows of these oil majors, which have still not received almost Rs 10,000 crore of oil bonds from the government. Also, the year saw the total interest burden of the companies swell 164% to over Rs 8,700 crore. On the bourses, the companies have done well over the last one month on the buzz of sectoral reforms and speculation on deregulation in petroleum retailing. However, with crude oil prices continuing to rise, the marketing operations of these companies will go back to losses without such comprehensive reforms.

Time Technoplast: Growth vistas

Commissioning of new plants and entry into new markets provide a trigger for growth

TIME Technoplast is Mumbai based manufacturer of innovative plastic products. It is India’s leading manufacturer of drums and containers used in transportation of chemicals with nearly 4 million units per annum and 75% market share in India. The company derives nearly 58% of its annual revenues from industrial packaging, with lifestyle products contributing 9%, and the rest coming from infrastructure products.

GROWTH DRIVERS
The company recently commissioned its greenfield battery unit at Panoli and high pressure HDPE pipe and pre-fabricated structures at Silvassa. It is setting up another plant to manufacture drums and containers near Kolkata to commission by September 2009 and planning to enter China with a greenfield unit. The government has recently made the usage of auto-disable syringes mandatory in India to improve public health. This is set to help Time Technoplast, which is a leading producer of such syringes from its plant in Baddi.
It has started supplying plastic fuel tanks for export variants of Tata’s commercial vehicle ‘Ace’ from its Pantnagar plant. Thanks to their low weight, which can improve an automobile’s mileage, the plastic fuel tanks have a substantial growth prospects in India. The company’s new capacities are coming up tax free zones and this is likely to reduce its effective rate of tax to around 20% in FY10 from 28.7% in FY09. The company is also working on other innovative products such as green batteries, fuel cells, polymer composite LPG and CNG cylinders, sound barriers as part of its various product lines. All these products have great growth potential in Indian as well as exports markets. Most of these products will be rolled out over next few quarters. At a macro level, with the natural gas based polymer capacities come up in the Middle East, it is expected that the global polymer prices will remain depressed in coming 2-3 years. This bodes extremely well for a plastic product manufacturer like Time Technoplast.

FINANCIALS
The company has always maintained its operating profit margin around 18% - 20% over last five years, which signifies its ability to command premium for its products. During the same period the company’s net profit grew at a cumulative annual growth rate (CAGR) of 109% as against 44% CAGR in net sales. Its performance for the December 2008 quarter was weakened due to the crash in commodity prices necessitating a write off in inventory value. At the same time, higher interest rates and longer working capital cycle pushed up the interest cost. As a result, the company’s consolidated profit fell 32% to Rs 14.5 crore

VALUATIONS
At current price of Rs 38.5, the scrip is trading at a P/E of 11.2 times based on trailing twelve month profits. We expect the company to end FY09 with earnings of Rs 3.9 per share, which discounts the current market price 9.8 times. During FY 2010 the company will have full benefit of its various new capacities, which are likely to boost its EPS to Rs 5.3. At its current market price, the stock is trading at just 7.3 time the forward EPS for FY10.

CONCERN
Several of the company’s products such as the plastic fuel tanks, fibre coated CNG / LPG cylinders, duro-turf, pre-fabricated structures, roadside sound barriers are new to Indian market and need government approvals as well as customer acceptance, both of which are time-consuming.

MRPL: Oil’s well

INDIA’S largest public sector independent petroleum refinery Mangalore Refineries and Petrochemicals (MRPL) more than doubled its net profit to Rs 608 crore during the fourth quarter ended March ‘09 from year-ago levels. However, the poor show in the preceding two quarters pulled down net profit for the whole year by 6%.
The company had posted poor refining margins in the preceding two quarters due to the crash in petroleum product prices. In the fourth quarter, however, buoyancy in crude oil prices aided MRPL’s growth. Its gross refining margins (GRM) - the differential between the cost of raw materials and the price of refined products sold - stood at $7.54 per barrel, making it the company’s best March ending quarter in at least five preceding years. During the March ‘08 quarter, the company’s GRM stood at $5.6 per barrel.
MRPL also improved its capacity utilisation to nearly 140% of its rated capacity during the quarter with a crude throughput of 3.42 million tonnes, 8.6% higher than the corresponding quarter of the previous year.
At the end of the March ‘09 quarter, the company’s net debt - borrowed funds net of cash equivalents - has become nearly zero due to strong operating cash flows and reduction in debt. The company’s interest cost during the quarter, at Rs 32.8 crore, was 8% lower y-o-y.
The weaker rupee caused a net forex loss of Rs 188.5 crore for the March quarter. For FY09, the exchange loss was at Rs 587.9 crore.
The company had created a provision of Rs 62.35 crore towards mark-to-market losses on outstanding forward forex contracts in the December ‘08 quarter. The contracts were taken to hedge the risk of changes in foreign currency exchange rates on future export sales. However in the March ‘09 quarter, these mark-to-market losses stood at only Rs 22.6 crore allowing the company to write back the excess provisioning of Rs 39.7 crore.
The company’s board of directors proposed Rs 1.2 per share as dividend during FY09, the same as last year. The scrip jumped over 14% after the results, to Rs 75. At the current market price the stock is now trading at 11 times its earnings for FY09 with dividend yield of 1.6%.