ONGC: Production Growth to Boost Oil Co’s Profitability despite Price Fluctuations

ONGC’s net profit for the quarter to March doubled in spite of a higher subsidy burden and stagnating production with oil prices ruling high coupled with a weak rupee. A production growth from FY13 onwards will enable it to improve profitability irrespective of crude oil price fluctuations. ONGC’s crude oil production for the March quarter at 6.58 million tonne was 3.2% below the year-ago period. Still average prices were 11.7% higher at $121.64 a barrel at the gross level. A weak rupee meant that in rupee terms, the price was nearly 24.1% higher at . 6,117 a barrel.
This was the key factor that boosted ONGC’s profitability while the discounts it needs to extend to downstream local oil marketing companies rose 16.8% to . 14,170 crore.
The company’s revenues grew by 22.8% to . 19,340 crore in the quarter mainly due to higher oil prices and a weak currency. Thanks to this, the company was able to limit its expenditure growth to just 7%. This propelled the 56% growth at the operating profit level to . 8,020 crore.
ONGC’s depreciation, which includes depletion, amortisation and impairment losses, fell 41.5% to . 1,349.3 crore. The resultant pre-tax profits were double that of the yearago numbers. The exploration firm has been regularly making new discoveries and was able to add 84.13 million tonne of oil equivalent (MTOE) to its reserves, while production was 47.03 MTOE. These have put its reserve replacement ratio — a measure of how much the company added to its reserves while pumping out each barrel of oil — at 1.79, its highest in nearly two decades and an indication that its recoverable reserves are growing faster than its current production level, giving more visibility to its future growth.
ONGC has set its eyes on improving oil production in FY13, which has been stagnating for long. This should enable it to post better profitability in FY13, as fluctuations in crude oil prices are of little consequence to the company due to subsidy discounts. 

KEY POINTS ONGC’s crude oil production for the March quarter at 6.58 million tonne was 3.2% below the year-ago period
Average prices were 11.7% higher at $121.64 a barrel at the gross level
A weak rupee meant that, the price was nearly 24.1% higher at . 6,117 a barrel
The reserve replacement ratio — a measure of how much the company added to its reserves while pumping out each barrel of oil — is at 1.79, its highest in nearly two decades 

‘Our Innovation Sets Global Trends’: TOM CORR PRESIDENT & CEO Ontario Centres of Excellence

At a time when economies across the world are grappling with problems, Canada’s Ontario province is busy establishing its identity as a region where innovation and entrepreneurship obtain wholehearted support. This is important for Canada as a whole, as Ontario houses 38% of its population and contributes 41% of its $1.7 trillion GDP. Although one may wonder what is new in a state government promoting entrepreneurship to generate economic growth and employment, the difference lies in approach and execution. The government of Ontario has created an entire ecosystem under the Ontario Centres of Excellence (OCE) to seamlessly support innovators who are working to turn great ideas into globally-competitive products and services. It provides all the hand-holding that innovators need all the way ranging from attracting talent, idea generation, research and development, financing and mentoring to the final step of commercialisation. The secret of success lies in the ability to tie-up the industry needs with research. “We have achieved phenomenal success in actively identifying specific industry challenges and connecting them with the right academic researchers who are on the verge of big breakthroughs in related areas,” says Tom Corr, president and CEO of Ontario Centres of Excellence.
That role continues to be crucial because industry often does not know about all of the research underway at universities and colleges there and how it can impact their businesses. “It is our job to walk the halls of the research institutions and find out what’s going on, because industry cannot ask for what they do not know about. We also identify industry challenges and aim to find solutions to filltheir specific needs,” he says. OCE certainly has impressive statistics to support its success story. In fact, in the last one year alone, OCE invested $21.1 million (. 116 crore) in 477 research, commercialisation and talent projects that attracted $40.7 million (. 225 crore) in investment from industry partners.
Also, 19 patents and 16 new technology licences were granted with OCE support, while 111 patent applications were submitted.
Things were never always like this. Twenty-five years ago, the traditional economic foundation for the province, and for Canada, was shifting from a North American-focused and commodities-based economy to a globally-oriented and knowledge-based economy. There was limited connection between universities, colleges, research hospitals and industry. Quality research being produced by the academic and research institutions was not being utilised to its full potential.
Now OCE has become a provincial coordinator for industry-academia collaboration programmes. It is also a key partner in delivering Ontario’s innovation agenda.
OCE funds various research projects and activities out of the funds received as grant revenue from Ontario’s Ministry of Economic Development and Innovation, and from industry and other contributors. OCE also administers the Industry Academic Collaboration Program, which is designed to leverage the full capacity of Ontario’s research institutions to help technology-based companies create jobs and prosperity by commercialising Ontario-based research discoveries. Advanced manufacturing, health technologies, energy and environment are seen as promising sectors.
“All OCE’s investments are made with industry partners who co-invest with us. They are committed to matching and, in most cases, exceeding the initial funding provided by OCE,” notes Mr Corr. This is perhaps the most important aspect since ability to attract industrial funding is the key test of R&D success. “It is an incredible value for companies, providing them with the opportunity to develop top-tier intellectual property and to work with talented researchers. Such collaborations form lasting partnerships that drive industry research, help create companies and generate jobs and economic prosperity.”
Canada is already well-known as the birthplace of several important innovations of the 20th century such as insulin, Canadarm that repairs spaceships, the Imax movie screens, stem cells and 3D software. Programmes such as OCE are bound to create future success stories for this North American nation.
“I see OCE as a catalyst that advances innovation by helping to ensure that the great discoveries coming from our colleges and universities become the cutting-edge technologies that will help establish Ontario as a world leader in several sectors. OCE will continue to build on its strengths by building economic prosperity and jobs for the province of Ontario,” says Mr Corr. Surely, every country or state government would like to adopt this goal. 

(The author visited Toronto, Canada, at the invitation of the Ontario ministry of economic development and innovation)

Re Positive Riding The Currency Slide

For India Inc, things couldn’t get any worse. It is already battling a demand slowdown amid macro headwinds and a policy paralysis. And now, the rupee’s plunge has left it with no place to hide. But not all are feeling the pain. In fact, for exporters it could turn out to be a windfall. ET Intelligence Group digs out a few of these gainers that may not be on the investors’ radar

    The rupee kept making record lows every day of the last week. This is a matter of worry for the economy, companies as well as consumers. A study of the latest annual earnings data of top BSE 500 companies by the ET Intelligence Group reveals the impact of the weak rupee on India Inc’s import and exports bill. On the net level, a significantly weakened rupee is bound to adversely impact the country’s commerce. India Inc earns 20% of its standalone revenues from exports. However, it spends over 36% of its revenues on imports. A 8.9% depreciation in the rupee against the dollar and similar movement against other major currencies of the world since the beginning of the current quarter is likely to impact the companies’ net forex bill. This does not include the impact on the profits of mark-to-market losses on forex contracts. While each company would be impacted to the extent of the hedging undertaken by it, it is difficult for companies to hedge its entire forex exposure — especially when the currency has entered uncharted territory. With India importing more than 84% of its crude oil requirement and more than one-fourth of its natural gas requirement, the petroleum industry remains the single largest importer for the country. India imported 172.11 million tonne of crude oil in FY12 out of the 204.8 million tonne processed by domestic refiners. Reliance Industries leads the pack in our study — being the top foreign exchange earner among Indian companies and one with the highest import spending also. In FY12, the company had total forex earnings of 1.98 lakh crore — constituting 58% of its total standalone revenues. Its imports bill stood at 2.64 lakh crore, eating up 77.7% of total revenues. As a result, it enjoys natural hedging. Incidentally, oil companies dominate the list of companies’ with highest forex spends. However, the situation is not all bad for India Inc. The depreciated rupee increases the competitiveness of exports. Companies from traditional export-oriented sectors like IT, oil & gas, jewellery and pharmaceuticals dominate the list of top Indian exporters. TCS, the secondlargest exporter of India Inc earns 98% of its revenues amounting to 38,098 crore from exports. For such exporters, remaining unhedged would provide the maximum advantage from the currency depreciation. However, that is not the case. Even an exporter’s gain is limited by the forward contracts that it would have entered into to protect against currency volatility. Moreover, when one takes up hedging in a volatile market scenario, the cost of hedging is likely to be high. The Street is likely to have factored in the increase in realisations for most of these exporting companies on account of the rupee’s slide during the current quarter. ETIG brings you a slew of small and mid-sized companies that earn a large chunk of their revenues through export of goods and services. They are from less obvious sectors like food processing, garments, hospitality, marine vessels, minerals, auto ancillaries, coffee and chemicals. 

Global Offshore Mumbai-based Global Offshore is in the business of chartering out its fleet of 11 offshore vessels to the petroleum exploration industry. In line with the global practice, charter rates for the vessels are denominated in US dollars, and that means Global Offshore has lots to gain from a weaker rupee. Two of Global Offshore’s vessels recently began contracts with Petrobras in Brazil at daily rates of $24,000 and $30,000, which are substantially higher than what the rest of its fleet gets. As a result its March 2012 quarter net profit jumped more than 7-fold to 11.1 crore. The company is awaiting delivery of an additional vessel in mid-2012 at a cost of $48 million. Five of its existing assets will complete their ongoing contracts between now and November 2012. Any rise in rates it is able to secure for new contracts will be a big positive.
The market for offshore support vessels remains oversupplied and crowded particularly with more and more traditional shipping companies viewing this business as more attractive than their normal work. This has resulted in the charter rates staying sluggish, and they may remain so in the foreseeable future. 

ADF Foods Mumbai-based ADF Foods is a small-sized fast moving consumer goods company engaged in the manufacture of packaged ethnic Indian food. The company earns over 95% of its revenues from overseas markets like the Middle East, the US, Europe and Australia. The company’s bottom line growth has been subdued since its acquisition of US-based Elena Foods. Though net sales increased by 33% over the last four trailing quarters, net profit dropped by 23.8%. High expenditure and forex losses adversely impacted the bottom line in the December quarter. Integrating the business of the US-based foods company is likely to remain a challenge. Besides, an increase in input and packaging costs, food inflation and exchange rate fluctuations are likely to impact the company adversely. 

Cochin Minerals & Rutile Kerala-based Cochin Minerals & Rutile is a 100% export oriented unit (EOU) producing synthetic rutile, ferric and ferrous chlorides and iron hydroxide from naturally found mineral deposits on Kerala’s beaches. Its key product synthetic rutile, which accounts for over 92% of its turnover, is an important source of titanium dioxide — a white pigment, used in paints as well as personal care products such as sunscreen lotions. Being an export-oriented unit, Cochin Minerals is a natural beneficiary of the depreciating rupee. The company’s net profit for FY12 jumped almost 12-fold to 57.1 crore as prices of rutile improved. At the end of September 2011 the company had a debt-equity ratio of 0.4. The company is currently trading at a P/E of 3.7 and has announced a dividend of 12 per share, which gives a 4.4% yield.
The company had been facing a shortage of ilmenite — the raw ore needed in the production of synthetic rutile. A steady supply of ilmenite will be key to the company’s future growth. 

Vikas WSP Rajasthan-based Vikas WSP is India’s leading guar gum powder (GGP) manufacturer supplying to varied sectors like oil drilling and fracturing, food processing, textile printing and paper making. India is the dominant producer of guar gum in the world, accounting for 80-90% of the total global production. The company is in an expansion mode and plans to double its capacity on back of rising demand from the fracking industry that works at extracting gas trapped in shale formations. Though the company’s revenues have increased steadily over the quarters, its realisations have not risen in tandem. Higher cost of raw material — guar gum —has impacted the company’s bottom line. The prices of guar gum have not declined much despite the futures trading ban. The stock price of Vikas WSP has rallied — tracking the rising prices of guar gum. The small-cap stock without any listed peer is trading at over seven times its earnings. 

Technocraft Industries Technocraft Industries is a diversified company with a ‘three-star export house’ government recognition. It earns almost 70% of its revenue through exports. It is the second largest producer of drum closures globally. This division contributes about 35% to the company’s revenue. Apart from this, it also makes welded steel tubes and scaffoldings as well as cotton yarn.
After making a loss of 7.3 crore in the June 2011 quarter, the company’s performance has consistently improved. During the December 2011 quarter, its profit almost doubled compared with the year-ago period to 11.2 crore and its operating profit margin rose from 17.2% to 21.6%. 

AVT Natural Products Promoted by Kerala-based AV Thomas Group, AVT Natural Products manufactures and exports marigold oleoresins, spice oleoresins, essential oils and value added teas to countries outside India.
The company has been performing remarkably well since the last four quarters ended December 2011. During this period, net sales have doubled and net profit has increased five-fold. Its overseas subsidiaries in China and Singapore have been doing well due to an increase in growing areas, higher flower output and better marigold oleoresin prices. At the same time, the company is battling challenges like sustained inflation in food prices, poor labour availability and escalating labour costs in the marigold growing areas. The company’s stock is trading at a price to earnings multiple of 5.6. 

CCL Products Guntur-based CCL Products is an export-oriented unit, with the ability to import green coffee into India and export the same - free of all duties. CCL has an established presence in the international markets in the traditional spraydried instant coffee segment and has made a successful entry in the freeze-dried coffee intending to gain share in the promising market segment of liquid coffee. The company’s key markets in Europe, CIS and Far East have posted a good recovery after the financial downturn. Its newly-formed subsidiary in Vietnam is expected to explore and expand in new markets. For the four quarters ended March 2012, the company’s net sales were up 38% while its net profit rose 40% over the previous year. 

Automobile Corporation of Goa Automobile Corporation of Goa (ACGL), manufactures sheet metal components, assemblies and bus coaches. The company is jointly promoted by Tata Motors and EDC Limited (formerly known as Economic Development Corporation of Goa, Daman & Diu). It is a major supplier of pressings and assemblies to Tata Motors, a large proportion of which is exported. During the last fiscal, sales from its bus division, which accounts for nearly three-fourths of its revenue, declined 12%. This was mainly on account of shrinkage of volumes from the Gulf countries — the company’s traditional markets — as it is losing out to more competitive manufacturers in other countries. To compensate for this, the company is increasing its focus on the domestic market, where volumes grew 50% during the last fiscal. It is still going to gain from the rupee depreciation to the extent of its exports. 

Kitex Garments Kitex Garments is primarily a manufacturer of fabrics and garments, which contribute 80% of its revenues. The company derives 67% of its revenues in foreign exchange, indicating heavy dependence on overseas markets. In the last five years, the company’s operating profit and net profit margin have demonstrated a linear growth. In the last five years, the company’s operating profit margin grew to 21.8% in FY12 from 17.43% in FY08. Also, its net profit margin grew to 9.15% in FY12 from 5.05% in FY08.
The appreciation of the dollar against the rupee would benefit the company largely. The June quarter would be reasonably good considering the cost advantage factor for Indian textile exporters. On the valuation front, the company is trading at a price to earnings ratio of 9.5 times. This is a bit expensive when compared with its peer Alok Industries, which is trading at a price to earnings ratio of 3 times. 

Asian Hotels West The Mumbai-based five-star hotel is known for the Hyatt brand. In FY11, over 60% of the company’s revenues was in foreign exchange, indicating high dependence on arrival of foreign tourists. The advantage of being present in a major metro ensures a constant flow of foreigners — leisure and business travellers. Having a single property and a powerful brand in the form of Hyatt Regency near the Mumbai airport, the company has maintained its operating profit margin of 30% in the last four fiscals, indicating the benefits of its strategic location. Seasonally, the first quarter of the fiscal is a weak quarter for the hospitality industry in India. As a result, the June 2012 quarter would be a subdued one for the company. The rupee’s slide is likely to cushion this seasonality impact. On the valuation front, the company is trading at a price to earnings ratio of 8 times. This is better than its peers such as Royal Orchid Hotel and Taj GVK Hotels & Resorts, which are trading at a price to earnings ratio of 22 and 12 times, respectively. 

Balkrishna Industries Balkrishna Industries is one of the leading players in off-the-road tyres. It mainly caters to tyres for tractors, trailers and earthmovers. The company is in the process of doubling its capacity to 230,000 metric tonne per annum (MTPA), which is expected to be completed by FY13. Balkrishna Industries receives nearly 80% of its revenues from the replacement market where it fetches an operating margin of around 18%.
The company’s revenues have been growing at a CAGR of 30% since the last five years. Despite an aggressive capacity expansion, the company’s debt is at comfortable levels. As of September 2011, its debt-to-equity ratio was 1.6. Since the company derives 90% of its revenues from exports, it stands to benefit immensely from the depreciation in the rupee. However, Europe, its primary market, is currently reeling from a slowdown. Hence its volumes would be under pressure in the near term. At the current price of 263, the stock is trading at a P/E of 10.4. Due to softening rubber prices, the stock has grown by over 52% in last six months. 

Camlin Fine Sciences Mumbai-based Camlin Fine Sciences is the world’s largest integrated supplier of food antioxidants TBHQ and BHA. Antioxidants are used as preservatives in edible oils and processed foods. The company also makes artificial sweetener sucralose and a few bulk drugs needed by the pharma industry. Since a majority of the company’s products get exported, it is a major gainer from the rupee’s depreciation. Camlin’s FY12 consolidated profits fell 47% to 3.9 crore, while its sales nearly doubled to 335.2 crore. The company is trading at 28.3 times its consolidated net profit for FY12, which is on the higher side. Losses in subsidiaries, a high debt-to-equity ratio of 2.3 apart from managing the competition and volatility in raw material costs remain the main concerns for the company. 

CAIRN INDIA: Pumped Up for a Good Show with a Lot in Reserve

The stock has lost favour with the market in a falling oil price scenario. Nevertheless, its strong cash flows, debt-free status and high return ratios make it a good defensive bet in a volatile market

    At a time when the overall investment scenario is clouded with uncertainty an investor should stick with companies that have strong cash generation capacity, de-leveraged balance sheet, excellent execution record, high return ratios and good management. Cairn India fits the bill perfectly. The stock has fallen recently in line with international oil prices. However, a long-term investor should view this as an opportunity to invest in a good business at an attractive valuation.Accumulating the stock is recommended on dips. 

BUSINESS Cairn India is India’s largest private sector crude oil producer with its key asset in Rajasthan, where it holds a 70% stake, producing at 175,000 barrels per day. In addition, it holds stakes in two other producing assets — the Ravva offshore field in Andhra Pradesh and CB/OS-2 in Gujarat. The company’s remittances to the government in the form of royalty, cess, profit petroleum and tax jumped in FY12, which restricted its profit growth.
As a precondition to the Vedanta Group’s acquisition deal the company had to accede to the government’s demand to pay proportionate royalty on production in Rajasthan. During FY12 it paid 3,688 crore as royalty and 1,566 crore as profit petroleum, as against none last year. Its cess payments jumped 34.7% to 1,285 crore and are likely to go up even further with the government raising the cess to 4,500 per tonne from 2,500 earlier. 

INVESTMENT RATIONALE Cairn India has entered the MSCI Emerging Market Index from May 31, 2012. This is bound to create more interest among overseas institutional investors.
Although crude oil prices have fallen by over 15% in the last couple of months, the rupee’s depreciation has cushioned the impact to a large extent. Crude oil prices are likely to remain low in the coming months, but should once again start moving up as global economic conditions improve.
Cairn India has displayed strong project execution skills in the Rajasthan block to achieve major milestones in raising the output. It recently upgraded its estimate of recoverable reserves from the block to 1.7 billion barrels, a rise of 20% from 1.4 billion barrels estimated a year ago. This can support a peak production rate of 300,000 barrels per day (bpd) compared to the earlier estimate of 240,000 bpd.
The company has made a couple of high potential discoveries in the Sri Lanka and KG onshore blocks. Development success there can mean higher production potential in future.
The company recently formalised its dividend policy to distribute 20% of its profits as dividends every year. At the current level of consolidated profits, the company can generate around 2.6% of dividend yield. This may not appear attractive right now, but in another 3-4 years for today’s investor the yield will surely become attractive. 

FINANCIALS Cairn’s consolidated revenues have grown at a cumulative annualised growth rate (CAGR) of 102.3%, while net profit grew at 114.6% in the last three years. The company has become debt free with a net cash balance of 7,893.6 crore as on March 31, 2012.
The company’s average daily gross operated production in the March quarter stood at 180,293 barrels of oil equivalent (boe), with working interest at 107,292 boe. 

VALUATIONS Cairn is currently trading at 7.8 times its consolidated earnings for FY12 and a price-to-book-value ratio (P/BV) of 1.3. This is attractive compared to ONGC’s P/E of 9, but in line with Oil India’s P/E of 7.5, both of which are yet to publish their March quarter results. 
Entry to MSCI Emerging Market Index from May 31, 2012, is bound to increase overseas investor interest in Cairn India

Falling Crude will Need Policy Support Now

The recent fall in crude oil prices is exactly the type of good news that the Indian economy needs badly today. However, it may have come a little too late, as the simultaneous fall in rupee is limiting the economic gains. Nevertheless, the trend is certainly something to cheer about, but will need supportive policy action to bring about a real change.
Crude oil prices had steadily climbed earlier in 2012 notwithstanding the growing concerns over European economic crisis due to tensions over Iran as US and Europe proceeded with sanctions. These fears receded with Iran returning to the negotiating table with the UN Security Council over its nuclear ambitions on April 14. These talks, which resumed on May 23, in Baghdad, have given hopes that the dispute over Iran’s nuclear programme could be resolved through discussions.
“There have been a few other factors combining to exert a downward pressure on oil prices in recent days. These include disappointing US employment data, which renewed concerns over the health of the economic recovery of the world’s largest consumer of oil, and euro zone joblessness rising to a 5-year high in April. While all these portend further weakening in oil demand in the developed world, supply-side indications are also adding a bearish pressure,” mentioned Vandana Hari, Asia editorial director, Platts — a leading provider of energy information.
Even the International Energy Agency feels convinced that the tide has turned. According to IEA, the global crude oil production stood at 91 mbpd in April2012, with OPEC production rising to 31.85 mbpd and non-OPEC production rising to 52.9 mbpd from last month.
For the Indian economy, with its deteriorating public finances and rising oil subsidies, this is a big opportunity to set its shop straight. The oil industry’s under-recoveries that stood at . 563 crore per day in the first half of April 2012, have eased to . 509 crore per day for the second half of May 2012. This should fall further, particularly if the government can push through some price hikes. The weakening rupee could, however, prove a spoilsport. The Indian basket of crude oil averaged around $111.15 per barrel in the first half of May 2012, which was 10.4% below the average $124.03 in the first half of March 2012. However, as the rupee weakened substantially in May, the fall in crude oil cost in rupee terms was just 3.7% in the same period to . 5,957.9 per barrel. If the rupee were to weaken further, it won’t take long for the benefits of falling oil prices to evaporate. In fact, decontrolling the petroleum industry at home to boost public finances could hold a key to provide a long lasting support to the rupee’s value in the international market.

SRF: Capacity Addition to Beat Revenue Blues

Despite fears of slackening revenues, SRF’s expansion plans and inexpensive valuation make it a strong long-term bet

The shares of Gurgaon-based multi-business company SRF are trading near 52-week low on poor FY12 show and apprehensions over slackening carbon credit revenues. However, the company’s expansion plans, which will make up for the lost carbon credit revenues, inexpensive valuations and high dividend yield make it attractive for long-term investors. 

BUSINESS SRF manufactures a variety of products including fluorine derivatives, polyester (BOPET) film and technical textiles. The company is a leading manufacturer of refrigerant gases and derives a chunk of its income from carbon credits on incineration of HFC-23. This benefit stands to be phased out from May 2013, which has impacted the prices of carbon credits, SRF’s profits as well as valuations.
The company’s FY11 annual report mentioned 64.17 crore received on account of carbon credits. The corresponding number for FY12 is not known. SRF has eight manufacturing plants in India and three overseas. It derived 53.5% of its FY12 revenues from technical textiles, which include NTCF, coated and belting fabrics, 30% of its revenues came from chemicals and remaining 16.5% was from packaging film. 

GROWTH DRIVERS The company is expanding the capacity of fluoro-specialty chemicals, packaging films and technical textiles, keeping in mind the absence of carboncredit income in future.
Mid-FY12 it commissioned the first phase of new coated fabrics plant in Gummidipoondi, which makes lacquered tarpaulins and coated fabrics for high tensile structures and niche industrial applications. Its chemical complex at Dahej will start producing fluoro-specialty chemicals from June 2012, which will be scaled up in phases by March 2014. It will set up a plant with 12,500 TPA capacity of HFC 134a refrigerant gas at Dahej. First half of FY14 will see greenfield packaging film plants coming up in Thailand and South Africa. 

FINANCIALS The company’s profits for FY12 were 21.8% lower compared to last year due to fall in prices of carbon credits and extraordinary profitability in BOPET business in FY11. The company’s debt-to-equity stood at 0.3 at end-March 2012. It has a history of strong operating cash flows with tight management of working capital. 

VALUATIONS
The company is currently valued at 3.2 times its FY12 profits and 0.7 times its book value at end-FY12. Removing 50 crore from net profit as coming from carbon credits, which are unlikely to continue in future, the P/E would stand at 3.9. The company has paid 14 per share dividend in the past two years, which translates into a yield of 6.5%. The valuations are attractive compared to its peers.

PLASTENE INDIA: High Valuation Makes the Issue Unattractive

Plastene India’s deteriorating performance in FY12 and high valuations make the IPO unattractive for retail investors, particularly considering the current market conditions. 

BUSINESS Plastene India is a Gujarat-based manufacturer of jumbo bags, or FIBC (flexible intermediate bulk container), and woven sacks with a capacity of 56,200 tonne per annum (TPA). The company also has distributorship from Indian Oil for supply of PP, HPDE and LLDPE in Kutch and Saurashtra. This not only generates commission income, but also reduces raw material costs by 0.5%. 

OBJECTS OF IPO The company wants to expand its existing facilities in Kutch and Rajpur for producing woven sacks and jumbo bags by 18.5%, besides introducing a new product — block bottom valve bags — with a capex of 77.4 crore by April 2013. 

FINANCIALS Plastene India’s net profit grew at a CAGR of 22.7% between FY08 and FY11, while net sales grew at 40.4%. However, the performance deteriorated in FY12. For the 10-month period ended January 2012, the company’s net profit was down 42.8% on 5.2% lower net sales. Its operating profit margin has remained between 9% and 12% in the past five years. 

VALUATIONS On the post-issue equity, the company’s annualised EPS for FY12 stands at 3.4. In the IPO price band, this translates into a price-toearnings ratio (P/E) of 23.8 to 24.7. The company’s peers such as Flexituff International, Jumbo Bags and Emmbi Polyarns are trading at P/E multiple between 7 and 23.3. 

CONCERNS Plastene India is carrying a leveraged balance sheet with debt-to-equity ratio of 1.6 as on end January 2012. This has impacted its profitability due to high interest costs. On an annualised basis its FY12 interest cost will be nearly 34%, up y-o-y at 25.4 crore, with the interest-coverage ratio barely around 2. The company’s working capital has nearly doubled in the past three years, with rising inventories and sundry debtors. The company has conflict of interest with a group company Plastene Polyfilms, which is in similar line of business. The company doesn’t have any long-term supply contracts with customers.

Expansion, Subsidy Changes to Boost GSFC

Gujarat state-run fertiliser and chemical manufacturer GSFC has outperformed the BSE Sensex by a wide margin in 2012 so far. Changes in the government’s subsidy rules have reduced the volatility in its earnings, while it is expanding its chemical business. Both these factors will enable the company to grow its earnings in the next few quarters.
With nearly two-thirds of the annual turnover coming from fertilisers, GSFC derives one-third of its revenues from industrial chemicals, including caprolactam and Nylon-6. The company enjoys the benefits of a fully-integrated plant where it manufactures everything from the basic raw material ammonia to final products such as urea, DAP or nylon. The company is a large producer of phosphatic fertilisers such as Di-ammonium Phosphate (DAP), Ammonium Sulphate and Ammonium Phosphate Sulphate. Strong operating cash flows helped GSFC emerge debt-free by the end of FY11. The company has now embarked upon various expansion projects that will put this excess cash to better use. 
GSFC’s methanol plant is likely to commission by June 2012 with 173,000 tonne per annum (TPA) capacity. With methanol prices trading above $450 per tonne in the Asia-Pacific region and India being a net importer, GSFC’s profitability is likely to get a booster from the new capacity.
The company now gets 2.4 MMSCMD of natural gas from various sources such as APM, RIL’s KG basin, Panna-Mukta-Tapti and imported LNG, with an average cost of $6 per MMBTU. It will have to source additional gas for its methanol plant. Besides, the company’s joint venture in Tunisia-TIFERT will commission operations later this year, which will supply 180,000 tonne annually of phosphoric acid. The company still trades at a P/E valuation of 4.5 and a P/BV ratio of 1.2 with a dividend yield of 1.6%. This is lower when compared to its staterun or private sector peers.

Global Offshore up 20% on Stake Sale Buzz

  Shares of Mumbai-based Global Offshore,
    earlier known as Garware Offshore, hit the
    20% upper circuit of . 78.90 on the BSE on speculation that a Norwegian firm is in talks to acquire a stake in the company. Market grapevine has it that promoters may be looking to sell their stake, which could be bought at a premium to the current market price. Top company officials said such talk was ‘baseless’ and expressed surprise over the surge in the stock. A top official denied that promoters were in talks to sell the stake. Global Offshore shares have almost halved in a year compared to the 7.5% decline in the Sensex. 

RELIANCE INDUSTRIES: New Projects Unlikely to Fire Up Co in Short Term

Reliance Industries has announced several new large projects for the next 4-5 years in the refining and petrochemical segment, which shows the company has kick-started its next big capital expenditure cycle. This should put to rest the uncertainties relating to how the company plans to deal with its growing pile of cash. However, all the projects are long term in nature, and unless business environment improves, the company’s stock price may not see much of an upside in the near term.
RIL will be investing over $12 billion over the next few years in the refining and petrochemical industries, which may go up due to its investments in retail, exploration and production or telecom segments. Still this will not call for any significant increase in the company’s debt level, since its operating cash flows will be adequate.
RIL’s presentation to analysts mentions the setting up a $4-billion petroleum coke gasification project that will produce syngas — a combination of hydrogen and nitrogen — that will replace expensive LNG as fuel. “RIL believes the gasifiers can add around $3 per barrel to the refinery GRM, which at the current run rates would imply a $1.3 billion to gross refining earnings,” says a Credit Suisse’s post-earnings report on the company.
The company is also bullish on India’s growing demand for polymers and petrochemicals and has announced a $8-billion capital expenditure plan to expand its capacities of polyester, PET, PFY and intermediates, besides adding new product lines such as carbon black and rubber. 
According to RIL, the growth rate in India’s polymer demand has been close to 1.2 to 1.4 times the GDP growth rate. India’s polymer market, currently at 7.8 MMTPA is set to grow to over 12 MMTPA in the next five years, supported by demographics, changing lifestyles and growing income levels. Indian per capita consumption of polymers remains substantially below the world average, which will go up gradually.
The company projects a scenario in the Indian market marked by a shortage in supply of primary petrochemicals, which will lead to wide scale imports in the near future.
All these expansion projects will be commissioned in phases over the next 4-5 years. A post-result report by Bank of America Merrill Lynch gives the broad timeline saying that RIL is implementing projects to enhance polyester (PFY and PET) and raw materials and intermediates (PTA and PX) capacity. 
The commissioning would be as follows: PFY capacity in the second half of FY13, PET in 2013, PTA in two phases between July 2013 and June 2014, followed by paraxylene in 2014-15, according to this report.
These projects are big and do hold the potential to boost RIL’s bottom line in a marked manner when commissioned. However, they entail long gestation and won’t do much to assuage current investor worries.
The Credit Suisse report goes on to say if things go according to plan, and with higher gas prices (in India and in the US), “we estimate all the E&P, petrochemical projects can almost double RIL’s EBITDA by 2016–17, without much net debt increase. Given the lead time and the early stage (risk) of these projects, the market may not get excited about this growth now, but should begin to see value over time.”