Volumes speak for Gujarat Gas

The quarterly results of Gujarat Gas for the quarter ended December 2007 were better than expected as new supplies of natural gas came into play. The company’s consolidated net profits jumped 121% to Rs 39.24 crore, taking the full year profits to Rs 152.95 crore.

During the quarter, the company drew additional natural gas supply of 1.43 million standard cubic metres per day (MMSCMD) from Tapti gas field to take the total volume of gas sold to 3.65 MMSCMD. These gas volumes were nearly 7% higher as against the corresponding quarter of previous year and 26.5% higher from the September 2007 quarter. As the volumes in retail and CNG segments grow steadily over a period of time, the company sold a substantial quantity from the additional gas to industrial consumers on short-term bulk contracts. Coming back to the financial statements, Gujarat Gas reported 26% higher net sales at Rs 345.87 crore during the quarter ended December 2007 on a consolidated basis. Operating margins shot up substantially by 630 basis points to 18.5%, resulting in a 91% jump in operating profits. Profits before tax jumped 107% to Rs 58.94 crore. However, the future appears somewhat uncertain for the company with the government initiating steps to bring entire gas produced by Panna Mukta Tapti (PMT) fields to Gail for marketing from April 2008.

NITIN FIRE Protection: Some Like It Hot

Considering Nitin Fire Protection’s high growth and earnings visibility, investors with an 18-24 month horizon can put money in the stock

NITIN FIRE Protection (NFPCL) offers turnkey fire protection services to commercial and industrial clients with expected annual consolidated turnover of Rs 130 crore in FY08. It has set up a unit to manufacture high-pressure cylinders in Vizag SEZ. It has bagged orders worth Rs 170 crore for this plant, to be executed over 15 months, while growth from its core business continues unabated. Considering NFPCL’s high earnings visibility, investors with an 18-24 month horizon can invest in it.

BUSINESS:
NFPCL operates via six subsidiaries and offers products & services in fire security, electronic security and intelligent building management systems segments. It also trades in high-pressure seamless cylinders, which it sources from China. It recently set up an arm in Jabel Ali Free Trade Zone, Dubai, to offer fire protection services. NFPCL has set up a 500,000 units p.a. facility to manufacture high-pressure cylinders used for CNG. Located in an SEZ, this facility will cater to export demand. With this, NFPCL will become the second-largest producer of high-pressure seamless cylinders in India. The company holds 10% stake in an oil exploration block in Rajasthan, adjacent to Cairn’s discovered oil fields. Its exploration activities will begin soon and continue for 2-3 years. NFPCL may invest Rs 12 crore over the next three years in this activity.

GROWTH DRIVERS:
Its CNG cylinders plant will be commissioned in this quarter. The unexecuted order book for this plant is over 120% of NFPCL’s annual turnover. The demand for CNG cylinders is set to remain strong in future. Meanwhile, NFPCL’s fire protection business is set to grow 20-25% y-o-y for the next two years.

FINANCIALS:
For Q3 FY08, NFPCL saw 165% jump in net profit to Rs 15.3 crore, and 48% rise in net sales to Rs 101.5 crore. For FY07, it had net profit of Rs 10 crore on sales of Rs 100.5 crore. It has been able to maintain OPM at 18%. High-pressure cylinders may generate OPM in excess of 20%.

VALUATIONS:
NFPCL is set to close FY08 with net profit of Rs 21.3 crore, which may rise to Rs 40.6 crore in FY09. The CMP of Rs 459.75 is 27.3 times and 14.3 times the expected earnings for FY08 and FY09, respectively. Considering its high growth and earning visibility, the valuations seem attractive for investors. NFPCL does not have any direct peer. Everest Kanto Cylinders — India’s largest producer of high-pressure seamless cylinders — is trading at a P/E of 29.6, while electronic security provider Zicom trades at a P/E of 19.4.

RISKS:
NFPCL has no experience in manufacturing high-pressure cylinders. Commissioning of this unit was planned in October ’07, but was delayed.

DEEPAK FERTILISERS: Lots In The Pipeline

Deepak Fert & Petrochem’s revenues will rise once it secures additional supply of natural gas. Investors with an 18-24 month horizon can consider the stock

DEEPAK FERTILISERS and Petrochemicals (DFPCL) has an annual turnover of Rs 950 crore. It derives over 72% of its revenue from chemicals and 28% from fertilisers. Successful commissioning of Dahej-Uran pipeline (DUPL) may provide upside once the company secures additional natural gas. Investors with an 18-24 month horizon can consider the stock.

BUSINESS:

DFPCL manufactures various chemicals. It enjoys 45% market share in nitric acid, 35% in ammonium nitrate and 16% in methanol. It is the only producer of isopropyl alcohol (IPA) in India. It also trades in some chemicals and fertilisers. But the lack of availability of sufficient natural gas remains a key problem. DFPCL recently diversified into the realty sector and has built a specialty shopping mall ‘Ishanya’ with 5.5 lakh sq ft leasable area in Pune. DFPCL also entered into a JV with Yara International, a global manufacturer of ammonium nitrate and specialty fertilisers. The JV will invest in the 300,000-tonne ammonium nitrate plant the company plans to set up at Paradip at a cost of Rs 400 crore. At current prices, this plant will generate annual revenue of over Rs 300 crore. The company is building storage tanks to facilitate imports of ammonia that will free up natural gas for other products. It also plans to reduce greenhouse emissions from its factories.

GROWTH DRIVERS:

After completion of DUPL, the company has drawn a test quantity of natural gas and seeks to finalise a firm supply for future use. Higher availability of natural gas will not only help it to operate its facilities at full utilisation levels, but will also enable it to save on high-cost naphtha. Volume growth from IPA business and revenues from ‘Ishanya’ will drive DFPCL’s profitability. At current lease rates, ‘Ishanya’ may add 10% to its operating profit.

FINANCIALS:

The company’s net sales saw a CAGR of 20.5% over the past four years, while net profit rose 10.1%. During the quarter ended December ’07, net profit fell 1% to Rs 24.5 crore, while revenue rose 13% to Rs 274 crore.

VALUATIONS:

The company’s EPS for trailing 12 months stood at Rs 11. The CMP of Rs 130.75is 11.9x this EPS. Supply of natural gas may boost its revenues by Rs 200 crore on a full-year basis. In addition to the savings on naphtha, this can boost its annual operating profit by Rs 45 crore. Although the company appears fairly valued at current price, the potential benefits from additional gas supplies have not being taken into account. It has consistently paid dividends. The stock can generate value for investors.

CONCERNS:

DFPCL has faced delays in project execution. Its future growth may suffer if it is unable to secure additional supply of natural gas in time

LIFE IN THE SLOW LANE

India Inc’s Q3 earnings show that while the growth story is intact, it’s not quite setting the blistering pace it once did.

THE STOCK market is being hammered, thanks to fears of a US recession and a number of subprime skeletons tumbling out of the closet. For those hoping that third-quarter (Q3) FY08 results will bring some cheer to the flagging market, the performance of India Inc has not been too encouraging. This was expected, given that some of the major economic indicators such as GDP, industrial production and exports are slowing down. While there have been some outperformers in Q3, at an aggregate level, signs of a slowdown are definitely visible.

We analysed the results of 2,380 companies for the quarter ended December ’07 and found that net sales grew by 16.4% over December ’06, while the growth in bottomline was restricted to 16.1%. The fact that this is the lowest YoY growth rate in the past six consecutive quarters strengthens the overall concern that the growth has begun to peak out. This sample excludes banking and oil & gas companies, which distort the real picture due to their size and fluctuating incomes.

The disconcerting trend that was witnessed in the past two quarters — wherein other income grew at a faster clip than operating income — continued in Q3. Other income, which contributed just 22% to the net profit in the December ’06 quarter, accounts for over 34% of the same in the December ’07 quarter. There is a disproportionate rise in interest costs as well, and increased tax provisions have also played a prominent role in the erosion of growth in net profit. However, to its credit, India Inc as a whole has displayed great resilience in maintaining operating profit margins higher than year-ago levels despite a slowdown. The aggregate operating margin in Q3 FY08 was 19.2%, against 19% in the corresponding quarter of the previous year.

Our analysis also reveals that the slowdown is secular in that it cuts across sectors. However, the slowdown in growth of the cement sector is the most striking. The cement industry managed to clock a meagre 6.2% growth in net profit, compared to the whopping 216.1% profit growth in December ’06 quarter.

The other industries that have reported consistently falling growth figures include capital goods, entertainment & media, steel and pharmaceuticals. However, packaging, chemicals, fertilisers and automobiles bucked the trend, showing a higher growth in the December ’07 quarter, compared to December ’06. The packaging industry’s good show is largely attributable to the significantly improved numbers published by Jindal Poly Films, Max India and Cosmo Films. The net profit of the packaging industry spurted 104.5% during Q3 FY08, against a growth of 29.5% in the December ’06 quarter. However, it must be noted here that other income played a significant role in boosting the profit of Max India.

The chemicals industry also had an exciting quarter, recording 42% profit growth during the quarter vis-à-vis 21% in the year-ago period. The profit growth in this industry was led by India Glycols, Phillips Carbon Black, Pidilite, Aarti Industries, DCW, Bihar Caustic & Chemicals and Hikal, while leading companies such as Deepak Nitrite, Chemplast Sanmar, Atul and Nocil found the going tough.

The fertiliser industry has been another outperformer during this period, led by substantially better profits reported by Gujarat Narmada Valley Fertilisers (GNFC), Zuari Industries, Coromandel Fertilisers and Mangalore Chemicals, while other companies suffered. The aggregate profit of this industry grew by 26.3% in Q3 FY08, against 24.3% earlier. However, it must be noted that GNFC’s profits were boosted due to the merger of Narmada Chematur.

The auto industry posted 14.6% YoY growth in net profit in the December ’07 quarter, against 10.6% recorded in December ’06. But this was mainly on account of higher other income, rather than operating income. Sharp jumps in other incomes of Tata Motors, M&M, Ashok Leyland and Hindustan Motors boosted the industry’s performance.

Sectoral woes apart, our analysis reveals that while operating margins remained stable during the quarter, the industry’s profits were eroded by interest costs and tax provisions, which are heading northwards. India Inc’s interest costs, which were around 2.7% of its net sales in the December ’06 quarter, have gone up to 3.6% in Q3 FY08. While the rise in interest costs can be explained by an overall increase in the cost of borrowed funds, an increase in corporate indebtedness cannot be ruled out. The industries which have witnessed the steepest rise in interest cost as a percentage of net sales are telecom, shipping & logistics, FMCG, steel & alloys, entertainment & media, cement and sugar. A FEW industries such as power, consumer durables and textiles have reduced their interest burden in proportion to their net sales.When it comes to tax provision, analysis shows that there has been a steady rise in tax provisions as a percentage of net sales, from 3.6% in the December ’06 quarter to 4.1% in December ’07. The two main reasons for this are marginal rise in the effective rate of tax and higher other income boosting pre-tax profit.

The cement industry witnessed the highest spurt in tax provisions, which stood at 10.5% of its December ’07 net sales, up from 7% in December ’06 and just 2.6% in December ’05. Fertilisers & agrochemicals, power and plastic & rubber products were some of the other industries that witnessed a disproportionate rise in tax provisions. On the other hand, telecom & equipment, textiles and shipping & logistics registered a gradual decline in the same.

The proportion of depreciation to net sales has remained range-bound in the past at around 3.5%. This indicates that the rise in depreciation is in line with growth in net sales. A rise in overall depreciation indicates increasing capital expenditure by corporates and hence, growth in depreciation is heartening. With new investments taking place, industries such as cement, shipping & logistics, sugar and telecom & equipment have witnessed a steady growth in depreciation as a percentage to net sales. On the other hand, for industries such as power and steel & alloys — where the gestation period for new capacities being commissioned is typically several quarters — this figure is on a downward trend.

India Inc’s December ’07 quarterly results have brought forward strong evidence which reinforces the nagging worries of investors. The growth in corporate sales and net profit has further slowed down, and if one has to go by global economic indicators, the immediate future doesn’t appear very cheerful. At the same time, interest, depreciation and tax put together are now taking a larger toll of 11.2% of net sales, compared to around 9.8% in the year-ago period. And other income is providing support to the growth in bottomline. If one removes the effect of other income from the profitability analysis, India Inc’s net profit level appears even more worrisome.

However, all’s not lost. One good thing that has come out over the past few quarters is India Inc’s ability to maintain its operating margins. The other positive is that given the upsurge in capital expenditure the economy is witnessing, corporates are expanding capacities and several infrastructure projects are under way. Lastly, so far, domestic consumption continues to be strong and this is likely to support India’s growth going forward, even when export growth stagnates due to the economic slowdown in the US. However, we may have to wait for another couple of quarters to confirm this conclusion.

Extraordinary gains keep petroleum sector afloat

THE petroleum sector came out with mixed results for the quarter ended December 2007. Dismal performance at the operating level during the quarter was boosted by extraordinary items — the prominent one being Rs 4,733-crore profit reported by Reliance Industries (RIL), contributed by stake sale in Reliance Petroleum (RPL).
A set of nine companies operating in petroleum exploration and production, refining and marketing witnessed a 16.3% growth in aggregate net sales. Operating profit growth was restricted to 3.1% due to under-recoveries from sale of fuels by marketing companies. Net profit rose by 48.2% on account of higher extraordinary income. If one were to exclude this item, the real growth in PAT would have been just 7.7%.
Integrated marketing players continued to suffer from under-recoveries as domestic fuel prices did not rise in line with the increase in international prices of crude oil and petroleum products during the quarter.
These companies — Indian Oil, HPCL and BPCL —could not derive any benefit from higher gross refining margins, higher help from the government and higher discounts from upstream oil companies. BPCL’s net profit fell by 4% while HPCL reported a net loss. The industry leader Indian Oil registered a 16.7% improvement in bottomline at Rs 2,091 crore.
In the private sector, RIL enjoyed an excellent quarter, posting refining margins of $15.4 per barrel. Sub-optimal performance of its other business segments resulted in operating margin falling below the year-ago level. The other private sector refiner Essar Oil continued to lose money in the same period.
Standalone public sector refiners reported multifold rise in profit due to strong refining margins. Being comparatively smaller in size, their performance did not have any material impact on aggregate results. T
he three standalone refiners — Mangalore Refinery (MRPL), Chennai Petroleum (CPCL) and Bongaigaon Refinery (BRPL) — together represented around 9% of the aggregate December 2007 sales of the industry and around 6% of PAT.
The rising crude oil prices, as high as $100 per barrel in the global markets, could not improve the performance of the country’s largest petroleum exploration and production firm ONGC.
Under the government directive, the company had to extend record-high discounts, exceeding $30 per barrel to marketing companies.
ONGC’s sales dipped 2.9% during the quarter and operating margins weakened. However, higher other income and fall in depreciation helped the company curtail the fall in net profit to 6.5%. The strong performance by refining companies and private players may continue depending on the gross refining margins. However, the rate of growth is likely to remain tapered.

The Time’s Ripe

Budget-speak may result in stocks getting hammered & that’s when smart money moves in

BUDGET ANNOUNCEMENTS don’t affect all sectors or companies uniformly. While some tax proposals improve market sentiment with regard to certain sectors, others have a negative influence on some other sectors. A case in point is the excise duty hike on cement and withdrawal of indirect tax exemption available to construction companies with retrospective effect announced last year. The market reacted swiftly, pulling down the stock price of most of the stocks in the two sectors.The ET Cement index fell by 6% on budget day, while ET Construction index shed 8%.

The pessimism in the two sectors continued for over a month. However, by the end of ’07, most of the stocks in the two sectors reached new highs. Is it a coincidence or is this a regular feature in the budget month? To find out, we studied the movements of ET sectoral indices on budget day and during the following weeks, for five years since ’03. Additionally, we compared the Sensex returns in February and March for every year since 1991.

The results were startling. We found that every budget leads to a fall on the budget day (and the following weeks) in some or other sectors. And this provides a buying opportunity for investors, since the fall is a temporary phenomenon. In ’07, for instance, the ET Construction index more than doubled from its closing value on budget day. In ’03, shipping, textile and sugar indices witnessed a similar trend.These three indices fell the most on budget day and ended March with a negative return of 10%. In the next 12 months, however, their value nearly tripled.

The Sensex exhibits similar gyrations during and after the budget. In 13 of the past 17 years since 1991, the benchmark index has fallen in the month of March. But the post-budget blues are almost often preceded by a mini rally in February. Hence, the decline in stock prices due to the budget has no relation with the expected future returns in the following months. Instead, investors can use this as a buying opportunity. As the fall continues for at least two weeks after the budget, investors need not rush to buy the stock on the budget day. They will be better off if they accumulate their favourite stocks over a period of time and thus, lower the average investment cost. For example, in ’04, the ET Consumer Durable index fell over 2.5% in the week following the budget day. Subsequently, it declined by another 9% in the next week and finally ended the month with a negative return of 14.5%.

But here’s a word of caution for investors. Do not buy a stock only because it fell on the budget day. Instead, buy those stocks that are growing and are expected to grow even after the budget.What matters in the medium and long term is the demand for goods and services offered by the company. In a growing economy, the company can easily pass on tax increases to its customers.

High user charges take the sheen off new airports

User Fees,Airport Charges Make Flying A Costly Affair

EXPECTATIONS of air travellers that privatisation of Indian airports will bring in efficiency and make air travel cheaper seem to be completely misplaced. User fees and recovery of infrastructure charges by concessionaires on fuel, baggage handling will be passed on to passengers, thereby increasing the cost of air travel. After the muchdiscussed user development fee of Rs 675 that every passenger using the new Bangalore airport will have to pay, the GMR group-promoted Hyderabad airport has written to oil companies saying it will impose throughput charges of Rs 2,170 per KL of aviation fuel.

Oil companies have confirmed that they will pass on the cost to airlines. Airline executives said they would resist any increase in costs because margins in the business are already wafer-thin. The Federation of Airlines plans to take up the issue with the ministry of civil aviation. However, if they were forced to pay the charges, airline sources said they would have to pass them finally on to passengers. Incidentally, airlines are already fighting with airports on a similar increase in ground handling charges. Domestic airlines already collect Rs 1,600 as fuel surcharge on every ticket. This charge has been kept constant even though fuel prices have declined in January.

The confusion on how much to charge on each of these counts is compounded because of the lack of an airport regulator to decide on the issue. The proposed AERA (Airport Economic Regulatory Authority) Bill is slated to be presented in Parliament in the Budget session. The two new airports in Hyderabad and Bangalore will, however, be open for business in March.

The aviation fuel station at the Hyderabad airport, being built by GHIAL, owes its existence to an open access policy that allows every eligible oil company to market fuel. Throughput charges cause heartburn

ALMOST all oil refining companies, including RIL, MRPL and Essar Oil, had expressed interest in operating at this airport. But the higher throughput charges have come as a shock, said one private refiner who did not wish to be identified. GMR Group spokesman clarified: “No final decision has been taken on the fuel pricing yet.’’ However, the e-mail sent to the oil companies and available with ET details the proposed charges. The communication states that GHIAL plans an ‘infrastructure recovery charge’ of Rs 1,500/KL and throughput fee of Rs 670/KL. A service tax of 12.3% will be extra. The new airport is scheduled to be opened on March 16.

There is no information yet from the other private airport, which is being constructed by Siemens-led consortium in Bangalore. The BIAL airport spokesperson said the charges are still being worked out. However, oil companies maintained that a similar increase could be on the cards. A consortium of oil PSUs — Indian Oil and Indian Oil Tanking — is putting up aviation fuel facilities at this airport and they will be recovering the charges subsequently.

“Worldwide, throughput charges are imposed by airport authorities to recover the capital expenditure of setting up the infrastructure over a period of time. But at these high rates, GHIAL’s capital costs will be recovered in just 3-4 years. After that, it will be just pure profits to the airport owner,” said an airline company official.

While throughput charges at major airports are currently not very high, the tendering process for upgrading airports in Chennai and Kolkata had revealed that players were willing to pay up to Rs 1,200 per thousand litres of aviation fuel. However, the aviation industry appealed to the ministry against this method of deciding the throughput charges.

TIME TECHNOPLAST : Life In Plastic, It’s Fantastic

Higher capacities and new products will drive Time Technoplast’s future growth. Investors with a 12-month horizon may find the stock attractive

TIME TECHNOPLAST (TTL) is one of India’s leading producers of plastic products with an annual turnover of Rs 500 crore and a market capitalisation of Rs 1,650 crore. The company focuses only on niche, technologically superior plastic products. It came out with its initial public offer (IPO) in mid-’07 to fund its expansion plans. Considering its upcoming capacities, recent acquisitions and a strong product pipeline, the scrip is expected to generate substantial returns for investors over the next 12 months.

BUSINESS: TTL has a 75% market share in the domestic industrial packaging segment. It has a technology tie-up with German major Mauser since 1993. The company’s product portfolio includes industrial packaging products such as drums and containers for chemicals producers, lifestyle products like matting and turfs, auto components such as radiators and anti-spray rain flaps, healthcare products that include auto-disable syringes and products for infrastructure such as safety nets and reinforcement for road surfacing.
TTL’s production is spread across six locations in the country, giving the company a wide reach and logistical advantage. In October ’07, the company added another vertical to its business by acquiring NED Energy, which supplies batteries to the telecom sector. In FY07, NED Energy earned a net profit of Rs 3.3 crore on sales of Rs 45.1 crore.

GROWTH DRIVERS: The company started FY08 with a plastic processing capacity of around 50,000 tonnes per annum (tpa) and plans to double this figure by the year end. Within the next two years, it aims to become the largest plastic processor in the country. It is also setting up plants abroad. Its industrial packaging facility at Sharjah was commissioned in October ’07, while its auto components plant in Poland started functioning in January ’08. To augment NED Energy’s battery manufacturing capacities of 100 million ampere hours (Ah), it acquired Bahrain-based Gulf Powerbeat with an installed capacity of 150 million Ah. It plans to add fresh capacities of another 200 million Ah by September ’08. The battery business alone can contribute Rs 160 crore to the company’s turnover in FY09. The company has several new products in its pipeline. These include ‘green batteries’ — which reduce the quantity of lead and acid — lightweight batteries, gel batteries and others. TTL is also working on new products such as plastic fuel tanks for automobiles, glass reinforced polymer cylinders for LPG and CNG and high-pressure polyethylene pipes, among others. Most of these products, which will be rolled out over the next few quarters, have huge growth potential in domestic and exports markets.
The company is also trying to develop the first commercially usable fuel cell. It has signed an exclusive agreement with Council of Scientific and Industrial Research (CSIR) for transfer of fuel cells technology. In coming months, the environment for domestic plastic producers is expected to improve, which will benefit TTL. It is expected that excise duty on plastic products will be slashed in the forthcoming Budget, that will improve polymer consumption in the country. Moreover, with the addition of several new polymer capacities, the global polymer market is expected to face a glut from the end of ’08, which will put pressure on polymer prices.

FINANCIALS: TTL’s net sales witnessed a compound annual growth rate (CAGR) of 47.5% from Rs 124.4 crore in FY04 to Rs 399 crore in FY07. PAT during the same period saw a substantially higher CAGR of 102.8% to Rs 41.1 crore. During the nine-month period ended December ’07, it reported a net profit of Rs 64.7 crore, which included extraordinary gains of Rs 13.4 crore. Net sales stood at Rs 458.4 crore, with operating margin of 21.4%. Since the last quarter of the year generates maximum sales and profits, the company may post a net profit of Rs 90 crore for the whole of FY08.

VALUATIONS: TTL’s current market price of Rs 792 discounts the projected EPS for FY08 by 18.4x. We expect the company to continue its high-paced growth in future, thanks to its expansion plans and products in the pipeline. High-performance products will enable it to maintain its market leadership, thus resulting in higher operating margins in future. We expect the scrip to generate healthy returns over the next 12 months.

TULSI EXTRUSIONS: No Head Room

Tulsi Extrusions’ valuations are comparable with that of its peers. So, there’s hardly any upside left for investors

COMPANY: TULSI EXTRUSIONS ISSUE SIZE: Rs 45.6-48.45 CRORE PRICE BAND: Rs 80-85 DATE: FEBRUARY 1-5, ’08

TULSI EXTRUSIONS (TEL) is a Jalgaon-based PVC pipe manufacturer. The company has come out with an initial public offer (IPO) to raise over Rs 45 crore to fund its expansion projects, as well as long-term working capital needs. Approximately 60% of these IPO funds will be used for the expansion project to increase the company’s PVC pipes capacity by 70% and add new products such as polyethylene pipes and fittings. The remaining proceeds will be utilised to set up branch offices, meet working capital requirements and for other general purposes. Although the demand for PVC pipes in India is growing rapidly, the pricing of the IPO appears aggressive. Investors can consider skipping the IPO.

BUSINESS: With the acquisition of three associate companies in the past 12 months, TEL has a total PVC pipes and fittings capacity of 10,483 tonne per annum. The company markets its products under the brand name ‘Tulsi’ in Maharashtra, Madhya Pradesh, Chhattisgarh, West Bengal and Rajasthan through a network of 867 dealers. TEL’s products are suitable for agriculture, transportation of potable water, sewerage and drainage systems, construction and telecom industries. It has entered into a joint venture agreement with an associate company in South Africa to expand the geographical reach of its business. It also plans to set up a 1.5-mw wind power generation project at a capital cost of Rs 10 crore to meet its captive energy needs.

GROWTH DRIVERS: Plastic pipes continue to capture an increasing market share from conventional steel pipes. TEL’s expansion project is expected to come on stream by the end of July ’08, which will drive up economies of scale. With higher production, the company will be able to widen its geographical presence.

FINANCIALS: During the first eight months of FY08, TEL achieved a net profit of Rs 4.7 crore on net sales of Rs 36.8 crore. Its operating margins were substantially higher at 20.4%. The company’s net sales, which have been growing at a compounded annual rate of 72% since FY03, touched Rs 59.2 crore in FY07, while net profit witnessed a CAGR of 62% during the same period.
TEL’s operating cash flows have been negative during three of the past four years, as well as during the eightmonth period ended November ’07. It has witnessed an increase in borrowed funds over the past few years. However, its debt-equity ratio has reduced to 0.9 for the eight-month period ended November ’07 from 2.5 as on March 31, ’06 and 1.29 as on March 31, ’07.

VALUATIONS: After the current IPO, TEL’s equity capital will increase to 1.25 crore equity shares of Rs 10 each. Considering this postissue equity, the annualised earnings per share for the eight-month period ended November ’07 work out to 5.7.
As a result, the P/E multiple stands between 14.1 and 15 at the lower and upper price band, respectively. TEL’s valuations are comparable with that of its peers in the plastic products industry, such as Astral Polytechnik, Finolex Industries, Nilkamal and Supreme Industries. As a result, there is hardly any upside left for investors.

Kenyan chaos takes a toll on Tata Chemicals’ profit

ON A consolidated basis, Tata Chemicals reported a 42% fall in net profit at Rs 91.1 crore during the quarter ended December 2007 on the back of a 5% fall in net sales to Rs 1,700.1 crore. However, this dismal performance was mainly the result of some one-time expenses and losses totalling around Rs 35 crore, which are not likely to repeat in future.
The consolidated Q3 results were affected by four important factors. First, the company refinanced over $40-million high-cost debt with low-cost loans, paying a pre-payment penalty of over Rs 14.5 crore. Second, the operations in Kenya were affected in December due to political unrest. Also, the interest and depreciation costs moved up as the new soda ash facility in Kenya commenced production. Finally, higher coal prices in Europe could not be passed on to customers due to long-term contracts.
However, the scenario has changed since then. The new soda ash plant in Kenya has achieved nearly 80% capacity utilisation level and the unrest has ebbed. In Europe, new contracts for 2008 were signed at over 10% higher prices. Over 90% of European sales of the erstwhile Brunner Mond Group, which TCL acquired in 2005, are 1-year contract now. At the same time, the company’s expansion projects as well as new ventures in India are on track.
TCL’s operating margins improved slightly during the quarter, thanks to a better performance by the fertiliser business. The segment profits improved despite a fall in revenues, as the company curtailed trading in di-ammonium phosphate (DAP), which was incurring losses due to unprecedented spurt in international DAP prices. The inorganic chemicals segment had a tough run though.
The company on January 31, 2008, announced acquisition of GCIP — a US-based natural soda ash maker with annual capacity of 2.5 million tonne. Valued at $1 billion, financing this acquisition remains an important issue for the firm, which currently carries around $175 million in cash and liquid investments and around $375 million in listed equities. The company’s outstanding debt as on December 31, 2007, stood at $372 million, including $96 million of outstanding FCCBs. As a result, the company enjoys considerable flexibility to finance the acquisition through a mix of debt and equity.
This acquisition will take TCL’s total soda ash capacity to 5.5 million tonne with a 14% global market share. Over 50% of this capacity is based on natural soda ash, the production cost of which is just 40% that of synthetic soda ash. The soda ash demand remains strong globally while the supply continues to remain stiff. As a result, the international prices continue to hover around $300 per tonne mark. The demand in the US is likely to weaken in the coming months due to a housing slump. However, the demand in emerging economies, including China and India, is growing fast, which will sustain the current high prices. The lower cost of production at the newly acquired US facility gives TCL the flexibility to sell the material in farther away countries.