Nagarjuna Agrichem: On a Fertile Land

Higher Profit Growth, Capacity Expansion Plans To Decide Its Stock Movement Now

THE Hyderabad-based agrochemical manufacturer Nagarjuna Agrichem (NACL) has significantly outperformed the markets in 2009. In the past one year, the scrip has gained over four times, while the benchmark Sensex rose 1.8 times. Apart from the re-rating of the agrochemical industry, the company’s earnings growth also contributed to this upsurge. For the 12-month period ended September 2009, NACL’s profit jumped 90% against the year-ago period.
The company currently operates three plants in Andhra Pradesh — the largest at Srikakulam manufactures technical agrochemicals and undertakes contract manufacturing while the smaller ones at Ethakota and Shadnagar are engaged in formulations.
The company is currently expanding its existing capacities through a capex of Rs 16.5 crore. This envisages doubling its formulation capacity and 37% expansion to its technical capacity at its existing plants. Additionally, the company plans to set up a greenfield project in an SEZ in Vishakhapatanam at a capital cost of Rs 205 crore, which will double its current technical pesticides capacity. The company is expected to raise around Rs 125 crore of equity for the same with Rs 30 crore from internal accruals and Rs 50 crore through fresh issue of equity. At the current market price, this may entail nearly 13% dilution in equity.
The company has a bouquet of products in the retail market offered under 43 brands. The company distributes its products through a network of 8,850 dealers across the country. The proposed expansion will boost its exports going forward.
The western states of the country — Maharashtra, Haryana, Gujarat, Punjab and Karnataka — apart from Andhra Pradesh, constitute nearly 70% of the company’s domestic sales. Nearly half of the company’s annual revenues come from exports to over 15 countries, including the US, Europe and Japan. The company, which was traditionally managed by the promoter group, has recently brought in professional management by appointing a new chief operating officer in January 2009. The company has also set up a vision to expand its sales to $500 million by 2015. Considering Rs 605 crore turnover for FY09, this envisages a CAGR above 25%. The company, which paid Re 1 per share as interim dividend last year, has doubled it to Rs 2 per share this year. For FY09, it had paid further Rs 3 per share as final dividend.
The company, which is currently commanding a price-to-earnings multiple of 13.5, appears fully justified in view of the healthy growth outlook. The company’s future profit growth and proposed equity dilution will be the key issues that shareholders should watch out for.

Kemrock Industries: Dilution effect

The Vadodara-based manufacturer of composite plastics and products, Kemrock Industries, recently announced its board approval for Rs 400 crore of preferential issue of equity shares and issued 16 lakh equity warrants to a strategic investor. The warrants were issued at Rs 90 each at 25% of the issue price of the equity shares. The rest 75% will become payable over the next 18 months on conversion of the warrants.
Earlier in May ‘08, the company allotted 4.6 lakh shares and 3.93 lakh warrants to the same strategic investor, RPM International, at Rs 650 each on a preferential basis. RPM International, a US-based manufacturer of paints and sealants, currently holds 15.85 lakh equity shares or 14.4% of the equity of the company. Assuming a full conversion of the recently issued 16 lakh warrants, RPM will become the second largest shareholder in the company after the promoter and managing director Mr. Kalpesh Patel. However, crossing the 15% holding limit will trigger an automatic open offer for the company, which can make it the largest shareholder of the company.
Kemrock’s performance on the bourses has been spectacular in ‘09 so far despite a forgettable ‘08. In ‘08, the company suffered from weak earnings performance that impacted its valuations. The company, which was trading at over 45 times its profits at the start of ‘08, was being valued at just 5 times the profits by the year end.
During ‘09, Kemrock’s valuation improved swiftly despite a continuing stagnancy in its profit growth. Currently, the company’s market capitalisation is twoand-a-half times that at the start of the year. However, this is mainly due to doubling of the P/E multiple of 11, as its per share earnings grew merely 10%.
The company has also diluted its equity periodically, which has impacted the per share earnings. Between December ‘07 and December ‘09 the equity has expanded nearly 46% from Rs 7.55 crore to Rs 11.01 crore. This is just the paid-up equity without considering outstanding warrants that can be converted into equity shares at the option of the holder.
Considering the company’s successive equity dilutions, retail shareholders are unlikely to benefit from any future earnings growth by the company.

AGROCHEM: Good numbers, dividends key

START of the rabi sowing season has invigorated the performance of agrochemical companies on stock exchanges. India’s agrochemical manufacturers have done exceedingly well on the bourses gaining 15.8% in market capitalisation against a 1.8% fall in the Sensex over the last one month. This appreciation in the market value comes both from growing earnings as well as improved valuations. In the past six months, when the average price-to-earnings multiple of the Sensex’s 30 stocks gained around 13% to 21.4 at present, the valuation multiples of a number of agrochemical companies zoomed past swiftly, which marks a re-rating of the industry.
The industry leader United Phosphorous, which was trading around 13 times its profits for the past 12 months six months back, is now commanding a P/E multiple of around 17.3 — a gain of 33%. The biggest beneficiary of rerating of this industry was Sabero Organics and Nagarjuna Agrichem, both of which are on Wednesday trading at P/Es that are 70-80% higher than six months back. Not all the companies have benefited from rerating of the industry, though. Excel Crop Care and Insecticides India are still trading at almost similar valuation, as they were six months back and the change in their market capitalisation comes mainly from earnings growth. Excel Crop Care’s per share earnings are down 6%, while Insecticide India’s earnings have grown 16% in the past six months.
The main reason of this rerating of the industry has obviously been the earnings growth, with most players registering a steady growth despite monsoon related problems. During the September 2009 quarter, which is the most critical quarter for the Indian agrochemical players due to the kharif season, the agricultural production was down due to erratic rains and reduced acreages. However, overall, the agrochemical industry did well, mainly due to the increased liquidity in the hands of the farmers. Interestingly, Punjab Chemicals was one of the largest gainers. Although the company can report profit for the December quarter, it seems far from wiping its slate clean. Other main gainers were United Phosphorous, Sabero Organics and Nagarjuna Agrichem. Meghmani Organics, Excel Crop Care, Rallis India and Insecticides India proved to be the laggards over the past one month.
At present, the expectations of the future performance of the pesticides industry are indeed bright. However, the recent rerating of the industry means there are hardly any hidden gems now. Steady earnings growth prospects and dividends could be the prime considerations, rather than a jump in valuation multiples should be the investors’ aim henceforth.

OPEC: Oil cartel may fail to maintain balance in ’10

ORGANIZATION of Petroleum Exporting Countries (OPEC) members may have to cut production in 2010 as well, similar to what they did in 2009. Although oil prices have stabilised and there are signs of a recovery in the global economy, doubts about the sustainibility of the recovery linger. The picture is not yet clear on the demand outlook for oil in 2010, while the market continues to remain well-supplied with high inventory levels. This was the major concern with which the 12-member OPEC met on Tuesday in Angola.
In 2009, OPEC members cut back on their oil production sharply, following the economic turmoil and market crash in 2008. However, crude production from non-OPEC countries gained steadily. The International Energy Agency’s data show that OPEC’s oil production was lower by 2.7 million barrels per day (mbpd) in 2009 whereas non-OPEC production rose by 0.5 mbpd. The scene is unlikely to change even in 2010. The non-OPEC production is expected to rise further by another 0.8 mbpd to 51.9 mbpd in 2010, while the production of natural gas liquids (NGLs) will add another 0.8 mbpd to supply. These increases are expected to prove sufficient for taking care of whatever incremental demand comes up in 2010 from the ongoing recovery in the global economy. In other words, to support the prices by maintaining the demand-supply balance, OPEC will have to produce even lesser in 2010 than it was producing in 2009.
This phenomenon is ultimately resulting in the world’s reduced dependence on OPEC. Nearly 34.7% of the world’s oil was being produced by OPEC in 2004, which went up to 36.1% in 2008. However, this has come down to 33.7% in 2009 and is expected to reach 33.1% in 2010. Even as they are cutting back on production, OPEC members are also investing heavily in increasing their production capacities. It was not surprising, therefore, that in his opening remarks for the OPEC Conference, Angolan petroleum minister Josi Maria Botelho de Vasconcelos stressed the need for all petroleum producing countries — OPEC as well as non-OPEC — to come together to balance the market.
The final outcome of the OPEC Conference to leave the earlier decided quotas at 24.845 mbpd was in accordance with market expectations. However, the compliance with this quota has been steadily reducing. OPEC’s latest report puts the total production by 11-member countries at 26.6 mbpd or nearly 1.8 mbpd higher than the quota. The slippage, if continues unchecked in future, can add pressure on global oil prices.
Although OPEC countries are temporarily feeling the heat of the situation, they are going to rule the oil market in the years to come. Nothing makes it clearer than the fact that these 12 countries put together control over one trillion barrels of oil reserves, which is nearly threefourths of the world’s total proven oil reserves.

Financing growth opportunities

Asian Oilfields, which is one of the listed seismic data acquisition companies in India, recently announced a preferential allotment of 40.5 lakh equity shares to Samara Capital, which can raise around Rs 25 crore. Samara Capital is already the single largest shareholder in the company with over 13.3% stake and this preferential allotment will take its stake above 36.2%, triggering an open offer according to SEBI norms.
Asian Oilfields, which has emerged debtfree, is raising these funds to finance its growth opportunities. Firstly, it is planning to diversify into mineral exploration through core mining drilling. It has already obtained contracts worth nearly Rs 5 crore and an investment of Rs 15 crore is envisaged in buying two drilling rigs. This will also enable the company to utilise its assets during the monsoon season when seismic data acquisition is not possible.
At the same time, it is also moving up the value chain in petroleum exploration by undertaking a 3D data acquisition contract for the first time. The company may have to invest up to Rs 20 crore in equipment and infrastructure if it gets the contract.
At the moment, the company is executing a 2D data acquisition contract in Mizoram with the unexecuted portion worth of Rs 15 crore. There are several contracts in the pipeline, where the results will be known in the coming weeks.Other things remaining equal, if we consider the equity dilution from the proposed preferential allotment, the P/E ratio would rise to 23.3, which is on a higher side. Although the company appears to be on a growth path and the E&P industry continues to grow domestically, the company does not have a steady growth record. Only a strong order flow in the near future could justify such high valuations for the company.

Looking for a better tomorrow

THE Punjab-based IOL Chemicals commissioned its 6,600-tonne per annum plant to manufacture isobutyl benzene (IBB), which marks the near completion of its Rs 250-crore expansion plans launched last year. When this expansion plan is completed by March ‘10, the company will emerge as India’s largest producer of ibuprofen with full backward integration in terms of raw materials and power.
The company had earlier raised capacities of its chemical products such as acetic acid, acetic anhydride and added plants to manufacture acetyl chloride and monochloro acetic acid (MCA), which again are inputs for ibuprofen. By March ‘10, its ibuprofen capacity will reach 6,000 tonnes from the current 3,600 tonnes, making IOL India’s largest producer of this anti-inflammation drug. The company is also completing expansion of its captive power plant from 4 MW to 17 MW.
The company’s performance during the first half of FY10 was subdued mainly because of the global depression in the acetic acid and derivatives market, which together constitute nearly 70% of the company’s annual sales. The rising cost of alcohol, the company’s key raw material, also impacted profits. But with the new sugarcane crushing season starting in India, the raw material worries will subside.
The expansion project is likely to bring down the average cost of production for the company and improve its margins. At the same time, the company, which has already started marketing IBB, will continue to sell at least one-third of its production in the open market. The company, which recently obtained permission to export to Canada, is also awaiting US FDA approval for its ibuprofen. Exports to US can improve its realisation by nearly 10% compared to other export markets. All these factors will bring in additional revenues and profits to the company.
The company is currently carrying around Rs 210 crore of debt taken mainly for the expansion projects. In the next step, the company has plans to enter the market of anti-ulcer pharmaceutical ingredients by setting up a Rs 100-crore plant. R&D efforts and pilot testing are under way and the company may go for private equity placement to finance the unit. The company has also announced plans to make a preferential allotment of 15 lakh shares and 30 lakh warrants to the promoter group. The scrip, which is currently trading at 12.5 times its profit for the last 12 months, appears fully priced.

TATA CHEMICALS: Just The Right Chemistry

Tata Chemicals is not only expanding its core businesses, but is also diversifying into new areas. The stock is an excellent investment target for investors with a 12-month horizon

TATA CHEMICALS (TCL), one of the world’s largest manufacturers of soda ash, is benefitting from rising soda ash prices globally, while policy changes have boosted the profitability of its fertiliser business. It has embarked upon several capacity expansion projects and is diversifying into biofuels. TCL will reach new heights once these projects come on-stream in FY09. Consider investing in the company with a 12-month horizon. Incorporated in 1939, TCL is India’s leading manufacturer of inorganic chemicals, fertilisers and food additives. The company, which is currently valued at a little over Rs 8,000 crore, reported consolidated net sales of Rs 5,800 crore for FY07. TCL acquired UK-based soda ash maker Brunner Mond in December ’05, which owns plants in the UK, the Netherlands and Kenya. It also holds one-third equity stake in a phosphoric acid manufacturing Moroccan company IMACID.

BUSINESS:
TCL’s fertiliser manufacturing business contributes nearly 60% to its total revenues. It has a 0.87 million tonne per annum (mtpa) capacity of urea and 1.2 mtpa capacity of phosphatic fertilisers. TCL is also one of the world’s leading synthetic soda ash makers with a total combined capacity in excess of 3 mtpa and commands an 8% global market share. It has 50% share in the branded, iodised salt market in India. It is also aggressively optimising costs in a bid to sustain the competitive advantage in global markets. GROWTH DRIVERS:
Currently, TCL has gained, thanks to two favourable developments. The first of these is policyrelated: the quarterly system of calculating subsidy is now done on a monthly basis, and subsidy towards distribution cost has increased. This has resulted in higher and quicker receipts of subsidy payments from the government. TCL will also benefit from any further easing of the government’s fertiliser policy. The second factor is the global shortage of soda ash, which has boosted prices to new highs. Hence, soda ash prices, at $300 per tonne, are around 40% higher on a year-on-year (YoY) basis. TCL also has aggressive growth plans. Debottlenecking projects are under way at its urea as well as inorganic chemicals plants, which will be completed by September ’08. This will boost TCL’s domestic soda ash capacity by 30% and urea capacity by 60%. Even the cement and salt capacities will go up. These additional capacities, when fully functional, will add over Rs 1,100 crore in revenues annually. Besides India, TCL aims to expand its presence in the global soda ash business as well. It recently expanded its soda ash capacity in Kenya, which is one of the lowest cost producers of soda ash in the world. The company plans to set up another plant there. Besides its existing business, TCL is also diversifying into new areas. Biofuels is one such business it is bullish on.
The company is setting up a 30-kilolitres-per-day (klpd) sweet sorghum-based ethanol facility at Nanded in Maharasthra. This facility is being set up as a prototype, which, if works well, can be expanded to 100 klpd in future. It has also formed a company called ‘Khet-Se Agriproduce India’, in a 50:50 joint venture with Total Produce of Ireland, to foray into wholesaling agricultural commodities — one of the fast-growing business opportunities in India.

FINANCIALS:
TCL reported a healthy 26.1% growth in net profit in H1 FY08 on a consolidated basis, despite a mere 2% sales growth. It also expanded its operating margins, thanks to stringent cost management. The performance would have been even better, had it not been for exceptionally heavy rains in Gujarat, which affected the production at its plants. TCL posted 18.6% YoY growth in net profit and 43.9% YoY growth in sales for the year ended March ’07.

VALUATIONS:
At the current market price of Rs 360, the scrip is trading at around 13.8 times its consolidated EPS for trailing 12 months at Rs 26.1. Based on the estimated forward EPS of Rs 35.2 for FY09, the P/E will be 10.2. This is highly attractive, considering TCL’s current performance, as well as expansion plans. Being a Tata group company, TCL holds equity stakes in most of the group companies such as Tata Motors, Rallis India, TCS, Tata Tea and Tata Steel, among others. The current market value of these listed investments accounts for roughly one-fifth of TCL’s total market capitalisation. Considering all these aspects, we believe TCL is an excellent investment target for investors with a 12-month horizon.

RISKS:
The newly expanded soda ash capacity in Kenya is currently facing some technical problems and is running only at 30-40% capacity. Full benefits of this facility may not be available till the end of FY08. Any significant fall in global soda ash prices may have a negative impact on the company’s growth.

POTENT MIX
TCL is present in all three key agro-nutrient segments in the fertiliser business — nitrogen (N), phosphorous (P) and potassium (K)
Easing of government’s fertiliser subsidy payment policy has had a positive effect on TCL’s cash flows
It is diversifying into the biofuel business and wholesaling of agro-products Debottlenecking projects will add around Rs 1,100 crore to sales on completion
TCL has set up an innovation centre at Pune to explore new business areas in nano and biotech space
TCL operates ‘Tata Kisan Sansar’ network of 514 outlets in North and East India to provide agri-inputs to farmers
TCL’s ‘Khet-Se’ initiative involves setting up collection and processing centres, as well as a cold chain for the distribution of fresh vegetables and fruits Tata Salt controls over 50% market share in the branded salt segment in India TCL’s production at the Mithapur plant was affected during the quarter ended September ’07 due to heavy rains and technical problems

Refining Industry: Woes Are Not Over Yet

HIGH crude oil prices, low demand and burgeoning inventory levels continue to haunt the global refining industry, which is witnessing a steep fall in margins, forcing production cuts. The industry is going through a transformation, as new refineries in India and China are ramping up production, while their counterparts in the West are curtailing it. As the International Energy Agency — an energy advisory to the 28 industrialised OECD nations puts it — ‘the refining industry is grappling with the outlook of persistently weak profitability’.
The seasonal demand of fuel oil, which usually peaks in the winter months, is pretty low this year. The US department of energy expects the country’s fourth-quarter fuel demand to dip 7% against the year-ago period due to recession. High inventory, too, is a problem. The fuel oil stocks in the US typically peak close to 135 million barrels in November or December before being drawn down through the remaining winter months. However, by end-September ‘09, the stocks had crossed 170 million barrels — more than 25% higher than the typical peak. This spurt in crude oil prices, without a commensurate increase in refined products, has resulted in severe erosion in refining margins. According to the global indicative margins computed by British Petroleum (BP), the refining margins for the September-December 2009 quarter are likely to be the lowest-ever since 1990 when the computing began. Till date, the fourth quarter indicative margin stands at $1.12 per barrel against an average of $4.87 in the January to September 2009 period, or $5.19 for the fourth quarter of 2008.
No wonder that the refiners are now cutting down production as much as is economically feasible. According to the Organization of Petroleum Exporting Countries (OPEC), the refining capacity utilisation for October 2009 was 81.9% in the US, 81.2% in the Europe and 81.3% in Japan. Although the current low utilisation level could improve, the inventory pile-up will prevent any sharp spurt in the next few months. The current situation is turning out to be a good opportunity for growth-oriented Asian companies to expand their presence in target regions through acquisition of assets. Reliance Industries is currently negotiating with LyondellBasell in Europe, while Essar Oil is negotiating with Shell for its three European refineries. At the same time, companies such as Cals Refinery and Nagarjuna Oil are in the process of dismantling and relocating refinery units from Europe to India. The refining industry is currently going through a painful, though necessary, process of transformation. Although domestic refiners are operating at over 100% of their rated capacities, their refining margins are set to suffer. Unless crude prices ease, the next few months appear difficult for petroleum refiners.

DyStar buy a boon for Kiri Dyes

The 6-Fold Jump In M-Cap Since January ‘09 Is More Than Sensex’s Growth Of 1.7 Times

AHMEDABAD-BASED dyestuff manufacturer Kiri Dyes, which launched an IPO in early-2008, has widely outperformed the benchmark BSE Sensex in 2009. The six-fold jump in the market capitalisation of this company since January 2009 has been more than just 1.7 times growth in the Sensex. Apart from the successful implementation of its backward integration projects and improving profitability, its acquisition of DyStar boosted its stock market performance.
Although the full details are not yet available, the single location company from Gujarat with an annual turnover of close to Rs 300 crore has agreed to buy selective assets of the world’s leading dyestuff manufacturer DyStar. DyStar, which filed for a bankruptcy protection a couple of months ago, is a Rs 5,500 crore turnover company with 20 production units in eleven countries.
For quite some time, Kiri Dyes had been contemplating inorganic routes to propel its growth. In August 2009, its board had approved raising Rs 250 crore through qualified institutional placements (QIPs) or FCCB/GDR etc. Simultaneously, it increased the limit of FII investment to 49% from 24% earlier.
The company also raised its borrowing powers from Rs 300 crore to Rs 700 crore and also set up an overseas subsidiary.
Kiri Dyes had raised Rs 70.7 crore by way of an initial public offer of its equity shares in April 2008 to set up plants manufacturing its raw materials such as sulphuric acid, H-acid, olieum and chlorosulphonic acid. This backward integration has enabled the company to expand its operating margins, which stood at 21.2% for the half year ended September 2009 compared to 16.3% in the corresponding period of last year.
The company also entered into a joint venture with China’s Well Prospering Company to set up an export-oriented dyestuff manufacturing unit in Gujarat that commenced operations in July 2008. Well Prospering had acquired a 8.3% stake in the company through a pre-IPO placement.
During 2009, the promoters’ shareholding in the company increased to 69.8% as of end-September 2009 against 66.6% at end 2008, while FIIs raised their stake from 3.1% to 4.4%.
At the current market price of Rs 657, the scrip is trading 90 times the earnings for the trailing 12 months. The company’s future prospects do appear bright, with its imminent jump in the global dyestuff market through the acquisition of DyStar. However, the run-up during the past 12 months means that most of these positives have already been factored in.

OIL: Weak demand may pose risk to market

ALTHOUGH hopes of economic recovery and an upturn in demand drove crude oil prices to over $75 per barrel, a further rise appears doubtful. Serious concerns have emerged over the sustenance of the global economic growth and its impact on oil demand while supply continues to rise steadily and inventories are at a historic high. The International Energy Agency (IEA) expressed this concern in its latest monthly report. “If economic prognoses prove too optimistic, or the winter stays mild, market sentiment could easily weaken once again,” it said. Similar views were also expressed by Opec, which went a step ahead to warn of an impending correction in the crude oil market. “Given the fragile state of the global financial system, economic growth may remain subdued for some time to come. In contrast, commodity markets have rallied since March, factoring in strong economic growth ahead.”
Through much of October, positive economic data boosted oil prices. The technical end of the US recession pushed oil prices above $80. However, much of the recovery apparently was driven by special stimulus measures such as the cash-for-clunkers car purchasing programme, and a temporary homebuyer tax credit.
According to the IEA, the global oil demand stood at 85.1 million barrels per day (mbpd) in September 2009 quarter — 0.8 mbpd lower than the year ago period — but 1.7 mbpd higher since estimated six months back. Much of this growth has been contributed by the non-OECD countries, mainly China (0.96 mbpd). Just like in the US, the Chinese oil demand growth too shows a strong linkage to stimulus-induced infrastructure spending. With the country raising consumer fuel prices starting November, the demand may not be as strong as seen so far.
Indeed, global diesel demand – which powers the railways and trucks that support the global industrial activity and trade – remains subdued and is expected to register a 3.1% y-o-y decline in 2009, with the OECD featuring a particularly severe contraction (-5.7%).
The historically high petroleum inventories too could pressurise the commodity’s pricing. Oil inventories, as at end September 2009 in OECD countries, are at a historically high level of 4.34 billion barrels. The capacity addition and growth in crude oil supply is likely to keep prices low. The situation in the oil market may continue to look balanced for now. However, as we move towards the traditionally lower demand season in the second quarter of 2010, a weak oil demand will raise the risk of disturbing the already fragile fundamentals.

Reliance Industries: Growth is Life

23rd Nov 2009

Ramkrishna Kashelkar ET Intelligence Group

The proposed acquisition of LyondellBasell by Reliance Industries, which has just carried out two of its multi-billion-dollar projects in the refinery and E&P space, can mark a mega-leap for the hither-to India centered behemoth. The acquisition, if goes through, can not only expand the company’s presence significantly in the global petrochemicals market, but will also give it entry into the technologically superior specialty chemicals. Similar to what Reliance is in India LyondellBasell is a refinery to polymers to chemicals major in Europe and the US, but has progressed into the advanced materials business through extensive R&D efforts.

LyondellBasell (LB), which was created at the height of the market boom in December 2007, reported operating loss of $5.9 billion for the year ended December 2008, with its networth turning negative. Although the company’s operations generated over $1 billion cash during the year, it had debts worth $22.9 billion payable within the year 2009, which forced it to take refuge under Chapter 11.

One of the most attractive points for RIL in this acquisition is LyondellBasell’s global leadership in polypropylene and its derivative products. LB represents 14% of world’s polypropylene capacity. LB’s two refineries – one in Houston, Texas and the other in France – with a combined refining capacity of 373,000 barrels per day can add nearly 30% to RIL’s existing refining capacity in India. LB is also the owner of several proprietary technologies and catalysts used in the production of downstream petrochemicals such as propylene oxide.

The exact value of the deal or the stake that RIL proposes to buy in LB are yet not known, however, the deal is likely to be an all-cash deal. In this regard, Reliance surely has a huge potential power to make such large overseas acquisition for cash.

As on 30th September 2009 RIL had cash and cash equivalents of Rs. 19,421 crore (US$ 4.0 billion). An additional $650 million were raised by its subsidiary when it sold treasury shares in September this year. This subsidiary continues to hold another 8.96 crore shares in the company valued at over $4 billion. RIL’s net debt was approximately Rs 51000 crore resulting in a net debt to equity ratio of 0.42. If the company decides to raise this debt-to-equity ratio to 1, it can borrow nearly Rs 70,000 crore more or around $14.9 billion.

Considering these factors, RIL’s acquisition of LB, if successful, will surely help the Indian major to make a global mark in the long term. Investors must, however, bear in mind that the actual acquisition could take months to fructify and the benefits may not accrue in the short-run.

Lyondell buy may boost RIL’s global presence

THE proposed acquisition of Lyondell-Basell by Reliance Industries can mark a mega-leap for the hitherto India-centred behemoth.
The acquisition, if it goes through, will not only expand the company’s presence significantly in the global petrochemicals market, but will also give it an entry into the technologically superior speciality chemicals. Similar to what RIL is in India, Lyondell-Basell is a refinery to polymers-tochemicals major in Europe and the US, but has also progressed into the advanced materials business through extensive R&D efforts.
LyondellBasell reported an operating loss of $5.9 billion for the year ended December 2008, and its networth turning negative. Although its operations generated over $1-billion cash during the year, it had debt worth $22.9 billion payable within the year 2009, forcing it to take refuge under Chapter 11.
RIL will gain from Lyondell-Basell’s global leadership in polypropylene and its derivative products. It represents 14% of the world’s polypropylene capacity. Its two refineries with a refining capacity of 373,000 barrels per day can add nearly 30% to RIL’s existing refining capacity in India. It is also the owner of several proprietary technologies and catalysts used in the production of downstream petrochemicals such as propylene oxide.
The exact value of the deal or the stake that RIL proposes to buy in LyondellBasell is yet not known, however, it is likely to be an all-cash deal.
As on September 30, 2009, RIL had cash and cash equivalents of Rs 19,421 crore ($4 billion). An additional $650 million were raised by its subsidiary when it sold treasury shares in September this year. This subsidiary continues to hold another 8.96 crore shares in the company valued at over $4 billion. RIL’s net debt was approximately Rs 51,000 crore resulting in a net debt-to-equity ratio of 0.42. If RIL decides to raise this ratio to 1, it can borrow nearly Rs 70,000 crore more ($14.9 billion). Investors must, however, bear in mind that the actual acquisition could take months to fructify and the benefits may not accrue in the short run.

BPCL Interview: “Challenge was converted into an opportunity”

Year 2008 was probably one of the toughest phases in the history of Bharat Petroleum Corporation (BPCL), country’s secondlargest oil marketer. The company however used the crisis as an opportunity to squeeze out the last drop of inefficiency from its system. In a conversation with ET Intelligence Group’s Ramkrishna Kashelkar , BPCL’s chairman and managing director, Ashok Sinha, discusses the company’s learning from the crisis and how is he is preparing the organisation for the future

In the last one-year of turmoil, what were your experiences?
The steep volatality in crude oil prices created a lot of constraints for our industry. Being in PSU we could not raise the prices of our four key products that constitute around 70% of our output, since we are essentially fulfilling the local demand.
This external constraint created liquidity problem for us. However, the government was well aware of this and it did provide us certain windows in making available the liquidity. Access to foreign exchange was provided to us through the central bank. That was most welcome.
Being a PSU, you’ve to keep markets supplied…
Yeah, we have the commitment to serve the customers. People expect to buy fuel when they visit the petrol pump. As a company, I can’t say today I will sell, tomorrow I won’t. There are so many externalities — fluctuating exchange rates, interest rates can go against you, oil prices are volatile, under-recoveries, inventory valuations —that are for us to handle. We cannot make the consumer bear the burden of the external factors affecting our business, right?

What were the strategies used by BPCL to counter these adversities?
These constraints made us look inwards and squeeze more efficiency at every level for generating cash that in turn created value for the company. It was all about innovating without losing the focus and simultaneously creating value and benefits, which we can share.
First thing was to sensitise the entire organisation to external events and what can we do to help ourselves. For example, we reviewed our entire debt collection system. We moved to the RBI’s real-time-gross-settlement (RTGS) for our debt collection from LPG and retail dealers to reduce working capital requirement. The benefit was mutual as it freed them from the routine of making demand drafts and sending them across. Similarly we looked at areas like transportation, inventory, capital productivity to prioritise the use of cash.
We formed a team that spanned out and gathered inputs from the employees because ultimately all the knowledge resides in them. A system was created to harness it, test it, challenge it, analyse it and to see how our earlier decisions would have changed and implement it for the future. The project was called WIN – We Innovate Now. It brought in a sense of urgency and induced everyone to innovate. Now these processes have got so institutionalised that it has become part of the company’s DNA. So the challenge was converted into an opportunity.

Now that the crude oil is around $75, would you still need the oil bonds?
This year the volatility is substantially less compared to last year and I don’t expect to see that sort of volatility in next six months. However, on the current prices, we have started going negative on cash — although it’s not very high, as witnessed last year. Still we need to get that compensation quickly. Firstly for the liquidity reasons and most importantly to take care of our long-term projects. After all, why does any company need to make profit? The profit is essential for investing in the business for the future growth. If the country wishes to achieve the GDP growth we talk about the investment cycle must continue. Therefore, the current hand-tomouth situation must change. Stability in the system can enable us to take long-term view. In our industry, what you decide today can fructify 3-4 years down the line and without stability in earnings, we can’t commit for such long-term projects.

What is the current status of your Bina refinery?
The Bina refinery was conceptualised way back in 1994. The project envisaged nearly 1000-km of pipeline with offshore installations. So there were delays in obtaining environmental and other clearances. But once we took our final investment decision in Dec 2005 after getting all those clearances, the project has progressed smoothly and is scheduled for mechanical completion in first quarter of 2010. The pipeline, single buoy mooring (SBM), tank farm etc are already completed. Even most of the refinery units are in place; only the final linking up process is on. It is taking time just because these are the processes that are done sequentially and not simultaneously. Within couple of months of taking our investment decision we had closed the entire debt funding. In terms of equity we have taken up 50% with 26% subscribed by the Oman Oil. About the rest of the equity, we will see when and how to raise the funds. Our primary focus right now is on completing the refinery and getting the product out. That is more important for us than the equity funding.

How far India’s refining capacity addition is justified at a time when globally the industry is not doing so well?
The recent fall in gross refining margins (GRMs) is mainly due to the huge demand destruction that has happened. The global refiners are down to 85% capacity utilisation. This is just a temporary adjustment and ultimately the additional capacities would get consumed as the global demand is expected to grow. In global scheme of things India’s capacity addition is not very significant.
Petroleum refining is a cyclical business. At times there is overcapacity and at others there are shortages. As a result when the GRMs are below minimum acceptable rate of return, the refiners start cutting down production. Whatever said, in the long term the refiners will make money. You must understand that it take atleast 5 years from concept to commercialisation while setting-up a refinery.

You are growing, diversifying, innovating day-by-day. How do you manage talent to sustain this growth?
Four-five years ago we started the process for project DESTINY setting up fairly aspiring goals like doubling our volumes and the profits by four times by March 2010. This was broken up in who will contribute in which way. So the next challenge was to have the leadership pipeline to deliver it. So with that, we started the project CALIBER. We have looked from the top-downwards, taking a 360 degree feedback on each employee. We have so far reviewed our top 500 people. Everybody has been reviewed by five directors besides his/her immediate seniors and juniors etc.
The competencies of each employee are mapped and compared with the global benchmarks. A team of facilitators presents the individual candidate to us in terms of where each person stands. Someone can be good at executing projects, someone can be good at strategic thinking, someone at technical matters, while someone else at creative things and so on. This has helped us in drawing up personalised development programmes for each of them. Then the training department steps in to ensure that they are given the world class training.
I believe we are the first among PSUs to take such a holistic view of the HR challenges. And why just PSUs, we are perhaps first among all Indian companies!

How do you view competition?
Competition is always there but you must understand that there is collaboration also. And it is not just between PSUs. We will collaborate with anyone if it makes business sense for us. Long ago, immediately after Indian Oil was born, an agreement was signed in 1962 between IOCL, Esso (now HPCL after its nationalisation) and Burma Shell (now BPCL) for product supply. The principles of that agreement still remain valid today. In this industry, you don’t fight over infrastructure and products, rather you leverage that.
In fact, an example of such collaboration with a competitor could be our B2B IT tie-up with Indian Oil, which is perhaps the largest of its kind in India. The value of transactions captured by the system could be in excess of Rs 30,000 crore per year right now.

Today all the oil companies are going for investment in upstream. What has caused this?
Our selling prices are completely controlled but our production costs are market driven. So we have to look for a hedge by investing upstream. Presently, BPCL has 26-27 blocks in which we have participating interest. Plus now we have 2.5% stake in Oil India, which has several producing assets.
So our portfolio now looks a little more balanced with blocks from different stages of development —from wild cat exploration, post 2D, 3D portfolio to developmental drilling and now the producing blocks.
We are now in a consolidation phase in E&P. We are present in mostly proven regions, except for Mozambique, which is totally unexplored area. Most of these are phase-I commitments. Most of them will complete by end of 2010, when we will have to take call on where we want to go, where we want to get out of and so on. We have a separate company for focussing on the E&P business, since this is a very specialised business with high risk and the mind set needed there is totally different. The next target in this area is to move into being an operator. Apart from being an active investor in all our blocks, we already have a joint operatorship in a Rajasthan field. The learning from this block will enable us in taking up operatorship in future projects.

ABAN OFFSHORE: Debt liabilities no longer pose threat

ABAN Offshore’s successful qualified institutional placement (QIP) of equity shares comes as a major positive development for the debt-ridden company, which had recently rescheduled its debt obligations.
With an outstanding debt of over Rs 16,600 crore, the company’s debt-to-equity ratio stayed above 9.5 for the year ended March 2009. This will now ease to below 6, after the QIP placement. This equity infusion and earlier debt rescheduling signal an attempt by the company to overcome key hurdles to performance — both financial as well as relating to the stock market — over the past couple of years.
With oil prices rebounding above the $75 level, Aban Offshore has been able to deploy 17 of its vessels and has just three jack-up rigs idle presently. This, along with the improvement in the global E&P industry, has helped ease the concerns of the analyst community. Most brokerage houses are now offering a ‘hold’ or ‘buy’ recommendation on the company.
Over the past one year, the Aban Offshore scrip had been on a frenzied course — outpacing the market in both upward and downward directions. This was mainly due to significantly high trader interest and limited investor interest, as indicated by low double-digit delivery percentage. The scrip that was underperforming the benchmark Sensex in the first three months of 2009, has nearly quadrupled since April as against a 72% recovery in Sensex. This higher volatility has increased the company’s beta — a measure of volatility and risk compared to the benchmark Sensex — to 1.3 now as against just 0.77 in 2007.
Earlier this year, Aban rescheduled repayment of the mountain of debt it had raised to finance its expansion plans including the acquisition of Norwegian Sinvest in 2007. Now the debt repayment is spread over the next 10 years with an average of Rs 1,600 crore due every year.
The company has more than quadrupled its consolidated operating income to Rs 3,050 crore in FY09 from Rs 719 crore two years ago, while its cashflow from operations grew nearly seven-fold to Rs 2,108 crore from Rs 319 crore in FY07. Although the interest burden during this period has more than tripled to Rs 885.3 crore in the year ended March 2009 and could rise to Rs 1,000 crore for FY10, Aban Offshore appears well-poised to meet future debt obligations.
The scrip is currently trading at a multiple of 15.3 to its earnings of Rs 87.7 per share for the trailing 12 months. Considering the equity dilution following the QIP, the P/E works out to 17.6. Much will hinge on earnings growth or news of deployment of its idle vessels.

AGROCHEM: Rabi season bodes well for agrochem cos

BRAVING a soft exports market and erratic monsoon in the domestic market, a majority of the agrochemical companies in India have done well in the September 2009 quarter. The reason lies hidden in the various agriculture-oriented schemes introduced by the government over the past couple of years: debt waiver, NREGA and substantial increase in minimum support prices of various crops. The increased liquidity in the hands of farmers is enabling them to invest more in their farms resulting in growing consumption of agrochemicals.
That the aggregate numbers for the quarter don’t reveal the full story is another matter. A closer inspection shows that the fall in the industry’s aggregate profits is mainly from extraneous reasons while their core business grew in profits. Out of the nine large agrochemical companies, only three suffered profit erosion. Others posted profit growth — over 50% in case of some.
It must be noted that the September quarter this year, which is the most important quarter for the industry due to the kharip season, witnessed deficient rains and reduced acreage. The Southwest monsoon rains were 23% lower in the June-September 2009 period against the long-term average. The overall acreage under cultivation, for the season, also came down 6% against the year-ago period. At the aggregate level, nine leading agrochemical firms reported a 7.9% fall in profits to Rs 248.6 crore in September 2009 against Rs 270 crore last year. However, all the three companies that saw their profits decline — United Phosphorous, Meghmani Organics and Punjab Chemicals — had their own set of problems.
Meghmani Organics, which posted a 17.6% profit growth in its agrochemicals division, increased its standalone profit for the quarter. However, heavy losses in its overseas arms wiped out profits at the consolidated level. While in case of Punjab Chemicals, the company posted losses, as its plant remained partially shut down throughout the September 2009 quarter due to fire.
The largest amongst those did well — Bayer Cropscience and Rallis India — posted a double-digit sales growth, although their profit growth was in single digit. Nagarjuna Agrichem and PI Industries were the two companies to raise their profits by over 50% against the year-ago period, while Insecticides India posted a growth of 47.6%. Even companies like Sudarshan Chemicals, which derives more sales from products other than agrochemicals, registered profit growth in the agrochemical division during the September 2009 quarter.
With fresh bouts of rains in October and November, the rabi season is expected to be better for the domestic agriculture. This could increase the area under cultivation as well as the domestic agricultural production, which bodes well for agrochemical players, going forward.

Lead StoryIndia Inc may have reported a slower rate of growth during the September ’07 quarter. However, the future doesn’t seem to be that gloomy

THE Indian bourses are vying for altitudes which many of us may not have even dreamt of, thanks mostly to the enthusiasm of foreign funds, which have been pouring money into the Indian equity market. Global investors are gung ho about India’s growth potential, given the robust estimates of GDP growth. Given this, it is a worthwhile exercise to track the quarterly performance of the Indian industry, which forms a major chunk of GDP if we combine the share of manufacturing and services.

Revenue and profit growth are tapering off since the March ’07 quarter and picture was no different in the September quarter. The latest aggregate results strengthen our view that the corporate growth has peaked. Both in incremental as well as percentage terms, corporate India is witnessing a gradual pullback. In the September ’07 quarter, aggregate sales of 1,747 listed companies that declared results rose by 17% and net profit grew by 22%. This was lesser than the corresponding figures of 31% and 54% during the September ’06 quarter. The oil companies and banks do not form a part of this sample, as given their size and volatility in earnings, the real picture could get distorted.

Sales growth is on a continuous decline over the last four quarters and during the September ’07 quarter it was the lowest when compared with any of the quarters since the December ’05 quarter. The slowdown may appear to be a result of a higher base effect as the year-ago growth rate was very high. To know the facts, we studied the incremental change (year-on-year difference between absolute numbers) in the aggregate topline and bottomline.

On an incremental basis, topline shows signs of fatigue. In the September ’07 quarter, nearly half of the companies reported a higher incremental jump in sales reckoned year on year. In the corresponding quarter of the previous year, roughly two-thirds of the companies were able to do so.

The growth rates in operating and net profits are also on a downward trend since last year. The rate of growth in operating profit has come down to 18.4% during the second quarter of the current fiscal from 42% in the September ’06 quarter. By similar comparison, net profit growth has tapered from 54.2% to 21.9%. On an incremental basis, however, corporate India is still able to keep up the tempo as half of the companies reported absolute year-on-year rise in net profit, similar to the yearago quarter. The slower growth in sales and profits can be attributed to sluggish performance by majority of companies in the sectors including automobile, cement, IT, metals and textiles. Operating margin weakened slightly from 18.8% in the year-ago quarter to 18.6% in the September ’07 quarter. Companies that witnessed a contraction in the margins were from various sectors such as sugar, textiles, non-ferrous metals, auto ancillaries, pharmaceuticals, dyestuff, and leather chemicals.

Other income continued to gallop and grew over 72% during the September ’07 quarter. This was mainly on account of the unrealised foreign exchange gains arising out of foreign currency borrowings. This notional other income boosted net profit, which grew 22% on a y-o-y basis despite rising interest and depreciation costs. Net margin expanded by 50 basis points to 12.3%. Do the second quarter results hint at the possibility of a slowdown in the future performance of Corporate India? The analysis of the quarterly results won’t be complete without answering this question.

Presently, the growth rates are indeed slowing down. However, we at ETIG believe that this is just a temporary phase – a so called ‘inflexion point’ – before the next phase of high-speed growth sets in. Corporate India is sitting on a huge work-inprogress as a number of capacity expansion projects are under way in almost all the industries, particularly in petroleum refining, cement, steel, and automobiles. At the same time huge investments are lined up for building the infrastructure in areas such as petroleum exploration and production, power generation and electrical equipments, construction, heavy engineering and similar industries. As these capacities come online, they will provide the impetus for Corporate India to take the next big leap. The aggregate y-o-y growth rates may decelerate marginally during the second half of FY ’08, but the same are expected to pick up with the start of FY ’09.

Further, some of the sectors continue to post robust performance. Capital goods and power generation companies reported improvements in operating profit margins during the quarter ended September ’07. Entertainment and electronic media – a relatively smaller industry considering the number of listed players – put up an impressive show led by the excellent performance of the industry leader Zee Entertainment.

The future appears to hold some challenges of global nature for Corporate India and wading through these may prove to be a daunting task. The US dollar is weakening steadily and India may witness a sustained rise in the rupee over the next few quarters. This will dent profitability of exporters. Global crude oil prices have crossed $95 per barrel levels and may soon touch $100 per barrel. Though the price regulation in the domestic market will keep the rise in fuel prices under check, impact of a higher energy price is expected to percolate through an increase in prices of crude oilbased commodities. It appears that the way ahead is rather tough at least in the immediate future. However, the things are likely to improve in FY ’09. Particularly, industries such as oil and gas, infrastructure, capital goods, telecom and power generation appear to hold a promising future ahead. There will be outperformers in other sectors also. However, they will have to be thoroughly researched.

Essar Oil: Aggressive plans

Essar Oil’s results for the September ‘09 quarter were important not for its quarterly numbers but more for the update on its various projects. The major amongst them is the progress on its wholly owned coal bed methane (CBM) block at Raniganj. The block, which is currently estimated to yield one trillion cubic feet of natural gas over its working life of 25 years, will start producing by end-March ‘10. This translates in cumulative earnings of Rs 20,000 crore over its lifetime or an annual average revenue of Rs 800 crore, assuming $4.2 per unit gas price. The company is currently preparing its development plan for the CBM block that envisages drilling 500 wells and deployment of innovative drilling techniques, which will be followed by financial closure by December ‘09. The company will also have to lay a 160-km pipeline to take the gas to its main consumption centre Kolkata.
The company also continues with its aggressive plan to expand capacity of its refinery on the west coast to 34 million tonnes in the next two years from current 10.5 MTPA. Financing of $1.5 billion has been tied up for the first phase, which will take the capacity to 16 MTPA by December ‘10. Another 18-MTPA expansion at the cost of $4.4 billion is scheduled for December ‘11.
In the expansion process, the index of a refinery’s quality - as referred by Nelson’s Complexity Index - would also double. This means the refinery would be able to produce fuels meeting most stringent Euro IV / V norms, eliminate low-value products such as fuel oil, and increase production of high-value products like petrol.
Apart from the organic growth, the company is actively pursuing acquisitions in the refining business. The company has already bought 50% stake in a 4-MTPA refinery in Kenya and is discussing with Shell to buy out its three European refineries with a combined capacity of 23 MTPA. The company, which sold over 0.62 million tonnes of fuel through its 1,278 retail outlets in the first half of FY09, is expanding its network to 1500 outlets by end FY10. Provided all its plans succeed, Essar Oil could emerge as a global petroleum major within the next few years.

Cairn India: Going gets better

Cairn India recently signed an agreement to supply crude oil to the Jamnagar refinery of Reliance Industries within days of receiving government approval for selling its crude to private refiners. The pricing terms, however, remain the same, implying a nearly $7.5-11 discount to the benchmark Brent crude price. The company recently arranged for a financing facility of $1.6 billion, half of which was used to repay earlier high-cost debt. Availability of additional financing is expected to boost the company’s ability to expedite its production schedule. Both these developments imply better flexibility for the company in marketing as well as operations. A number of extraordinary items dominated Cairn India’s September ‘09 consolidated numbers, as its net profit at Rs 470 crore stood at more than double its net sales. The company wrote back an earlier provision of Rs 164 crore towards an arbitration process, followed by a write-back of deferred tax provisions worth Rs 129 crore, plus another Rs 52 crore towards MAT (minimum alternative tax) entitlement and Rs 17.5 crore of FBT (fringe benefit tax). The company had no revenue during the quarter from sale of crude oil as it sold the maiden cargo of 210,000 barrels of Rajasthan crude oil to MRPL in the first week of October ‘09. The company is currently setting up a 600-km pipeline to transport oil to the Gujarat coast, only 5% of which is currently pending. Till the pipeline gets functional, it has to transport the crude oil by trucks, incurring nearly $7-10 per barrel of transport cost. The company is currently producing 11,500 barrels of oil per day and is on its way to ramp it up to 125,000 bpd by June ‘10 in three phases. Based on the current oil prices, this level of production could earn annual sales of over Rs 13,000 crore that can earn net profit of around Rs 3,400 crore. At the current market price of Rs 273 the company is being valued at nearly 15 times this number and looks fully valued. The movement in crude oil prices will continue to remain a key factor for Cairn’s performance.

Dolphin Offshore eyes mega deals

Stock Has Risen 275% In The Past One Year Against 50% Gains Logged By Sensex

THE shares of Mumbai-based Dolphin Offshore have significantly outperformed the market over the past one year — logging a gain of 275% against Sensex’s 50%. The scrip, which was underperforming the market in the first four months of 2009, got a boost when the company announced a bonus issue in May 2009. It has consistently outperformed since then. Although, in the recent market weakness post-Diwali, the scrip has fallen more than the Sensex, it remains substantially above its year ago level.
The company is now being valued at 11.7 times its earnings for the past 12 months. Dolphin’s poor performance for the September 2009 quarter too impacted its stock price. Its profit for the September 2009 quarter slipped 5% against the year ago period to Rs 11 crore as the turnover remained almost flat at Rs 66 crore. The September quarter has traditionally been off-season for Dolphin, as offshore construction work in India has to be suspended for monsoon. To keep its assets working, the company last year undertook contracts in China and Malaysia during these months — something which it could not repeat this year.
The company traditionally works as a sub-contractor on various ONGC offshore projects. However, last year it was able to register as the main EPC contractor with ONGC and bagged two contracts worth Rs 316 crore. This shift not only indicates at bigger-ticket contracts in future, but also an increase in margins. As a result, Dolphin’s profits for FY09 spurted 160% against previous year despite writing off nearly Rs 40 crore of outstanding debts. The company is currently executing projects worth Rs 380 crore — 10% higher than its turnover for FY09. ONGC, which is its principal customer, is in the process of awarding contracts of over $1 billion for laying new pipelines and setting up new platforms in its Bombay High field. Fighting hard domestic and international competition, Dolphin is eyeing these tenders to fuel its future growth.

Oil Country Tubular: Piping Growth

Growing E&P activity is likely to boost demand for Oil Country Tubulars’ products

OIL Country Tubular, which features second in ETIG’s list of 100 Fastest Growing Small Companies, has seen healthy growth, an improving balance sheet and a maiden dividend, hinting at bright growth prospects ahead. For investors with a risk appetite, this company could be a long-term play on India’s growing E&P sector.

BUSINESS: Hyderabad-based Oil Country Tubular (OCTL) is a producer of pipes and tubes required in the oil drilling and exploration industry. OCTL’s single plant has an installed capacity of 10,000 tonne per annum (TPA) of drill pipes, 50,000 TPA of casing pipes and 15,000 TPA of production tubing. It also provides services such as tool hardening, internal plastic coating for pipes and inspection, maintenance and reconditioning of drill pipes besides manufacturing accessories and spare parts.
The company has received necessary approvals from the American Petroleum Institute (API), making its products universally acceptable. In the last three years, on average, the company earned over half its revenues from exports.

GROWTH DRIVERS: The company plans to treble its casing manufacturing capacity to 150,000 tonne per annum by March 2010. It also has plans to double capacity of drill pipes to 20,000 tonne.
With oil prices recovering and hovering around $80 per barrel, global exploration and production (E&P) efforts, which had turned sluggish in the first half of 2009, are expected to revive. This will ensure steady flow of orders for the company, which is aggressively targeting various export destinations such as West Asia, South East Asia and Europe.

FINANCIALS: In the trailing five years, the company’s net profits have grown at a cumulative annual rate (CAGR) of 145% to Rs 65 crore in FY09. Net sales grew at 33% in the same period. In the year ended March 2009 the company’s operating margins weakened by 230 basis points to 24.2% of net sales compared to the previous year.
This was mainly on account of higher sales of casing pipes, where the margins came under pressure and a simultaneous fall the sales of higher margin drill pipes.
The company has repaid all its outstanding term loans during the year to emerge a debtfree company. In fact a major chunk of its FY09 profit growth came from significant cut in its interest burden. OCTL also paid its maiden dividend of Rs 1.5 per share for FY09.

VALUATION: At the current market price of Rs 101.2 the company is valued at 6 times its profits for the trailing 12 months. Other pipe manufacturers such as Maharashtra Seamless, Jindal Saw and PSL are trading in the P/E range of 8 to 10.

RISK FACTORS: Being a small company OCTL carries the risk of low level of transparency and operational disclosures and a lack of management interaction. The company’s future performance will depend on flow of orders and product mix.

Realty unit IPO to give Godrej’s growth a fillip

Investment In Realty Biz May Go Up To Rs 1k Cr

SHARES of Godrej Industries (GIL) have outpaced the market over the past six months by a wide margin. However, the weakness in the second half of October saw the scrip fall faster than the benchmark Sensex. At Rs 178.50, GIL shares are trading two-and-a-half times against year ago period compared to the 62% gains logged in by the Sensex.
GIL has been restructuring its businesses over the past several quarters. The company recently approved the merger of its wholly-owned subsidiary Godrej Hygiene Care with Godrej Consumer Products. After the merger, the holding of GIL in GCPL will go up to 24.8% from 21.6%. The company also bought back 21.3 lakh shares for Rs 28.9 crore.
Earlier, it had sold off its wholly-owned subsidiary operating in the pest control business — Godrej Hicare — to ISS Services and its BPO business under Godrej Global Solutions to Tricom India. The company also plans to divest its traditional business of vegetable oils by selling off its old refinery and develop real estate.
In the quarter ended September 2009, GIL signed a memorandum of understanding (MoU) with its 80% subsidiary Godrej Properties and its parent Godrej & Boyce to develop property in Vikhroli. To start with, in the first phase, it has plans to develop around 30 acres of land.
The company’s consolidated September 2009 quarter numbers were, as usual, dominated by its real estate and investment businesses apart from the extraordinary income on sale of Godrej Hicare. The company reported a three-and-a-half times jump in net profits after three consecutive quarters of profit fall.
At the current market price of Rs 178.50, the scrip is now trading at a price-to-earnings (P/E) multiple of 44.4. The company is being valued mainly for its asset pool — primarily the land bank — rather than its earnings. The current share price is around four times its book value.
GIL’s investment plans centre around its real estate subsidiary —Godrej Properties — which has received Sebi approval and is expected to approach the capital market soon with its initial public offer (IPO). The total investment in this business could go up to around Rs 1,000 crore over the next 12 months, provided its fund-raising plans fructify. This much-delayed IPO will unlock the value of GIL’s 80% stake therein and could provide a fillip for its future growth.

IOC, BPCL & HPCL: Govt bailout to decide oil cos’ future course

THE results of India’s three state-owned oil marketing companies (OMCs) IndianOil, BPCL and HPCL were below market expectations for the September 2009 quarter as the government did not fully compensate them for selling fuel below cost.
The three OMCs trimmed their losses substantially to just Rs 11 crore for the September quarter compared to the astronomical loss of Rs 12,891 crore they had together posted in the year-ago period.
IOC, HPCL and BPCL, which had received special oil bonds worth of Rs 20,559 crore in the September quarter last year, did not receive any bonds this September. The players were fully compensated for their under-recoveries last year despite extreme volatility, but now they will have to wait for a bailout in the second half of FY10. These companies had several things going for them during the September 2009 quarter. Firstly, retail auto fuel prices were revised upwards at the start of the quarter. Similarly, the three players booked a total of Rs 67 crore as forex gains during the quarter as against a loss of Rs 2,947 crore in the corresponding quarter of previous year. Reduced working capital requirements due to lower prices as well as lower interest rates resulted in the three companies saving nearly 58% of their interest costs or nearly Rs 1,200 crore compared to the year ago period.
IndianOil posted a small profit for the quarter mainly due to its growing petrochemicals business. For the smallest among the three — HPCL this was the fifth loss in the preceding eight quarters. The discounts extended by ONGC, OIL and Gail at Rs 3,442 crore also were lower by 76.5% y-o-y. Besides the lower discounts and non-issuance of oil bonds, the poor refining scenario hit the industry, which saw gross refining margins erode sequentially. All three companies registered a fall in margins in the September quarter vis-à-vis the June 2009 quarter. The profit of the players was also impacted due to the fall of close to 2.5% in their refinery production to a total 21.4 million tonne (MMT) for the quarter, as all three companies produced less compared to the year ago period.The future prospects of these three companies hinge on how the government decides to compensate them. All the companies have ongoing long-term capital expenditure plans and badly need visibility on future earnings for their funding.

RELIANCE: Petrochem,oil & gas are the ones to watch out

DESPITE doubling the refinery capacity and commissioning of natural gas production, India’s largest private sector company Reliance Industries posted a 6% dip in its net profit to Rs 3,852 crore in the September 2009 quarter. However, the new businesses took the company’s gross profit and pre-tax profit to their highest-ever levels, only to be hampered by a rise in depreciation due to new projects going live and MAT-induced tax.
Although its refinery throughput nearly doubled over the yearago period, the profits from refining halved, denting the company’s bottomline, which could not be repaired by higher margins in the petrochemical business and doubling of oil & gas profits. Global oversupply of refined products on the one hand and a crash in the differential between best and worst quality crude oils resulted in pressure on RIL’s refining margins. RIL’s refineries are better-equipped to process the worst quality crude oil, which have traditionally been available at a significant discount to the best quality ones, thereby earning a better margin compared to peers. RIL’s gross refining margins (GRM) dipped to $6 per barrel, the lowest in at least five years.
The company’s petrochemicals business, however, did much better against the market expectations, showing margin growth and recording its highest-ever quarterly profit in history at Rs 2,195 crore. Strong domestic demand and an 11% depreciation in rupee value against the year-ago period helped the company improve its realisations. RIL’s sales from petrochemicals business fell 14% despite a 8% y-o-y growth in volumes due to overall lower prices.
The oil & gas segment of the company, which is fast gaining prominence with growing gas volumes from KG basin fields, reported a three-fold rise in sales. Still, an erosion in margin resulted in restricting the profit growth at 90% y-o-y at Rs 1,226 crore.
Going forward, the ramping up of KG basin gas will keep propping up the company’s profitability while the refining business continues to suffer. The petrochemical business, too, is likely to witness increasing margin pressure over the next 2-3 quarters. However, the company would be able to reap full benefits of its expanded capacities once these cyclical businesses see an upturn.

ONGC: Natural gas price revision long overdue

RECOVERING from four consecutive quarters of profit fall, ONGC reported a marginal net profit growth of 6% for the September 2009 quarter taking its quarterly profit beyond Rs 5,000 crore mark, which proved to be its third-best historical performance. A 79% y-o-y drop in its subsidy burden allowing it a 21% higher price for its crude oil and rupee depreciation against the year-ago period were the key reasons.
The portion of under-recoveries that the government of India directed ONGC to share was Rs 2,630 crore for the September 2009 quarter, compared to Rs 12,663 crore in the year-ago period when oil prices had peaked at $147. As a result, the company’s net realisation on sale of crude oil stood at $56.42 per barrel, as against an average of $70.5 in the open market.
ONGC, which is mainly operating ageing oil fields in their natural decline phase, reported a 3.4% decrease in oil output to 6.63 million tonnes while its gas production inched up marginally.
Giving effect to ONGC’s discontinued trading business of MRPL’s products, ONGC’s net sales for the quarter were 2% higher y-o-y to Rs 15,192 crore. The company wrote off Rs 475 crore as drywell expenditure during the quarter towards a well drilled in KG basin increasing other expenditure 14%. As a result, the company could report only a minor improvement in operating margins pushing its operating profits 4% higher. However, an 18% fall in other income and 8% higher depreciation resulted in a flat pre-tax profit. Slightly lower tax rate enabled the company to show an improved profit for the quarter.
Going forward, the company is likely to benefit from a longawaited revision in its natural gas prices, which it sells below cost. Under the administered pricing mechanism (APM), the company sells nearly one-third of India’s total available gas at around $1.8 per million British thermal units (mmBtu). The proposed price revision to $2.6 could boost its annual profit by around Rs 2,200 crore or 11% of its FY09 consolidated profit.
The next three years will also see three of the company’s main diversification projects commissioning — ONGC Mangalore Petrochemicals (OMPL) by mid-2011, ONGC Tripura Power Company by early 2012 and ONGC Petro-additions (OPaL) by end-2012. Besides, the company is also involved in setting up two special economic zones — one in Dahej and other in Mangalore.

Higher base takes steam out of Gail’s spectacular show

GAIL’S otherwise excellent operating performance for the September 2009 quarter appeared dismal compared to the year-ago period, mainly on account of a higher base effect. The quarterly profits at Rs 713 crore were 30% lower only due to the abnormally high profits in the September 2008 quarter. Gail had enjoyed the benefit of higher LPG realisations, alongside a benign subsidy burden, which had boosted its quarterly profits beyond Rs 1,000 crore for the first time in its history.
The company, however, wrote off an additional Rs 258.5 crore in the subsequent quarter towards underprovisioning of subsidy in September 2008 quarter. The main highlight of Gail’s September 2009 quarter results was the spurt in volumes of natural gas transported. The transmission volumes jumped 30.5% to 106.58 million standard cubic metres a day (mscmd) for the first time crossing a three-digit level.
The revenues from this segment jumped 39% with profits growing 58% to Rs 616 crore, which was two-thirds of its gross profit. With the volumes of gas transported growing within the country, the importance of this segment will continue to grow. Till FY09, the natural gas transportation business, which has traditionally been its single-largest profit earning segment, had contributed around 40% of profits, which jumped to 50% in the quarter ended June 2009.
The company also indicated a significant fall in its expenditure written off on its exploration efforts. The spending on dry wells stood at Rs 17.7 crore, nearly one-third of the year-ago period. The company had written off around Rs 87 crore on an average in the preceding three quarters. This reduction does not indicate any reduction in E&P activity, but only that the results are not out. Hence, there is a possibility that the coming quarters could see a jump in this expenditure.
Going forward, Gail will continue to benefit from rising volumes of natural gas in India. The company’s proposal on revised pipeline tariff is pending with the Petroleum and Natural Gas Regulatory Board. However, no significant change is expected in its tariff structure.
The scrip, which lost over 11% in preceding five trading sessions, currently values the company at 19 times Gail’s profit for trailing 12 months. Considering the steady growth prospects ahead, the valuation appears reasonable.

RIL feels refining margin pinch, may log lower net

ETIG Poll Sees Op Profit Fall 5.6%, But Treasury Share Sale To Boost Profit Nos

INDIA’S largest private sector company, Reliance Industries, is unlikely to post a growth in operational profits over a year-ago period when it publishes its quarterly numbers tomorrow (Thursday, October 29, 2009).
Commissioning of its two world-class projects — the 28-million tonne RPL refinery and KG-D6 natural gas — may not count much, as the company faces immense pressure on its refining margins. An ETIG poll of seven brokerage houses pegs the company’s net profit from operations to fall 5.6% y-o-y to Rs 3,889 crore. The one-time income earned on sale of treasury shares last month will, however, boost the company’s net profit number. Amitabh Chakraborty, president (equities), Religare Securities, said, “We are expecting 20% fall in RIL’s sales this quarter due to lower oil prices. It could see a slightly higher operating margin, thanks to a higher proportion of E&P profits. Still, gross refining margin (GRM) at $6.5 and lower petrochemical margins mean our net profit target is 7% lower y-o-y at Rs 3,827 crore.”
Sharekhan concurs: “RIL’s higher E&P profits and merger of RPL will get offset by lower GRM and marginal decline in petrochemicals margins.” It added that the interest and depreciation costs, too, would shoot up due to commissioning of the two mega projects. The global petroleum refining industry witnessed margin pressure, further worsening from preceding quarters in the September 2009 quarter. “Benchmark Singapore complex refining margin weakened to $3.3/bbl (-20% q-o-q; -44% y-o-y) led by weaker middle distillate cracks,” according to a results preview report by Motilal Oswal.
The pressure could push RIL’s refining margins to somewhere between $6.6 and $7.4 per barrel of crude oil processed — a historic low level. The refining business, which contributed more than half of the company’s consolidated profits in FY09, is likely to represent just around a quarter of its profits in the September 2009 quarter.
Still, some suspense hangs over the performance of the newlycommissioned refinery. The refinery enjoying a better configuration than RIL’s first refinery had earned a net profit of Rs 105 crore in the June 2009 quarter. Sandeep Randery, a research analyst with BRICS Capital, said, “The performance of the new refinery could be a surprise factor, when RIL publishes its September 2009 numbers. We don’t know what refining margins it will post.”
RIL’s petrochemical business, which contributed nearly half of the company’s June 2009 profits, is also likely to witness margin pressure. “We expect RIL’s petrochemical margins to decline marginally in polypropylene (PP). However, better integrated margins in polyethylene could offset some of the fall in the segment margins,” said Deepak Pareek, a research analyst with Angel Broking. BRICS’ Sandeep opined that the future may not be bright for this segment. “The petrochemical margins may remain flattish for the September quarter, but are likely to weaken going forward.”
The E&P segment will be the star performer for the quarter, which is expected to see its share in the company’s total profits soar from less than a quarter in the preceding quarter. The company’s natural gas production is likely to have crossed 30 million cubic metres per day (MCMD) from around 19 MCMD in June 2009 quarter. Going forward, the immediate future of the refining and petrochemical industries appears clouded with both industries facing overcapacity globally. Still not many analysts are bearish on Reliance Industries.

New pipelines fuel GSPL growth

Co Likely To Repeat Its Sterling September Quarter Show In The Second Half Of FY10

THE Gujarat government-controlled Gujarat State Petronet (GSPL) has outperformed the benchmark Sensex by more than three times since mid-July 2009. The scrip is up 75.7% in the past three months compared to the 25% rise in the Sensex during the period. The company is currently valued at 19.2 times its profits for the past 12 months.
This better-than-expected performance has been attributed to a spurt in GSPL’s financial numbers following the commissioning of new pipelines and new supply contracts. The company registered a 147% jump in its June 2009 quarter profit and a growth of 288% in the September 2009 quarter. The company doubled its revenues in this period on the back of doubling its gas volumes. This performance is expected to be repeated in the second half of FY10 also. Particularly so, as the company had witnessed a fall in natural gas volumes in the corresponding period of last year due to the crash in naphtha prices.
GSPL’s board of directors as well as its shareholders had approved a contribution of 30% of its pre-tax profits to the Gujarat Socio Economic Development Society in FY09. However, the company did not make any provisions as no project was identified. The society also could not obtain a registration with income-tax authorities. The possibility of such a contribution will continue to remain a major concern for the company’s shareholders in future.
GSPL’s recently-published results for the September 2009 quarter were remarkable as its operating margins nearly doubled during the period. However, the spurt was mainly on account of writeback of excess provisions for salary hikes and hence, such high level of margins appear unsustainable.
The company, which currently operates 1,280 km of gas pipelines, plans to double its network to connect all 25 districts of Gujarat in coming few years. Low debt level, strong operating margins and high cash generation capacity are big positives. However, the distribution of 30% of its pre-tax profits for social services could play spoilsport.

SRF Ltd: Coming of Age

The expansion projects in the last two years are set to lift future profits of SRF

LOW valuation, attractive dividend yield and an expansion spree make SRF a compelling buy, but lack of clarity on carbon credits means the investors can invest only for medium term and review their decision based on the company’s future growth.

BUSINESS: SRF is a Gurgaonbased diversified company that manufactures technical textiles, chemicals and packaging film. The company is India’s largest manufacturer of nylon tyre cord fabric (NTCF) and specialised fluoro-chemicals including refrigerants. Its other products include chloromethanes and polyester film. The company made two overseas acquisitions in FY09 augmenting its current lines of technical textile business – Thai Baroda Industries in Thailand that manufactures NTCF and Industex Belting in South Africa that manufactures belting fabrics.
It also purchased the engineering plastics and industrial yarn business of its sister concern SRF Polymers during the year. With these acquisitions, the company now operates 11 plants including three overseas. The company is taking deliberate steps to reduce its dependence on NTCF business, which brought in over 55% of the company’s FY09 revenues. Similarly it is going for backward integration to ensure high margins.

GROWTH DRIVERS: The company has been steadily expanding its production capacities in the last couple of years, the benefits of which will become available in the next few years. Particularly, the company has invested around Rs 70 crore to add over 1000 tonne of fluoro specialty capacity. It added 14,500 TPA polyester industrial yarn capacity that can cater to the increasing demand for radial tyres, besides debottlenecking and modernising its facilities.
The company has acquired nearly 850 acres of land in Dahej to set up fluoro-chemical plants over next five years. It is also setting up a laminated fabrics plant in Uttarakhand with annual capacity of 48 million square metres to commission by March ‘10.
The company has commissioned over Rs 600 crore investment projects in last 18 months and projects worth Rs 725 crore are presently under way.
India imposed anti-dumping duty on NTCF imported from Belarus and China in May 2009. This, besides the auto sector revival, stands to benefit the company, which derives nearly half of its revenues from sale of NTCF.

FINANCIALS: The company’s net profit has grown at a cumulative annual growth rate (CAGR) of 29.4% in last five years while its net sales grew 17.5% during the period. The company has a strong history of operating cash flows and dividends. Last three years witnessed its interest coverage ratio on a consolidated basis deteriorate to 4.6 in FY09 from 12.5 in FY07. In the same period, its debt-equity ratio has jumped to 1.1 from 0.6. The ongoing investment phase of the company has taken its net block including capital work up 56% in this period to Rs 1,859 crore.
The company’s chemical business producing fluorine-based refrigerants, speciality chemicals, chloro-methanes and engineering plastics, is the largest profit making segment representing over 80% of the company’s FY09 profit. Packaging film segment contributed 11.6% and technical textiles accounted for just 4.6%. In FY09, the company completed a buy-back of its shares which led to around 5.3% reduction in its equity capital to Rs 61.88 crore. The company’s board has now approved another buy-back scheme at Rs 160 per share, which will remain open till July 2010.

VALUATIONS: The company is currently valued at 6.1 times its profits for the trailing 12 months. The company had paid Rs 10 per share dividend for FY09 translating in a dividend yield of 4.9%. Its peers Century Enka (P/E 9.2), Gujarat Fluorochemicals (P/E 4.9) and Jindal Polyfilms (P/E 4.8) are trading at around similar valuation.

RISK FACTORS: The company does not publish revenues and profit from sale of carbon credits, which boosts the profits of its chemicals business and may face profit erosion depending on the price and quantity of carbon credits sold. At the same time, there is little clarity on future of carbon credits after the first phase of the Kyoto Protocol ends in 2012.