Fall in crude price, rise in Re help HPCL net Rs 649 crore

Lower Interest Rates Regime Help Co Reduce Its Interest Cost By A Third

SUBSTANTIALLY lower petroleum prices helped India’s thirdlargest oil marketing company HPCL post a turnaround in the June 2009 quarter despite a weak performance of its refining business. The company reported a net profit of Rs 649 crore in the period under review against a net loss of Rs 888 crore in the year-ago period. Net sales, during the period, dipped 17% to Rs 25,819 crore.
The improved performance in the June quarter could be attributed to a host of external reasons. First, the crash in crude oil prices reduced the under-recoveries on sale of petroleum products. Second, the strengthening of rupee helped it register a forex gain of Rs 161 crore against a loss of Rs 224 crore in the corresponding quarter of last year. Third, the lower interest rates regime helped the company curtail its interest cost by a third to Rs 270 crore.
The company also achieved a better physical performance with 22% higher throughput at 4.1 million tonne during the June quarter. The company has just completed the Euro III upgradation project at its Mumbai refinery, while the project at Visakh will get over next month. The new joint venture refinery at Bhatinda under HPCL-Mittal Energy (HMEL) has achieved 35% completion and is on schedule to complete by February 2011.
Its gross refining margins — difference between cost of crude oil and price of the petroleum products — crashed to $5.71 per barrel from $16.49 a year earlier. Thanks to the auto fuels price revision earlier in July, the company is expected to continue posting profits even in the September 2009 quarter.
The impressive results have pushed the HPCL stock Wednesday’s high of Rs 338. Finally, it closed marginally higher at Rs 332 in a weak Mumbai market on Wednesday. The state-run company is now valued at Rs 11,255 crore, 5.3 times its profits for the trailing 12 months.

DROP-BY-DROP
The co achieved a better physical performance with 22% higher throughput at 4.1 mt during the June quarter
Because of auto fuels price revision, the co is expected to continue posting profits even in the September 2009 quarter

SUPREME Industries: Plastic Beauty

Real estate boost and strong growth outlook make Supreme Industries an attractive long-term investment bet

SUPREME Industries (SIL), one of India’s largest plastic products makers, looks a good bet for longterm investors. The company riding high on India’s growing appetite for plastic products saw its net profit treble in the quarter ended June. It is building a 10-storey office complex on a plot owned by it in Andheri West, a prime locality in Mumbai suburbs. This will boost its profitability over the next couple of years. At the same time SIL’s scrip is trading at a lower price-to-earnings ratio than other big players in the industry.

BUSINESS:
Established in 1942, Supreme Industries operates 19 plants across India and produces a range of plastic products such as pipes, furniture, industrial and packaging products. In fact, it claims to have the country’s largest plastic products portfolio. The company has an annual turnover of Rs 1,650 crore and a market capitalisation of Rs 760 crore. Plastic pipes systems accounted for 43% of its total turnover in the year ended June 2009, while industrial components, including automotive parts, brought in one-fifths of its earnings. It is also a leading player in cross-laminated films, furniture, protective packaging and material handling materials. Exports account for a negligible 5-6% portion of its total sales. Supreme Industries has restructured its business over last couple of years by selling off unprofitable divisions and investing in the others. It divested its PVC film business at Malanpur in Madhya Pradesh, food serviceware plant in Daman and flexible film division at Pondicherry.

GROWTH DRIVERS:
The company is developing its land at Andheri (West) by constructing a 10-storey commercial complex, set to be ready by October. The project, which will offer 2.5 lakh square feet office area for sale, is coming up in a prime locality. The proceeds from this project will boost the company’s earnings, while providing necessary funds to invest in its main business. Supreme Industries achieved 29% volume growth in FY09 despite the weak economic conditions and is expected to grow by over 20% for next couple of years as well. With overall indirect taxes coming down, the demand for plastic products is growing fast in India. At the same time, additional polymer capacities coming up in the Middle East are expected to suppress the prices of polymer over next couple of years. Both developments augur well for the firm’s future.

FINANCIALS:
Supreme Industries has a history of steady growth with the net profits growing at a cumulative annual growth rate (CAGR) of 35.9% over the last five years, with net sales growing at 15.7%. The company has not missed a dividend in at least 15 years. Its operating cash flows also have been strong over last five years. The company recently carried out a share buyback scheme reducing its paid-up capital by 8% to Rs 25.4 crore. Although, Supreme Industries’ performance during the first half FY09 was under pressure due to crash in polymer prices, it reported 90% jump in its net profit to Rs 97.4 crore for 2008-09 with the net sales growing by 26% to Rs 1651.9 crore.

VALUATIONS:

At the current market price of Rs 303.5, the scrip is trading at 7.9 times its earnings for last 12 months, which is cheaper compared to its key rivals Sintex Industries (P/E of 10.3), Nilkamal (P/E of 12.3) and Time Technoplast (P/E of 14.2). We expect the company to post EPS of Rs 57.8 for the year ending June 2010, which discounts the current market price by 5.3 times. For FY10, Supreme Industries has declared a payout of Rs 12 per share, which translates in 4% dividend yield at the current market price.

RIL Q1 profit may see a marginal dip

RELIANCE Industries (RIL), the country’s most valuable company by market capitalisation, may report a marginal dip in net profit in the June quarter when it announces its quarterly results on Friday because refining margins could show a marginal decline due to weakness in global demand for petro-products.
But RIL’s upstream (oil & gas) business is likely to make up for some of the losses in the refining business, which contributes two-third of its overall revenues, analysts say. The impact of the gas production from the famous KG basin will be reflected in the quarterly financial results, as the company started extracting gas from April 2.
Three analysts ET spoke to believe that the company’s profit after tax (PAT) is likely to fall by at least 3% to Rs 3,982 crore for the June quarter from Rs 4,110 crore in the year-ago period, while its net sales are seen coming down to Rs 32,700 crore from Rs 41,600 crore.
Some stock brokerages have come up with reports predicting RIL’s quarterly numbers. Macquarie expects RIL first quarter net profit to dip by 3%, while Morgan Stanley anticipates a 5% decline. Domestic brokerage firm Sharekhan thinks that RIL may see a 2% reduction in its net profit.
RIL is expected to report a gross refining margin (GRM) — the difference between cost of crude oil and the price of refined petroleum products — of $9 per barrel in the June quarter, against $12 a barrel in the 2008-09 fiscal. The regional benchmark Singapore margin stood at $4.5 per barrel during the quarter. The refining margins of the company had come under pressure due to weakening demand for petro-products globally. Essar Oil had reported a GRM of $6.47 during the April-June quarter.
Amitabh Chakraborty, president (equity), Religare Capital Markets, said: “We expect RIL first quarter net profit at Rs 4,100 crore, almost the same compared with what it was a year ago. Although the GRMs are expected to soften, the petrochemical margins are expected to remain firm. The major boost is likely to come from its oil & gas business.”

MRPL: Q1 PAT Halves

MRPL’s performance in the June 09 quarter failed to amuse investors. Its stock fell nearly 6% from its intra-day high on BSE after the standalone refiner said its net profit plummeted by 50% during the quarter.

MRPL’s June 09 quarter profit of Rs 420 crore appears satisfactory since the Rs 845 crore profit in the year-ago quarter was boosted by excessive inventory gains. However, if we exclude the impact of inventory gains, exchange fluctuation gains and lack of provision for mark-to-market losses, then the company's suffering from weak GRMs becomes evident.

In the June 2008 quarter, the gross refining margin – differential between the cost of a barrel of crude oil and value of petroleum products derived from it – dipped to $7.98 per barrel from $18.36 in the year ago period. The GRM in the June 09 quarter included $4.5 per barrel as inventory gains compared to $11.3 per barrel a year ago. Excluding the inventory gains, it was nearly half of the year ago period.

MRPL’s quarterly numbers were strengthened also by the exchange fluctuation gain of Rs 65 crore. The corresponding quarter of last year had an exchange loss of Rs 127 crore. Similarly, the company did not provide for any mark-to-market losses on unexpired forward contracts during the June 2009 quarter, while writing off Rs 69 crore in the June 2008 quarter. These elements significantly propped up MRPL’s June 09 quarterly performance.

During the quarter, MRPL’s refinery throughput inched up 3% to 2.85 million tonne. The company also boosted its exports by 11% to 0.83 million tonne during the quarter.

Globally the refining industry is facing challenging times ahead and the company will witness pressure on its GRMs. However, considering the low GRMs in September 2008 and December 2008 quarters due to sharp fall in petroleum prices, the company may report better numbers on a y-o-y basis in the coming quarters.
At the close of market, the MRPL scrip was 2.8% down on BSE at Rs 82.30.

Essar Oil: Tax exemptions add the glitter

Essar Oil: Q1 FY10 Results

Despite a difficult economic condition, 18-day refinery shutdown, a substantial fall in the net sales and other income, Essar Oil posted surprisingly superior results for the June 2009 quarter. Its profits before depreciation, interest and tax doubled while net profit jumped more than five times to Rs 169 crore compared to the similar period of last year. The secret lay in the tax benefits it enjoys. The company is eligible for sales tax deferral benefit worth $1.8 billion by August 2020 and a 7-year income tax holiday under section 80-IB.

At a time when the gross refining margins – the differential between the cost of crude oil and selling price of the refined products derived from it – have weakened globally, Essar Oil posted a respectable $6.74 per barrel of GRM. This was made possible by optimised crude oil mix and reduction in low-value products. During the June 2009 quarter, the company increased the proportion of sour and heavy crude varieties to 70% of total from 60% last year, while the production of heavy distillates dropped to 26% from 33% earlier.

However, this was not the only reason for the strength in the company’s GRMs. Nearly one-sixth of the company’s domestic sales took place from the retail outlets, which earned Rs 2400 per tonne (approx. $6.7 per barrel) marketing margin as the company is allowed to collect sales tax but is not required to pay it to the government till 2020.

The sales tax deferral benefit added Rs 210 crore to the company’s pre-tax profits, while due to the income tax holiday it had to provide tax at just 16.7% of pre-tax profit under Minimum Alternative Tax (MAT) scheme. The June quarter PBT was also strengthened by Rs 30 crore increase in value of inventory due to a change in valuation method.

The company is currently running its 10.5 million tonne per annum refinery at 133% capacity utilisation. 84% of this volume is sold domestically and the rest is exported. The company has re-opened all its 1300 retail outlets to be scaled up to 1500 outlets by March 2010.

The company is currently expanding its existing refinery to 16 MTPA by December 2010 and adding another 18 MTPA refinery by December 2011. With the recent Union Budget extending the income tax holiday for petroleum refining projects to March 2012, both these projects will benefit. The company is currently carrying a debt of $3 billion and will raise another $2.7 billion for the expansion, while $1.7 billion will be invested as equity.

The company is expecting to commission commercial production of coal-bed-methane from its Raniganj block from December 2009. The company has drilled 15 wells and plans to drill another 75 wells in FY2010 at an investment of $21 million. Over next three years, the output from this block is expected to reach 2.5 million metric cubic meters per day (MMSCMD). At current price of natural gas, this will add Rs 700 crore to company’s topline on annualised basis. The company’s investment plans will fructify over next three years, which will establish it as a major energy player not just in the country but in the world.

Reliance Industries: FACING A HOST OF WOES

After commissioning two mega-projects, Reliance Industries has hit a few roadblocks which could affect its profitability

Although Reliance Industries (RIL) finally succeeded in commissioning its megaprojects — natural gas production from KG basin and Reliance Petroleum refinery — they both seem to have run into a stormy weather. A large chunk of the KG basin gas continues to remain embroiled in legal hassles, while the RIL-RPL merger may get delayed due to shareholder objections. The recent Union Budget carried some bad news for the company, the global outlook for its business remains weak and its other businesses — Retail and SEZ — are going nowhere. The scrip has already lost a sixth of its value over last one month, but in view of these recent developments the valuations still appear rich and long-term investors should consider buying it only on dips.

RECENT EVENTS
Over last three months, RIL has commissioned his two mega projects – RPL refinery and KG basin gas – involving investments of around $18 billion. However, since then the things have progressed adversely for the energy giant. The Mumbai High Court granted an unfavourable verdict to RIL in its row against RNRL over the supply of 28 million cubic meters per day (MCMD) of natural gas at a price 44% lower to its current price. The matter is now being debated in the Supreme Court. The company is also fighting a similar court battle against the power major NTPC over another 12 MCMD of gas. At the same time, the company’s proposed merger with Reliance Petroleum is getting delayed following objections raised by some shareholders. The Union Budget for FY2010 introduced income tax exemption on production of natural gas, however, restricted it to blocks awarded under the 8th round of NELP. This deprived all earlier blocks — including RIL’s KG-D6 block — of tax exemption. To add to the woes, the Budget also proposed an increase in the Minimum Alternative Tax (MAT) to 15% from earlier 10%. And while the company is battling these odds, the business environment for refining as well as petchem continues to weaken. RIL’s only solace is thatRNRL’s power plants are not yet ready, which would allow it to sell natural gas at current prices for next 2-3 years.

BUSINESS
The company currently operates 33 million tonne per annum (MTPA) refinery at Jamnagar and has recently commissioned another 29 MTPA refinery under Reliance Petroleum. With both the refineries running concurrently, they now represent world’s largest single location petroleum refining complex. As the new refinery is set up in SEZ, the company has surrendered its status as an Export Oriented Unit (EOU) from April 2009. Over last few years RIL has entered aggressively in organized retail opening around 900 stores across 80 cities - an industry, which is witnessing entry of too many players and low profitability. The company is developing special economic zones in Haryana and Gujarat –another line of business, which has fallen out of favour.

GROWTH DRIVERS
The only hope for incremental growth comes from the company’s portfolio of E&P blocks. It is investing in exploration blocks in India as well as abroad and has also bagged a coal-bed methane (CBM) block. The potential hydrocarbon discoveries from these blocks will add value to the company. The newly constructed refinery, being more complex compared to the first refinery, will help command a better margin for the company. The company’s full integration from petrochemicals to refining to E&P will allow it to perform better in the times of uncertainty.

FINANCIALS
For the year ended Mar 09, the company reported a net profit of Rs 15607 crore marginally better than previous year afte.r removing the extraordinary items. The company’s operating profit margins weakened reflecting the weak economic conditions. The capacity utilisation at the company’s refinery too came down in the second half of the year with weakening gross refining margins. The company, which reported $15 a barrel GRM in FY08, could post only $12.2 in FY09. Similarly, the production of polymers too was 9% lower in FY09 at 3.07 million tonne.

VALUATION
At the current market price of Rs 1934, the scrip is trading at 19.4 times its earnings for the year ended March 2009. However, its per share earnings (EPS) is set to jump to Rs 130 for FY10, which discounts the current market price by 14.9 times.

Rallis India: Rallying Ahead

Unaffected by the delayed and deficient monsoon, Rallis India came out with substantially better results for the June ‘09 quarter. The net profit for the quarter more than doubled to Rs 9.4 crore despite a 5% fall in its net sales to Rs 166.45 crore. The company improved its operating margins to 11.8% from 9.7% in the corresponding period of last year. This, apart from a spurt in other income and fall in interest and depreciation costs helped it record 30% growth at the PBT level excluding extraordinary items. However, the accelerated depreciation written off during the June ‘08 quarter meant that the current quarter’s financial performance was twice as good of last year. However, the first quarter is not the best indicator of the company’s annual performance, as the agrochemicals business is seasonal. The company is setting up a new plant at Dahej and will be investing around Rs 150 crore over next twelve months. At the same time, it is also expanding capacities at its Ankleshwar facility with an investment of around Rs 50 crore. After a couple of years as a debt-free company, Rallis has borrowed Rs 50 crore from banks in FY09 to fund these expansion plans. The company has increased its net sales at a cumulative annual growth rate of 11% over the last five years, while its net profit has grown 27.5%. The financial strength of the company is also visible in the improving return on capital employed, debtequity and interest coverage ratios. With a spurt in the June ‘09 quarter profit, the company’s EPS for the trailing 12 months now stands at Rs 63.8, which discounts its current market price of Rs 730 by 11.4 times. Based on last year’s dividend of Rs 16 per share, the dividend yield works out to 2.2%. The scrip has gained 117% since the start of ‘09, more than twice that of the benchmark Sensex, which has risen 53%.

Oil cos may slip on subsidies, high refining costs in Q1

PETROLEUM companies, particularly oil marketers, are expected to report a fall in sales and profits when they come out with their results for the June quarter later this month in a sharp contrast to an impressive performance in the last quarter of 2008-09. Oil marketers have been selling auto fuels below cost for most part of the quarter, while refiners too are facing pressure on margins with fuel consumption falling globally. The 16% y-o-y depreciation in the value of rupee may not have made much of an advantage for domestic companies as the average crude prices during the quarter at $60 per barrel was half of the year-ago figure.

Oil marketing companies: State-run oil marketing companies, including Indian Oil, Bharat Petroleum and Hindustan Petroleum, had suffered heavily in the first quarter of 2008-09 by selling petro-products below their cost when the oil prices soared to new highs. The June 2009 quarter would be somewhat better due to substantially-lower crude prices. However, in the absence of special oil bonds from the government and a fall in the refining margins globally, the performance of these three oil majors will be subdued, but better compared to last year.

Standalone refiners: With the global demand for petro-products weakening, the refining margins have come under pressure. According to the International Energy Agency, the average benchmark Singapore gross refining margins had dipped into the negative territory in the quarter compared to $5.4 per barrel in the yearago period. Although the actual GRMs will be better than the benchmarks, this indicates weakness in the profitability of standalone refiners such as Essar Oil, Mangalore Refinery & Petrochemicals and Chennai Petroleum. Reliance Industries, which derives two-third of its revenues from petroleum refining, will, however, be able to prop up its profits due to a jump in its income from production of oil & gas. The company is expected to maintain its June 2009 quarter profits at the year-ago levels.

Petroleum producers: ONGC’s 5% lower production in the June 2009 quarter and substantially-lower crude oil prices are likely to take the country’s largest oil and gas producer’s profits down. The state-run company’s subsidy burden is estimated at around Rs 2,600 crore during the quarter, down from Rs 9,811 crore in the yearago quarter. The troubles for Cairn India’s oil production in Rajasthan are not yet over, with the company failing to commence production in the June 2009 quarter despite being ready. Natural gas companies: The natural gas transmission companies such as Gail, Gujarat Gas, Gujarat State Petronet (GSPL) and Indraprastha Gas are all expected to continue with their stable performances. They are expected to show a rise in volumes, thanks to the additional gas from RIL, starting April 2009. Petronet LNG has commissioned a project to double its LNG import capacity to 10 million tonne per annum towards the end of the quarter.

Better tomorrow: The second quarter of FY10 is expected to be better for the industry in comparison to the June quarter. The hike in petrol and diesel prices starting July will cut down the marketing losses of oil marketers and will perhaps help them report profits for the September quarter. If under-recoveries come down, the subsidy burden on ONGC too would ease a little. In the private sector, RIL-RPL merger and commissioning of Cairn’s oil production from Rajasthan will boost their earnings.

Petronet LNG set to take control of Dahej unit

PETRONET LNG expects to take possession of its expanded LNG import terminal in Dahej from contractors next week, saying that the technical problems that arose during the commissioning have been solved.

The company had expected that the expanded terminal would be able to operate at its full capacity by May 2009, but technical problems forced it to reschedule several cargoes.

“Despite those issues, the EPC contractors are within their contractual time limit, which is some time next week,” said Petronet finance director Amitabh Sengupta.

Japan’s IHI Corporation was awarded a contract in 2006 to double capacity at the Dahej terminal to 10 million tonne. With the additional capacity becoming available, the company has scaled up volumes.

“We are already operating at a level of 30 million cubic meters a day,” explained Mr Sengupta. For the year ended March 2009, Petronet LNG regassified 6.4 million tonne of LNG, equivalent to around 25.6 million standard cubic metres per day (MMSCMD).

Petronet LNG imports 5 million tonne per annum of LNG from Qatar’s RasGas under a 25-year contract, which started in 2004. This will be scaled up to 7.5 MTPA from the fourth quarter of 2009. Taking spot cargoes into account, the company’s supply of natural gas is expected to touch 38 MMSCMD towards the end of FY10. However, there are still some problems in scaling up the gas supply.

“The demand for natural gas remains high in India. However, the constraints on pipeline capacity may limit how much we can supply,” said Mr Sengupta.

Petronet LNG is also setting up a 2.5 MTPA LNG import terminal at Kochi by end 2011.

United Phosphorous: Green As Ever

United Phosphorous needs to be in the portfolio of every longterm investor, as the agrochemicals industry is set to gain from an agricultural boom

One-year beta 0.78

Institutional holding 55.61%

Current dividend yield 1.0%

Current P/E 13.5

Current m-cap Rs 6555.9 cr

Current market price Rs 149.15

UNITED Phosphorous (UPL), with its wide product portfolio and worldwide presence, appears well placed to benefit from a boom in agriculture over the next few years. Long-term investors should consider including this evergreen stock to their portfolio.

Business: Incorporated in 1969, United Phosphorous today is among top five generic agrochemicals manufacturers in the world. It has 23 manufacturing sites (nine in India, four in France, two in Spain, one each in UK, Vietnam, Argentina, Netherlands, Italy, Colombia and China) with a customer base spread across 86 countries. The company manufactures a wide spectrum of generic agrochemicals and specialty chemicals.
During FY09, the company derived 22% of its sales from North America, 21% from India, 32% from Europe and 25% from other countries, with all the regions reporting double-digit growth.
It has a wide domestic and global distribution network for the sale of its products worldwide and boasts of the largest agrochemical product portfolio in India. The company carried out a series of big-ticket buyouts during FY05 and FY08 to expand its geographical reach and product portfolio. In November 2004, it bought US-based AG Value for $36 million, followed by Spanish company Cequisa and Indian Shaw Wallace Agrochemicals in Jun 05. In Nov 05 it bought Argentinean Reposo and Dutch seed manufacturer Advanta in Feb 06. Acquisition of South African Crop Serve was followed by French company Cerexagri in Nov 06. The Argentina-based ICONA in July 07 and Colombia-based Evofarms in Feb 08 were its recent most acquisitions. UPL has also purchased various agrochemical products from a number of global leaders such as Bayer, Dow Agrosciences and Du Pont.

Growth Drivers: After several years of aggressive inorganic growth, UPL has settled into consolidation. In FY09, the company didn’t make any significant buy-outs and is not likely to go in for one in FY10 either. At a time when the growth in demand for food has outstripped the growth in supply, the pressure on agriculture has increased to improve farm yields the world over. Higher commodity prices have also resulted in higher liquidity in the hands of farmers, increasing their ability to invest in agriculture. This augurs well for the global agrochemicals industry, which after several years of singledigit growth, witnessed over 10% of real growth in FY09. In fact, the global economic slowdown is unlikely to take a toll on agriculture. United Phosphorous, with a wide product portfolio and expansive geographical reach, is well placed to benefit in this scenario. The company has a healthy track record of sales and profit growth, while maintaining strong operating margins over the past five years. The company has been regularly introducing new products to its various markets and has earmarked a capex of Rs 300 crore for FY10 on plant expansions and new product registrations.

Financials: During the FY09, UPL reported a 37% spurt in its net sales to Rs 4,802 crore, out of which 8% was from rupee depreciation, 15% due to higher prices and 14% due to an increase in quantity.
The company’s borrowing in FY09 increased by Rs 504 crore to Rs 2,073 crore as on March 31, 2009 mainly due to loans given to group company Advanta, repricing of forex loans and rise in working capital. To fund its inorganic growth, the company had raised $225 million through the issue of FCCBs in FY05 and FY07. Of these, FCCBs worth $157.1 million have been converted into equity shares and $67.9 million are outstanding.

Valuation: At the current market price of Rs 149.15, the scrip is trading at 13.5 times its earnings for the year ended March 2009. We expect the company to end FY10 with an EPS of Rs 13.1, which discounts the current price by 11.4 times. Its peers like Bayer Cropscience and Rallis India are currently trading at P/E of 11-13.