OIL readies war chest for inorganic growth

THE upcoming around Rs 2,800-crore public issue of Oil India (OIL) is expected to add to its already overflowing coffers and create a war chest for its future inorganic growth. The company’s bank balance is in excess of Rs 6,500 crore and generates over Rs 2,500 crore of operating cash flows annually — more than sufficient to meet its objective of investing Rs 4,500 crore over the next two years in its business.
“Financing our planned capital expansion in exploration and development is not the only objective behind this IPO,” said NM Borah, chairman and managing director of the public sector firm. “There are some interesting opportunities in front of us, both in corporate acquisition and investment in exploration acreage. As and when we decide to move forward, this additional cash balance will come in handy,” said Mr Borah. He was addressing in the first road show of OIL’s IPO in Mumbai. However, till such time that the company identifies investment avenues for these excess funds, they will merely boost OIL’s other income, which at Rs 937 crore in FY09 represented over 43% of its profits.
The IPO is in line with the government’s divestment programme. The government is selling 2.14 crore equity shares of OIL to Indian Oil, BPCL and HPCL to raise around Rs 2,200 crore. The divestment will take place at the IPO price, which is to be discovered through book building. Under the IPO, the company is offering 2.64 crore equity shares of Rs 10 each at a price band of Rs 950 – Rs 1,050, which will make it the first ever PSU to offer shares at a 4-digit price level. Post IPO, the government will retain 78.4% stake in OIL. Out of the shares on offer, 0.24 crore shares will be reserved for employees, 1.44 crore for qualified institutional buyers (QIBs), 0.24 shares in non-institutional portion and 0.72 shares for retail investors. At the same time, the government is selling another 2.14 crore equity shares of OIL with Indian Oil, BPCL and HPCL at the IPO’s issue price to raise around Rs 2,200 crore and still retain 78.4% stake in OIL.
At the higher price band, OIL’s market capitalisation will touch Rs 25,250 crore putting it in top 40 Indian companies and 10th largest PSU by market capitalisation. The success of this IPO may help it gain a higher ranking with the government for this mini-ratna category I company.
“We have met all the criteria for the navratna status. The success of this IPO will surely help us obtain that status,” mentioned Mr Borah. This promotion would bring in higher autonomy for the management in investing and expanding. OIL, which has majority of its producing assets in Northeast India, produced 24.95 million barrels of crude oil and 2.27 billion cubic metres of natural gas in FY09, which represented 10% of India’s crude oil production and 7% of natural gas production.

Cosmo Films: Packaging Prospects

Cosmo Films’ recent acquisition at an attractive price could propel it to a high-growth zone

THE year gone by might not have been great for Cosmo Films, but the future certainly appears exciting considering its recent acquisition of GBC Print in the US at a throw-away price. Long-term investors should not miss this opportunity for a healthy capital appreciation and an attractive dividend yield

Business:
Cosmo Films (CFL), promoted by Mr. Ashok Jaipuria in 1981, is one of the global leading manufacturers of Bi-axially Oriented Polypropylene Films (BOPP) with an annual capacity of 91,000 tonne spread between its two plants located at Aurangabad in Maharashtra and Vadodara in Gujarat. BOPP film is used in packaging most consumer goods ranging from soaps, food & soft drinks, toys to cigarettes. CFL is also India’s largest producer of thermal lamination film, which is mainly exported to Western countries. Exports represent a major chunk of the company’s business representing nearly 45% of its FY09 net sales. However, the proportion has come down from 56% in FY08 due to the economic slowdown in the US and Europe.

Growth Drivers:
To strengthen its position in thermal lamination film segment, the company acquired GBC Commercial Print, a division of ACCO brands of USA, in June 2009 for $17.1 million. GBC is an industry leader in thermal films and equipments with three plants in the US, Netherlands and Korea. The deal values GBC at around one-sixth of its annual revenues of $100 million. In comparison, Cosmo is right now trading at around one-third of its annualised topline. The demand for packaging film is growing strongly at around 8% globally and over16% in India. To cater to the demand the company has expanded its capacity at a cumulative annual growth rate (CAGR) of 7.4% over last five years, with nearly 12800 tonne capacity added in FY09. The demand for thermal lamination, where the company is now a global leader, is expected to grow rapidly as the traditional solvent based lamination is environment unfriendly. At the same time, the scenario on the raw materials front is likely to be comfortable due to expected oversupply conditions in polymer industry with new plants coming up in the Middle East and China.

Financials:
Over last five years, the company’s net sales have increased at a CAGR of 13.5%, while the profits have grown at 44.1%. During FY 09, the company’s performance was under pressure as the economic slowdown affected its exports. Still the company posted a jump in its profits due to Rs 44.7 crore written back towards change in depreciation method. The company has gradually improved its gross profit ratio to 16% in FY09, however, the net profit ratio weakened marginally to 6.5% from 7.6% in the previous year. The company has a long history of generating healthy operating cash flows. The debt-equity ratio stood at 1 as at the end of March 2009.

Valuations:
At the current market price of Rs 105.20, CFL is trading at 5 times its earnings for past twelve months adjusted for extraordinary income. The company has proposed Rs 5 per share as dividend for FY09, which gives a yield of 4.8%. Other companies in similar business are trading at earnings multiples of 3.5 to 7. With the acquisition of GBC, the company’s consolidated net sales for FY10 are likely to jump to Rs 1,189 crore with net profit around Rs 71 crore. The current market price is less than three times the estimated earnings for FY10.

Rallis India: No fundamental change

The Rallis India scrip gained over 10% in the last three trading sessions to close at Rs 760.8 on Friday following the news that Tata Chemicals would buy out stakes of other promoter group companies in Rallis. With this arrangement, Tata Chemicals will increase its stake in Rallis from the current 9.4% to 45.2%, thereby giving it the management control of Rallis.
Tata Chemicals’ board has approved to buy Tata Tea’s 24.52% stake in Rallis, 7.52% held by Tata Sons, 2.42% stake of Tata Investment and 1.35% stake of Ewart Investments at a price not exceeding Rs 850 per share. This will result in a maximum cash outgo of Rs 365 crore for Tata Chemicals, which was carrying Rs 990 crore of cash at the end of FY09. However, the other promoter group companies have not conveyed their approvals so far.
The asking price set by Tata Chemicals values Rallis India at a little above Rs 1,000 crore, around 10% higher than the latter’s current market capitalisation of Rs 911 crore. Although it’s difficult to evaluate the immediate operational benefit due to this transaction, the valuation appears fair for retail investors of Rallis India.
Since the transaction amounts to inter se transfer of shares among promoter group companies, Tata Chemicals need not come out with an open offer for Rallis India shareholders.
This transaction is the first step in the unification of the chemical businesses of the Tata Group. It will also create better co-ordination between the two companies, both of which have the same target customer, viz. the farmer. The group companies have long been sharing each other’s marketing infrastructure to increase customer reach. The arrangement does not impact fundamentals of Rallis in a big way. However, considering this as an endorsement of the current valuation of Rallis India, long-term investors should continue to remain invested.

Back In Favour

The valuations of the three oil marketing companies appear highly attractive, particularly in view of their ability to report profits in coming quarters

INVESTORS would have by now lost faith in India’s three public sector, Fortune 500 companies — Indian Oil, BPCL and HPCL — due to their topsyturvy performance last year. Last year proved very tough for these public sector Navaratnas due to huge underrecoveries. However, the industry seems to have shown signs of revival with the companies reporting first signs of profitability in the June ’09 quarter, which is likely to continue. Steady but slow: Despite a total lack of control over their own profitability, the stocks of these companies did not fall with the overall market in the last August 08 to February 09 period. The share prices of these three biggies found strong support around their book value. In the last quarter, however, the performance of these companies has been somewhat subdued despite the market revival. Since the start of April 2009, the shares of Indian Oil, BPCL and HPCL have gone up by around 37%, compared to over 60% gains in the benchmark Sensex to 15,160 on August 7, ’09. Wiping the slate clean: The June 2009 quarter was a turnaround for the oil marketing companies (OMCs), as they posted healthy profits and cash flows compared to losses earlier. Their refining operations were under pressure due to the global economic turmoil, however, the sharp reduction in marketing losses helped them. The crude oil prices ruled at $60 per barrel during the quarter — nearly half of the year ago period — which helped these players to cut down their underrecoveries on marketing operations to negligible levels. As a result, there was no need for any oil bonds and very low upstream support.

Two other changes provided great support to the financials of these companies. Strengthening of rupee meant that the companies recorded forex gains during the quarter, as against heavy forex losses in the corresponding quarter of previous year. At the same time, their interest burden receded considerably thanks to lower interest rates and also reduced debt burden. The interest cost of these OMCs had jumped nearly threefold in FY ’09 to Rs 8200 crore — twice that of their annual aggregate profit. Indian Oil’s quarterly numbers were also boosted by the merger of Bongaigaon Refinery with effect from 25th March 2008. Hence its financials were included in June 09 numbers, but not in the June 08 figures. Indian Oil also benefited from the improving performance of its petrochemical operations, the profits of which segment tripled during the quarter. Future expectations: Better future seems to await these three oil majors, particularly in the light of the recent Budget announcement about setting up of an expert group to decide a viable and sustainable petroleum pricing system. T

he recent increase in prices of auto fuels starting July 2009 has reduced the under-recoveries of these OMCs on petrol and diesel to a level below Rs 2 per litre. These transport fuels represent over half of India’s total consumption of petroleum products, while the other two subsidised products — kerosene and LPG — represent just 15% portion. As a result, the increase in auto fuel prices will help these companies report profits in the coming quarters. At the same time, these companies are investing in improving and expanding their refinery operations. The 6 million tonne Bina refinery of BPCL is expected to start operations by the end of 2009, while HPCL’s 9 million tonne Bhatinda refinery will be ready by February 2011. Indian Oil is also in the process of expanding its Panipat refinery and start polymer production. Valuations: Thanks to the profits in the June 2009 quarter as against losses in the corresponding quarter of last year, the valuation of oil marketing companies has become attractive. Indian Oil is currently trading at a price-to-earnings multiple of 10.9, BPCL at 7.8 and HPCL at 5.9 We expect these companies to remain profitable in the next two quarters, wiping out over Rs 9500 crore of losses incurred in the same period of the last year. This will boost the per share earnings of these companies giving a booster to their performance on the bourses. Risk Factors: The main risk lies in crude oil prices zooming up in a short span, without corresponding increase in the retail prices of the petroleum products. However, considering the weakness in demand and heavy potential supply that could enter the market at a short notice, we rate this risk as low in the coming quarters.

Oil & gas cos hit by lower prices, refining margins

NDIA’S oil & gas sector turned out dismal performance for the quarter ended June 2009 due to lower petroleum prices and pressure on refining margins, limiting the gains of the ET Oil & Gas index in the last one month to 6.7% against a 13.1% gain in the broader ET-100 benchmark.
Reliance Industries (RIL) reported a gross refining margin (GRM) of just $7.5 per barrel for the June 2009 quarter, less than half of $15.7 a year ago. Its refining business, which earlier used to contribute over half the profits, accounted to a little over a quarter of RIL’s profits for the June quarter. An increase in tax rates under minimum alternate tax (MAT) further impacted its bottomline, which fell 12% to Rs 3,636 crore. Essar Oil, however, turned out substantially better results, thanks to a sales tax deferral of Rs 210 crore and Rs 30 crore gain in inventory valuation. Its GRM was at $6.74 per barrel, while the company’s net profits for the quarter jumped fivefold to Rs 169 crore. State-owned refiners Mangalore Refinery (MRPL) and Chennai Petroleum (CPCL), both witnessed over 50% reduction in their profits for the quarter as GRMs crashed.
Three public sector oil marketing companies — Indian Oil, BPCL and HPCL — emerged clear gainers of low petroleum prices. They incurred negligible underrecoveries and posted substantially superior performances despite lack of any oil bonds. Further, the gains on rupee strengthening and a marked reduction in interest costs added lustre to their performance. Considering the revision in auto fuels in early July, these companies are expected to report healthy profits for the September 2009 quarter as well compared with the losses in the same quarter last year.
India’s largest oil producer ONGC reported a 27% fall in its profits to Rs 4,848 crore for the quarter due to lower crude oil prices. However, reduction in its subsidy burden meant that the performance was better than expected. The company has made several discoveries over past few years and added to its reserve base. Also, it is likely to obtain a better price for the natural gas it produces and sells below cost.
Cairn India witnessed its profits fall by two-third to Rs 45.4 crore despite a jump in other income, on the back of the lower crude oil prices. The company is expected to commission production from its Rajasthan fields sometime soon. The crude oil being waxy in nature will be sold at a discount of $6.5-$10 per barrel to the benchmark Brent prices. At the same time, the company will have to incur an additional cost of $7-10 per barrel on trucking it to the Gujarat coast, till its 600-km pipeline becomes functional by end-2009.
GAILIndia had a tough quarter, which witnessed substantial erosion of its profitability in petrochemicals and liquid hydrocarbons businesses. Despite gains in its natural gas businesses, the company posted a 27% fall in profit to Rs 655.8 crore. Two city gas distribution companies — Indraprastha Gas and Gujarat Gas — reported steady growth in gas volumes and profits during the quarter. The additional natural gas from India’s eastern coast benefited Gujarat State Petronet the most, which more than doubled its net profit during the quarter with a 40% jump in transported volumes.
Further ahead, the legal battle over KG basin gas with Reliance Natural Resources, and a depressed business outlook for its main refining business continues to cast doubts over the future profitability of RIL. Most of the other companies, including ONGC, Essar Oil, Cairn and GAIL, appear richly priced leaving little scope of growth for retail investors.

Tata Chemicals: Trouble Across The Border

Tata Chemicals came out with weak results for the June ’09 quarter with the consolidated net profit attributable to the group falling 60% to Rs 42.5 crore. The dismal performance on a consolidated basis came in spite of a strong 61% rise in standalone profits to Rs 94.4 crore, which indicates at continuing woes at its overseas businesses.

The company, which had written off hefty sums of Rs 119.2 crore towards impairment of assets and Rs 115 crore towards overseas pension liabilities in the March 2009 quarter, wrote off another Rs 87.4 crore towards restructuring costs in the June 2009 quarter. The company also provided for Rs 152.2 crore towards additional pension fund liabilities, which it chose to write off against accrued reserves. In other words, had it followed its earlier practice of charging these expenses to the quarterly profits, it would have posted a net loss for the June 2009 quarter. Although, these items do not entail an immediate cash outflow, they certainly lower the book value of the company’s shares.

Nevertheless, the company’s share price surged on the next day of the results by 6.5% on BSE to end the week at Rs 254.8. The total market capitalization of the company now stands at Rs 5992 crore or 10.3 times the profits for trailing 12 months.

Apart from the write offs, even the bruised profitability of TCL’s overseas businesses weighed down on its quarterly numbers. The UK-based Brunner Mond group reported a loss of Rs 40 crore, Moroccan joint venture IMACID posted a loss of Rs 12 crore, while US-based General Chemical’s profits dipped by a third to Rs 30 crore in June 2009 quarter against comparable period of last year.

Earnings in various foreign currencies proved a shortcoming for the company, which had to write off Rs 47.2 crore during the June 09 quarter in line with AS-11 provisions In view of the global economic slowdown, the company has adopted cash conservation measures by re ducing costs and working capital, by postponing capex and by restructuring overseas businesses.