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.

Subsidy burden weighs heavy on Gail

Co May Miss Profit Target For The September Quarter If Subsidy Burden Shoots Up

SHARES of Gail India, which is India’s largest natural gas transporter, dipped over 4.2% on Friday to Rs 362.85 on subsidy concerns. Despite underrecoveries of oil companies in the September 2009 quarter falling to one-tenth compared with the year-ago period, Gail’s subsidy burden has gone up.
“Our subsidy burden for the September 2009 quarter is above Rs 450 crore,” mentioned a highranking official of the stateowned company on condition of anonymity. Gail had contributed Rs 400.8 crore as subsidy in the September 2008 quarter, as part of the government’s subsidysharing mechanism.
However, Sandeep Randary, research analyst with BRICS Securities mentioned: “This is not a fair comparison. The company had revised its September 2008 quarter subsidy afterwards.” In the December 2008 quarter results, Gail had written off additional Rs 258 crore towards short provision of subsidy for the September 2008 quarter. Still, the subsidy for the September quarter is significantly higher than estimates put out by analysts.
“Based on our subsidy estimate of Rs 250 crore, our profit target for Gail was Rs 680 crore for the September 2009 quarter. If the subsidy burden turns out to be higher, the profit will go down accordingly,” said Vinay Nair, a research analyst with Khandwala Securities. The company is set to publish its quarterly results on October 28. A poll of seven brokerage estimates had pegged Gail’s profit 29% down y-o-y at Rs 722 crore for September 2009 quarter.
In the September 2008 quarter, Indian petroleum marketers, Indian Oil, BPCL and HPCL, which market auto fuels, kerosene and LPG at prices below cost, had under-recoveries of Rs 35,238 crore, out of which Rs 14,679 crore was reimbursed by upstream companies including ONGC, Oil India and Gail, while the remaining Rs 20,559 crore was paid through oil bonds.
Thanks to a policy turnaround from a year ago, the government now wants oil producers, ONGC and OIL, to share under-recoveries only on auto fuels, while Gail has to compensate for the losses on LPG. This arrangement has helped the oil producers to substantially trim their subsidy burden in the September 2009 quarter. ONGC, which bears the lion’s share in sharing subsidies, is expected to have cut its burden nearly 80% to around Rs 2,600 crore. All the oil companies will be publishing their September 2009 quarterly numbers between October 28 and October 30.

CHAMBAL FERT: Other income, lower fuel cost, boost margins

CHAMBAL FERTILISERS, one of India’s largest private sector fertiliser companies, reported a healthy 35.8% growth in profits for the September 2009 quarter despite a huge 44% fall in its net sales, as the company cut down on its trading business. Despite the profit growth, the scrip lost 2.7% on the Bombay Stock Exchange (BSE) to close at Rs 54.75. The current price values the company at 8.2 times its profit for the past 12 months.
A strong 900-basis point jump in operating margin to 17.9% drove Chambal’s profit growth in the September 2009 quarter. Apart from the reduction in trading activity — which was making losses last year — a sharp 37% fall in fuel costs and a 16% dip in other expenditure also boosted the operating margins. Other income for the quarter was 34% higher on y-oy basis to Rs 14.3 crore. The company incurred a cost of Rs 10.2 crore on converting floating rate loans to
shipping division, which resulted in a 52% y-o-y reduction in its interest cost to Rs 19.8 crore. The resultant pre-tax profit was 53% higher against the year ago period at Rs 100.4 crore. However, an increase in the effective rate of tax restricted the net profit growth at 35.8% to Rs 64.7 crore.
The company’s shipping business turned out to be a dampener during the quarter while its fertiliser and textile businesses prospered. The profits from the shipping business dipped to a meagre Rs 0.1 crore from Rs 26.2 crore in the corresponding quarter of last year. However, the 15% profit growth in the fertiliser business and curtailed losses in trading helped the company’s profit growth. The trading activity was reduced to just one-sixth of year ago period following a steep reduction in the volume and prices of di-ammonium phosphate, while last year’s trading losses turned into profits. The textiles division clocked a tiny profit against a small loss in the September 2008 quarter.
The company has completed partial de-bottlenecking of both its fertiliser plants situated at Gadepan in Rajasthan in March and April 2009. The partial debottlenecking will help in saving energy and lead to a marginal increase in urea capacity. Going forward, the company is likley to benefit from expanded capacities, better capacity utilisation due to a steady flow of gas and a revival of its shipping business.

No upside potential seen in HOEC

Current M-Cap At 22.6x Estimated Profits Is Higher V/s Larger Cos Like ONGC, Oil India

HINDUSTAN Oil Exploration (HOEC), which was trading around Rs 100 in mid-July 2009, has more than tripled in the last three months to near Rs 350. The trigger was the commencement of natural gas production from its PY-1 field in Cauvery basin, which was achieved just ahead of Diwali. PY-1 field was awarded under pre-NELP round for which the production sharing contract was signed in 1995.
This is a major development for the company, which had posted a net profit of Rs 53.6 crore on net sales of 85.2 crore for FY09. The company holds working interest in nine E&P blocks in India, which includes 100% ownership of the PY-1 field.
The other major producing field PY-3, where the company holds non-operating 21% stake, continues to remain under shutdown since July 2009 following a technical problem. Three other blocks in Gujarat, where HOEC holds stake, are producing tiny quantities of hydrocarbons and the fourth one got a DGH approval for development plan. The company has also made a natural gas discovery in Assam, which is being apprised. Recently the company also obtained exploration licenses for its two blocks in Rajasthan that it won in the seventh round of NELP.
As at March 31, 2009, the internal estimates of the Management of proven and probable reserves on working interest basis for the Company is 53.4 million barrel of oil equivalent, which is less than 2% of ONGC proven reserves.
Last year Italy’s Eni Group took over HOEC’s parent company Burren Energy and following a mandatory open offer, now holds over 47% in the company. The change in ownership not only benefited HOEC in terms of technical leadership, but also by way of a $125 million loan on attractive terms from Eni.
At its plateau production level of 50 million standard cubic feet per day (mscfd) the PY-1 field is capable of generating around Rs 300 – 350 crore in revenues annually for next six years.
Assuming the net profit margin at 50%, the company is likely to earn annual profit of around Rs 200 crore. HOEC’s current market capitalisation is 22.6 times this estimated profits, which is higher compared to its larger peers ONGC and Oil India and thus looks fully priced leaving little upside potential for new investors.

Petro majors likely to put out better numbers in Q2

But Outlook Remains Sombre As Cos May Face Margin Pressure, Going Ahead

THE Indian petroleum industry — especially the refiners and natural gas players — is expected to report some very good numbers for the September 2009 quarter results later this month.
The refiners, who suffered heavily from the crash in oil prices in the corresponding quarter last year, are likely to post a strong turnaround, while the rising availability of natural gas bodes well for pipeline players. Still the outlook remains sombre. The refining and petrochemical industries are likely to face margin pressure in the coming quarters. This will raise questions on their profit growth, even as the uncertainty over under-recoveries and subsidy-sharing remains.
The three oil marketing companies, which had jointly incurred losses running up to close to Rs 12,900 crore in the year ago period, are likely to emerge as the only strong gainers on a year-onyear (y-o-y) basis in the September 2009 quarter. Stability in crude oil prices, revised retail prices of auto fuels starting July and a steadily strengthening rupee are likely to help IndianOil, Bharat Petroleum and Hindustan Petroleum in posting healthy profits. Analysts peg the trio’s total profits for the quarter in the Rs 2,500 to Rs 4,500-crore range, based on assumptions for oil bonds.
The volatility in crude oil prices last year had impacted their profitability substantially.
The refining environment continued to weaken during the quarter ended September 2009 from the June 2009 quarter due to a global oversupply of refined products. This is expected to reflect in a sequential weakening of gross refining margins (GRMs) for the domestic standalone refiners including Mangalore Refineries, Chennai Petroleum and also private sector majors Reliance Industries (RIL) and Essar Oil. However, the sequential weakness may not result in a y-o-y fall in GRMs for these companies, thanks to the reduced crude oil volatility this year. GRMs represent the pricing differential between refined products and the crude oil required to produce them.
However, analysts expect a significant fall in the case of Reliance Industries, which had not witnessed any fluctuations in GRMs despite the oil price turbulence last year. The company, which posted over 50% y-o-y drop in GRMs in the June quarter to $7.5 per barrel, could see its GRMs weakening further in the September 2009 quarter to somewhere between $6.6 and $7.4 per barrel, which could very well turn out to be one of its lowest GRMs historically.
RIL’s petrochemical business, which comprised nearly half of the company’s June 2009 profits, is likely to witness margin pressure. Its earnings from natural gas production will add significantly to the profits. However, the analysts expect the company to report a y-o-y fall in net profit from operations. The company’s sale of treasury shares during the quarter that helped it raise Rs 3,188 crore will boost RIL’s other income and also the reported profit figure for the quarter.
ONGC’s performance during the quarter will depend on the amount of subsidy burden. In the preceding June 2009 quarter, its net realised price was 15.7% lower on y-o-y basis despite the negligible subsidy burden. However, the September 2009 quarter may see the company getting a better price for its crude oil compared to $46.7 per barrel that it got in the year-ago period. The downward trend in the company’s oil production is likely to continue with an around 3% fall. The analyst projections for the company’s September 2009 profit growth range from a fall of 11.9% to a growth of 26%.
Cairn India, which commenced production from its Barmer field by end August 2009, is unlikely to see any major revenues from the same, as its pipeline network is yet to be completed. The revenues and profits from the Ravva field operations will see a y-o-y fall due to lower oil prices.
The natural gas transporters are likely to see better revenues from the spurt in the domestic availability of gas. Gujarat State Petronet (GSPL) is likely to post a similar profit growth in the September 2009 quarter as it posted in the June 2009 quarter.
Gail’s profitability is, however, expected to come under pressure due to higher subsidy burden and its ongoing expenditure on petroleum exploration initiatives, which stood at a cumulative Rs 260 crore in the three preceding quarters. Gail’s profit is likely to fall between 21% and 45% from the year-ago period.
Going forward, the outlook for the refining business continues to remain weak, while the petrochemicals too will face increasing margin pressure due to commissioning of new capacities. The uncertainties over subsidy sharing and oil bonds will continue to obscure the future of public sector companies. The natural gas industry is expected to continue growing in line with the growing domestic availability.

Interview-Huntsman Corporation: “2010 And 2011 Will Be More Difficult Than 2009”

With economic turmoil, environmental concerns and climate change occupying the hotspots, the chemical industry is poised to change globally. To know what lies ahead, ET Intelligence Group’s Ramkrishna Kashelkar caught up with Peter Huntsman, CEO, Huntsman Corporation—a global producer of differentiated chemicals with revenues over $10 bn annually. Excerpts.

How has the chemical industry changed in last decade?
Globally we have seen a tremendous transformation in the chemicals industry over the last decade. A few years ago the best of producers were in the North America or Europe, but today I believe the best producers are in the Middle East, China and say Reliance in India. The commodity side of the chemical industry is undergoing a difficult phase right now because the Middle East is coming up with tremendous amount of new capacities. They have the advantage of new technology, very large scale and low cost raw material.

Is the difficult phase for commodity chemicals likely to prolong further?
In the view of the new capacities coming up in the Middle East, 2010 and 2011 will be more difficult than 2009 for the commodity chemicals globally. As I look at this, this is not a case of over capacity. Much of the pain will come companies like Reliance, SABIC and others emerging market giants leveraging their geographical or feedstock advantages and investing in new technologies and new capacities. The overcapacity is going to be in countries like US, where 20-30 year old plants are operating. Suddenly, they now have to compete with units that are 5 times bigger and working on state-of-the-art technology operating out of some faraway place. I think there will be tremendous transformation in the Americas and Europe in the commodity chemicals business.
As regards Huntsman, we used to be this segment of the chemicals industry till few years back. However, when I saw these new facilities coming up in India and the Middle East, I realised there was no way our ageing plants could compete against them. As a result, two years back we got out of all those commodity businesses and moved on to the specialty chemicals.
Now most of our products are now based on technology, innovation, where the size doesn’t matter. We manufacture them India, China, Saudi Arabia, Europe but our cost is pretty much the same all around the world. That’s the difference between a commodity and specialty business.

So you think the chemical companies in the US and Europe would focus only on the specialty chemicals in the future?
Yes, I think so. The specialty chemicals industry today is 30% in US, 40% in EU and rest in Asia-Pacific. Here the competition is not on price or raw materials, but on product technology and innovation. In the commodity space if one processes two or three raw materials, we have fifty or sixty raw materials, which come together. This is an industry, which is good for companies with a global footprint and the demand for these are global.
However, the rules of the game are totally different here. The customers, suppliers, transportation needs, the development, research efforts — everything differs. Hence it is very difficult to change over from commodities to specialties quickly. Huntsman had been in this for the past 15-20 years developing new technologies and innovating, so the changeover became possible. If you are not already in it today, it is going to be difficult to get in it in future.

What are Huntsman’s plans for India?
Just ten years ago we had less than 10 employees in India. That number rose to 250 three years back and as of now we have around 1500 associates here in India. Our sales also grew rapidly in the period to nearly $500 million at present. Today nearly 50% of Huntsman’s Indian business comes from chemicals catering to the textiles industry. Within next five years we plan to double our sales in India to $1 billion. We will be investing in excess of $100 million over next five years, which will be for not just expanding capacities and strengthening the R&D, but also for mergers and acquisitions.

What role do you think environmental concerns will play in the future of the chemical industry?
Environmental concerns are surely playing a great role in the working of the chemical industry today At Huntsman we have always tried to move away from petroleum feedstock to bio-based sources such as glycerine, bio-diesel, vegetable oils and bio-ethanol, to name a few. We are also exploring other renewable fuel technologies as well as agri-feedstock to make more of our products bio-based. Other efforts include high performance lighter products for improving aircrafts’ fuel efficiency or innovative composites and resins for fuel cell applications.
Environmental issues are going to be equally important in India or China in coming years as they are in the US or Europe. If you go to Sierra Nevada mountain in California, nearly 30% of small particulate pollutants found there have their origins in the China’s coal burning power plants. Hence this is no longer a regional problem but rather a global problem. Having stringent and uniform environmental norms will certainly help the chemicals industry. This will encourage introduction of better technologies and a much more responsible attitude from the chemical companies.

What are your views on the climate change?
Well, the chemical industry can either be part of the problem or part of the solution. Right now, I believe some companies are being part of the problem while others are part of the solution. Too many countries and companies are fighting against the environmental initiatives presently. But in my opinion, we are already beyond the argument stage with climate change. Crude oil is a dangerous raw material! We need to get away from it as quickly as we can. And it is not just about pollution; dependence on oil is also putting the reins of our future economic growth in the hands of unfriendly countries.
I don’t understand why the US doesn’t take more initiatives in this area. We are 5% of the world’s population, produce 8% of world’s oil but consume 25% of the world’s oil. Why don’t we take lead in this? We don’t have any right to ask countries like India to take the first step.

… but if not oil then what?
Part of this is looking for alternatives to oil, but there is not enough solar, wind energy to replace it fully. The other part is to use oil judiciously, conserve it. But our mentality towards oil consumption needs to change. In a place like Texas when it is extremely hot in the summer, we have freezing cold inside the buildings. Do we really need that? Huntsman is one of the largest producers of polyurethane foam, which is one of the most efficient insulating materials.
We are developing paints and coatings for roofs that will be able to reflect heat in the sunlight. The oil conserved through these methods will be equivalent of taking a quarter of all cars in the world off the road. The US alone can save nearly 3-4 million barrels of oil every day, if we have the same driving standards as in the Europe — that’s more than what India consumes today.
Some change is already becoming visible. For example, in the US government’s cash for clunkers programmes, we saw people getting rid of their low mileage vehicles such as pick-up trucks and SUVs replacing them with Hondas and Toyotas. That underlines the change in the mindset. America needs to be bold and take the lead in petroleum conservation because we consume the most in the world.

RALLIS India: Steady but slow

RALLIS India, the agrochemicals firm from the Tata group, reported a 10% profit growth for the quarter ended September ‘09 to Rs 46 crore, while net sales grew 13% to Rs 317 crore. Although the growth appears muted in the company’s most important quarter of the year, the performance is encouraging in view of the challenges it faced: erratic monsoon, reduction in the agricultural acreage, falling prices and low pest incidence. Notably, the entire growth came from higher volumes in the domestic market, as the prices and export sales were below the year-ago period.
The company maintained its operating profit margin at 23.2%, while other income jumped to Rs 1.1 crore from Rs 0.3 crore last year. Interest cost dropped to one of its lowest levels to Rs 0.55 crore thanks to tight working capital management.
The company is investing Rs 150 crore in setting up a new plant in Dahej, scheduled to be commissioned by June ‘10. This plant, with a 5,000 tonne of annual capacity, is expected to generate revenues over Rs 500 crore in its first three years of operations.
The company is also proposing to allot 9.8 lakh equity shares to Tata Chemicals on preferential basis, which will take Tata Chemicals’ shareholding in the company to 50.6%. Rallis is expected to raise Rs 89 crore from the allotment, which will be utilised to pay off Rs 88 crore of non-convertible preferential shares. After the allotment, the company’s paid-up equity will rise to Rs 12.96 crore. The current market price at Rs 973 is 15.6 times the diluted EPS.
The upcoming rabi season is expected to be significantly better compared to the last rabi season, thanks to higher ground water levels and soil moisture. The company appears well poised to benefit from this and is likely to post a stronger growth in the second half.

PRAJ INDS - R&D gains to turn things around

PUNE-BASED Praj Industries is yet to overcome some of the problems encountered by it. Although the leading provider of engineering and technological solutions for ethanol manufacturing posted a 31% rise in its quarterly net profit to Rs 39.6 crore for September 2009, the driving force has been other income and foreign exchange gains, while operations continued a weak march.

The company’s net sales for the quarter stood at Rs 200.7 crore, which were marginally better than the corresponding quarter of last year. Still, the company witnessed a 10% jump in its raw material cost. Despite a 3% Y-o-Y fall in employee cost and a 17.7% reduction in other expenditure, the operating profit for the September 2009 quarter was 7% lower on Y-o-Y basis to Rs 40.4 crore.

Praj Industries booked a foreign exchange gain of Rs 50 lakh on account of restatement of advances received from customers in foreign currency against a loss of Rs 11.3 crore in the September 2008 quarter. At the same time, the other income that represented income on investments and a reversal of doubtful debt provision, posted a 77% jump to Rs 9.8 crore, thanks to both these factors. Pre-tax profits rose 34.4% to Rs 48 crore, which translated into a net profit growth of 31% despite a slightly higher effective tax rate of 17.5% compared with 15.6% last year.

The company had a tough year in FY09 — particularly its overseas subsidiaries — due to the economic turmoil. As a result, it wrote off Rs 11.2 crore last year towards permanent diminution in the value of its investments in subsidiaries. At the same time, the company’s standalone profits for the year, too, dipped 15.5% to Rs 129.7 crore. Praj is almost debt-free with a cash balance of around Rs 130 crore, according to the FY09 consolidated balance sheet.

-fuels are driven more by mandates resulting from the government policies for climate change mitigation. The year 2008 witnessed a strong 38% jump in ethanol consumption over 2007, mainly driven by the US. Several countries in Europe and South-East Asia are currently in the process of implementing bio-fuel consumption mandates, which can result in a steady flow of orders for Praj Industries in the coming months. With these numbers, the company’s per share earnings for the trailing 12 months now stands at Rs 7.6. At the current market price of Rs 96.5, the scrip is now trading at a price-toearnings multiple of 12.7, which appears to be fair valuation. Praj Industries, which annually doubled its net profits between FY03 and FY08, has hit a rough patch in the past 18 months. While an economic revival globally will lift the performance of its subsidiaries and improve the growth outlook, the next phase of high-speed growth can be seen only once its investments in the R&D start to pay off.

Sintex running out of St option

At PE Multiple Of 10.8, The Stock Of Water Tanks Player Appears To Be Fully Valued

ON A day when the markets cheered strong economic numbers and the Sensex gained 2.3%, the stock of Sintex Industries shed 1.4% to close at Rs 248.6, following dampened quarterly numbers.

The scrip is now trading at a price-toearnings multiple of 10.8, at which it appears fully valued considering its future growth prospects. The company has underperformed the broad market since the start of 2009 registering just 27.7% gain till date against a 71.9% jump in the Sensex. In 2007, the scrip had substantially outpaced gains in the Sensex. However, the market meltdown of 2008 saw it lose sheen.

Well-known for manufacturing water tanks, the company has over the past few years entered into an array of businesses through a series of acquisitions. Its subsidiary Zeppelin Mobile Systems acquired a mobile tower company Digvijay for Rs 64.5 crore to emerge as a total solution provider in the telecom space. Zeppelin clocked a turnover of Rs 66.7 crore in the first half of FY2010, representing 7.2% of the company’s consolidated turnover.

For quite some time, the company has encountered problems. It had raised close to Rs 1,800 crore in FY09 through issue of FCCBs, QIP and preferential allotment for an acquisition, which did not happen due to the market meltdown. Its acquisition of Geiger Tech in Germany a year ago ran into trouble, when the company filed for bankruptcy. Sintex’s other overseas subsidiaries Wausaukee Composites in the US and Nief Plastics in France, too, have been hit by the global economic slowdown.

The company, which invested Rs 500 crore in its organic growth in FY09, carried a cash balance of Rs 1,168.5 crore as of end-March 2009. In fact, the other income earned on this surplus cash balance at Rs 156.3 crore in FY09 represented nearly 48% of the company’s consolidated net profit. A drop in other income was the main reason behind a fall in its profitability during September 2009 quarter.

Investors of Sintex Industries can take heart from the fact that despite a fall in profits, the company has maintained its operating profit margin at the past year’s level. The company’s domestic business continues to do well with rising capacity utilisation. However, the company is likely to report a dismal profit growth in the December 2009 quarter considering the high level of other income in the corresponding quarter of the previous year. An economic revival in the US and Europe next year and a well-timed acquisition could see the company grow its profits substantially in FY11.