23rd Nov 2009
Ramkrishna Kashelkar ET Intelligence Group
The proposed acquisition of LyondellBasell by Reliance Industries, which has just carried out two of its multi-billion-dollar projects in the refinery and E&P space, can mark a mega-leap for the hither-to India centered behemoth. The acquisition, if goes through, can not only expand the company’s presence significantly in the global petrochemicals market, but will also give it entry into the technologically superior specialty chemicals. Similar to what Reliance is in India LyondellBasell is a refinery to polymers to chemicals major in Europe and the US, but has progressed into the advanced materials business through extensive R&D efforts.
LyondellBasell (LB), which was created at the height of the market boom in December 2007, reported operating loss of $5.9 billion for the year ended December 2008, with its networth turning negative. Although the company’s operations generated over $1 billion cash during the year, it had debts worth $22.9 billion payable within the year 2009, which forced it to take refuge under Chapter 11.
One of the most attractive points for RIL in this acquisition is LyondellBasell’s global leadership in polypropylene and its derivative products. LB represents 14% of world’s polypropylene capacity. LB’s two refineries – one in Houston, Texas and the other in France – with a combined refining capacity of 373,000 barrels per day can add nearly 30% to RIL’s existing refining capacity in India. LB is also the owner of several proprietary technologies and catalysts used in the production of downstream petrochemicals such as propylene oxide.
The exact value of the deal or the stake that RIL proposes to buy in LB are yet not known, however, the deal is likely to be an all-cash deal. In this regard, Reliance surely has a huge potential power to make such large overseas acquisition for cash.
As on 30th September 2009 RIL had cash and cash equivalents of Rs. 19,421 crore (US$ 4.0 billion). An additional $650 million were raised by its subsidiary when it sold treasury shares in September this year. This subsidiary continues to hold another 8.96 crore shares in the company valued at over $4 billion. RIL’s net debt was approximately Rs 51000 crore resulting in a net debt to equity ratio of 0.42. If the company decides to raise this debt-to-equity ratio to 1, it can borrow nearly Rs 70,000 crore more or around $14.9 billion.
Considering these factors, RIL’s acquisition of LB, if successful, will surely help the Indian major to make a global mark in the long term. Investors must, however, bear in mind that the actual acquisition could take months to fructify and the benefits may not accrue in the short-run.
Sunday, November 29, 2009
Monday, November 23, 2009
Lyondell buy may boost RIL’s global presence
THE proposed acquisition of Lyondell-Basell by Reliance Industries can mark a mega-leap for the hitherto India-centred behemoth.
The acquisition, if it goes through, will not only expand the company’s presence significantly in the global petrochemicals market, but will also give it an entry into the technologically superior speciality chemicals. Similar to what RIL is in India, Lyondell-Basell is a refinery to polymers-tochemicals major in Europe and the US, but has also progressed into the advanced materials business through extensive R&D efforts.
LyondellBasell reported an operating loss of $5.9 billion for the year ended December 2008, and its networth turning negative. Although its operations generated over $1-billion cash during the year, it had debt worth $22.9 billion payable within the year 2009, forcing it to take refuge under Chapter 11.
RIL will gain from Lyondell-Basell’s global leadership in polypropylene and its derivative products. It represents 14% of the world’s polypropylene capacity. Its two refineries with a refining capacity of 373,000 barrels per day can add nearly 30% to RIL’s existing refining capacity in India. It is also the owner of several proprietary technologies and catalysts used in the production of downstream petrochemicals such as propylene oxide.
The exact value of the deal or the stake that RIL proposes to buy in LyondellBasell is yet not known, however, it is likely to be an all-cash deal.
As on September 30, 2009, RIL had cash and cash equivalents of Rs 19,421 crore ($4 billion). An additional $650 million were raised by its subsidiary when it sold treasury shares in September this year. This subsidiary continues to hold another 8.96 crore shares in the company valued at over $4 billion. RIL’s net debt was approximately Rs 51,000 crore resulting in a net debt-to-equity ratio of 0.42. If RIL decides to raise this ratio to 1, it can borrow nearly Rs 70,000 crore more ($14.9 billion). Investors must, however, bear in mind that the actual acquisition could take months to fructify and the benefits may not accrue in the short run.
The acquisition, if it goes through, will not only expand the company’s presence significantly in the global petrochemicals market, but will also give it an entry into the technologically superior speciality chemicals. Similar to what RIL is in India, Lyondell-Basell is a refinery to polymers-tochemicals major in Europe and the US, but has also progressed into the advanced materials business through extensive R&D efforts.
LyondellBasell reported an operating loss of $5.9 billion for the year ended December 2008, and its networth turning negative. Although its operations generated over $1-billion cash during the year, it had debt worth $22.9 billion payable within the year 2009, forcing it to take refuge under Chapter 11.
RIL will gain from Lyondell-Basell’s global leadership in polypropylene and its derivative products. It represents 14% of the world’s polypropylene capacity. Its two refineries with a refining capacity of 373,000 barrels per day can add nearly 30% to RIL’s existing refining capacity in India. It is also the owner of several proprietary technologies and catalysts used in the production of downstream petrochemicals such as propylene oxide.
The exact value of the deal or the stake that RIL proposes to buy in LyondellBasell is yet not known, however, it is likely to be an all-cash deal.
As on September 30, 2009, RIL had cash and cash equivalents of Rs 19,421 crore ($4 billion). An additional $650 million were raised by its subsidiary when it sold treasury shares in September this year. This subsidiary continues to hold another 8.96 crore shares in the company valued at over $4 billion. RIL’s net debt was approximately Rs 51,000 crore resulting in a net debt-to-equity ratio of 0.42. If RIL decides to raise this ratio to 1, it can borrow nearly Rs 70,000 crore more ($14.9 billion). Investors must, however, bear in mind that the actual acquisition could take months to fructify and the benefits may not accrue in the short run.
BPCL Interview: “Challenge was converted into an opportunity”
Year 2008 was probably one of the toughest phases in the history of Bharat Petroleum Corporation (BPCL), country’s secondlargest oil marketer. The company however used the crisis as an opportunity to squeeze out the last drop of inefficiency from its system. In a conversation with ET Intelligence Group’s Ramkrishna Kashelkar , BPCL’s chairman and managing director, Ashok Sinha, discusses the company’s learning from the crisis and how is he is preparing the organisation for the future
In the last one-year of turmoil, what were your experiences?
The steep volatality in crude oil prices created a lot of constraints for our industry. Being in PSU we could not raise the prices of our four key products that constitute around 70% of our output, since we are essentially fulfilling the local demand.
This external constraint created liquidity problem for us. However, the government was well aware of this and it did provide us certain windows in making available the liquidity. Access to foreign exchange was provided to us through the central bank. That was most welcome.
Being a PSU, you’ve to keep markets supplied…
Yeah, we have the commitment to serve the customers. People expect to buy fuel when they visit the petrol pump. As a company, I can’t say today I will sell, tomorrow I won’t. There are so many externalities — fluctuating exchange rates, interest rates can go against you, oil prices are volatile, under-recoveries, inventory valuations —that are for us to handle. We cannot make the consumer bear the burden of the external factors affecting our business, right?
What were the strategies used by BPCL to counter these adversities?
These constraints made us look inwards and squeeze more efficiency at every level for generating cash that in turn created value for the company. It was all about innovating without losing the focus and simultaneously creating value and benefits, which we can share.
First thing was to sensitise the entire organisation to external events and what can we do to help ourselves. For example, we reviewed our entire debt collection system. We moved to the RBI’s real-time-gross-settlement (RTGS) for our debt collection from LPG and retail dealers to reduce working capital requirement. The benefit was mutual as it freed them from the routine of making demand drafts and sending them across. Similarly we looked at areas like transportation, inventory, capital productivity to prioritise the use of cash.
We formed a team that spanned out and gathered inputs from the employees because ultimately all the knowledge resides in them. A system was created to harness it, test it, challenge it, analyse it and to see how our earlier decisions would have changed and implement it for the future. The project was called WIN – We Innovate Now. It brought in a sense of urgency and induced everyone to innovate. Now these processes have got so institutionalised that it has become part of the company’s DNA. So the challenge was converted into an opportunity.
Now that the crude oil is around $75, would you still need the oil bonds?
This year the volatility is substantially less compared to last year and I don’t expect to see that sort of volatility in next six months. However, on the current prices, we have started going negative on cash — although it’s not very high, as witnessed last year. Still we need to get that compensation quickly. Firstly for the liquidity reasons and most importantly to take care of our long-term projects. After all, why does any company need to make profit? The profit is essential for investing in the business for the future growth. If the country wishes to achieve the GDP growth we talk about the investment cycle must continue. Therefore, the current hand-tomouth situation must change. Stability in the system can enable us to take long-term view. In our industry, what you decide today can fructify 3-4 years down the line and without stability in earnings, we can’t commit for such long-term projects.
What is the current status of your Bina refinery?
The Bina refinery was conceptualised way back in 1994. The project envisaged nearly 1000-km of pipeline with offshore installations. So there were delays in obtaining environmental and other clearances. But once we took our final investment decision in Dec 2005 after getting all those clearances, the project has progressed smoothly and is scheduled for mechanical completion in first quarter of 2010. The pipeline, single buoy mooring (SBM), tank farm etc are already completed. Even most of the refinery units are in place; only the final linking up process is on. It is taking time just because these are the processes that are done sequentially and not simultaneously. Within couple of months of taking our investment decision we had closed the entire debt funding. In terms of equity we have taken up 50% with 26% subscribed by the Oman Oil. About the rest of the equity, we will see when and how to raise the funds. Our primary focus right now is on completing the refinery and getting the product out. That is more important for us than the equity funding.
How far India’s refining capacity addition is justified at a time when globally the industry is not doing so well?
The recent fall in gross refining margins (GRMs) is mainly due to the huge demand destruction that has happened. The global refiners are down to 85% capacity utilisation. This is just a temporary adjustment and ultimately the additional capacities would get consumed as the global demand is expected to grow. In global scheme of things India’s capacity addition is not very significant.
Petroleum refining is a cyclical business. At times there is overcapacity and at others there are shortages. As a result when the GRMs are below minimum acceptable rate of return, the refiners start cutting down production. Whatever said, in the long term the refiners will make money. You must understand that it take atleast 5 years from concept to commercialisation while setting-up a refinery.
You are growing, diversifying, innovating day-by-day. How do you manage talent to sustain this growth?
Four-five years ago we started the process for project DESTINY setting up fairly aspiring goals like doubling our volumes and the profits by four times by March 2010. This was broken up in who will contribute in which way. So the next challenge was to have the leadership pipeline to deliver it. So with that, we started the project CALIBER. We have looked from the top-downwards, taking a 360 degree feedback on each employee. We have so far reviewed our top 500 people. Everybody has been reviewed by five directors besides his/her immediate seniors and juniors etc.
The competencies of each employee are mapped and compared with the global benchmarks. A team of facilitators presents the individual candidate to us in terms of where each person stands. Someone can be good at executing projects, someone can be good at strategic thinking, someone at technical matters, while someone else at creative things and so on. This has helped us in drawing up personalised development programmes for each of them. Then the training department steps in to ensure that they are given the world class training.
I believe we are the first among PSUs to take such a holistic view of the HR challenges. And why just PSUs, we are perhaps first among all Indian companies!
How do you view competition?
Competition is always there but you must understand that there is collaboration also. And it is not just between PSUs. We will collaborate with anyone if it makes business sense for us. Long ago, immediately after Indian Oil was born, an agreement was signed in 1962 between IOCL, Esso (now HPCL after its nationalisation) and Burma Shell (now BPCL) for product supply. The principles of that agreement still remain valid today. In this industry, you don’t fight over infrastructure and products, rather you leverage that.
In fact, an example of such collaboration with a competitor could be our B2B IT tie-up with Indian Oil, which is perhaps the largest of its kind in India. The value of transactions captured by the system could be in excess of Rs 30,000 crore per year right now.
Today all the oil companies are going for investment in upstream. What has caused this?
Our selling prices are completely controlled but our production costs are market driven. So we have to look for a hedge by investing upstream. Presently, BPCL has 26-27 blocks in which we have participating interest. Plus now we have 2.5% stake in Oil India, which has several producing assets.
So our portfolio now looks a little more balanced with blocks from different stages of development —from wild cat exploration, post 2D, 3D portfolio to developmental drilling and now the producing blocks.
We are now in a consolidation phase in E&P. We are present in mostly proven regions, except for Mozambique, which is totally unexplored area. Most of these are phase-I commitments. Most of them will complete by end of 2010, when we will have to take call on where we want to go, where we want to get out of and so on. We have a separate company for focussing on the E&P business, since this is a very specialised business with high risk and the mind set needed there is totally different. The next target in this area is to move into being an operator. Apart from being an active investor in all our blocks, we already have a joint operatorship in a Rajasthan field. The learning from this block will enable us in taking up operatorship in future projects.
In the last one-year of turmoil, what were your experiences?
The steep volatality in crude oil prices created a lot of constraints for our industry. Being in PSU we could not raise the prices of our four key products that constitute around 70% of our output, since we are essentially fulfilling the local demand.
This external constraint created liquidity problem for us. However, the government was well aware of this and it did provide us certain windows in making available the liquidity. Access to foreign exchange was provided to us through the central bank. That was most welcome.
Being a PSU, you’ve to keep markets supplied…
Yeah, we have the commitment to serve the customers. People expect to buy fuel when they visit the petrol pump. As a company, I can’t say today I will sell, tomorrow I won’t. There are so many externalities — fluctuating exchange rates, interest rates can go against you, oil prices are volatile, under-recoveries, inventory valuations —that are for us to handle. We cannot make the consumer bear the burden of the external factors affecting our business, right?
What were the strategies used by BPCL to counter these adversities?
These constraints made us look inwards and squeeze more efficiency at every level for generating cash that in turn created value for the company. It was all about innovating without losing the focus and simultaneously creating value and benefits, which we can share.
First thing was to sensitise the entire organisation to external events and what can we do to help ourselves. For example, we reviewed our entire debt collection system. We moved to the RBI’s real-time-gross-settlement (RTGS) for our debt collection from LPG and retail dealers to reduce working capital requirement. The benefit was mutual as it freed them from the routine of making demand drafts and sending them across. Similarly we looked at areas like transportation, inventory, capital productivity to prioritise the use of cash.
We formed a team that spanned out and gathered inputs from the employees because ultimately all the knowledge resides in them. A system was created to harness it, test it, challenge it, analyse it and to see how our earlier decisions would have changed and implement it for the future. The project was called WIN – We Innovate Now. It brought in a sense of urgency and induced everyone to innovate. Now these processes have got so institutionalised that it has become part of the company’s DNA. So the challenge was converted into an opportunity.
Now that the crude oil is around $75, would you still need the oil bonds?
This year the volatility is substantially less compared to last year and I don’t expect to see that sort of volatility in next six months. However, on the current prices, we have started going negative on cash — although it’s not very high, as witnessed last year. Still we need to get that compensation quickly. Firstly for the liquidity reasons and most importantly to take care of our long-term projects. After all, why does any company need to make profit? The profit is essential for investing in the business for the future growth. If the country wishes to achieve the GDP growth we talk about the investment cycle must continue. Therefore, the current hand-tomouth situation must change. Stability in the system can enable us to take long-term view. In our industry, what you decide today can fructify 3-4 years down the line and without stability in earnings, we can’t commit for such long-term projects.
What is the current status of your Bina refinery?
The Bina refinery was conceptualised way back in 1994. The project envisaged nearly 1000-km of pipeline with offshore installations. So there were delays in obtaining environmental and other clearances. But once we took our final investment decision in Dec 2005 after getting all those clearances, the project has progressed smoothly and is scheduled for mechanical completion in first quarter of 2010. The pipeline, single buoy mooring (SBM), tank farm etc are already completed. Even most of the refinery units are in place; only the final linking up process is on. It is taking time just because these are the processes that are done sequentially and not simultaneously. Within couple of months of taking our investment decision we had closed the entire debt funding. In terms of equity we have taken up 50% with 26% subscribed by the Oman Oil. About the rest of the equity, we will see when and how to raise the funds. Our primary focus right now is on completing the refinery and getting the product out. That is more important for us than the equity funding.
How far India’s refining capacity addition is justified at a time when globally the industry is not doing so well?
The recent fall in gross refining margins (GRMs) is mainly due to the huge demand destruction that has happened. The global refiners are down to 85% capacity utilisation. This is just a temporary adjustment and ultimately the additional capacities would get consumed as the global demand is expected to grow. In global scheme of things India’s capacity addition is not very significant.
Petroleum refining is a cyclical business. At times there is overcapacity and at others there are shortages. As a result when the GRMs are below minimum acceptable rate of return, the refiners start cutting down production. Whatever said, in the long term the refiners will make money. You must understand that it take atleast 5 years from concept to commercialisation while setting-up a refinery.
You are growing, diversifying, innovating day-by-day. How do you manage talent to sustain this growth?
Four-five years ago we started the process for project DESTINY setting up fairly aspiring goals like doubling our volumes and the profits by four times by March 2010. This was broken up in who will contribute in which way. So the next challenge was to have the leadership pipeline to deliver it. So with that, we started the project CALIBER. We have looked from the top-downwards, taking a 360 degree feedback on each employee. We have so far reviewed our top 500 people. Everybody has been reviewed by five directors besides his/her immediate seniors and juniors etc.
The competencies of each employee are mapped and compared with the global benchmarks. A team of facilitators presents the individual candidate to us in terms of where each person stands. Someone can be good at executing projects, someone can be good at strategic thinking, someone at technical matters, while someone else at creative things and so on. This has helped us in drawing up personalised development programmes for each of them. Then the training department steps in to ensure that they are given the world class training.
I believe we are the first among PSUs to take such a holistic view of the HR challenges. And why just PSUs, we are perhaps first among all Indian companies!
How do you view competition?
Competition is always there but you must understand that there is collaboration also. And it is not just between PSUs. We will collaborate with anyone if it makes business sense for us. Long ago, immediately after Indian Oil was born, an agreement was signed in 1962 between IOCL, Esso (now HPCL after its nationalisation) and Burma Shell (now BPCL) for product supply. The principles of that agreement still remain valid today. In this industry, you don’t fight over infrastructure and products, rather you leverage that.
In fact, an example of such collaboration with a competitor could be our B2B IT tie-up with Indian Oil, which is perhaps the largest of its kind in India. The value of transactions captured by the system could be in excess of Rs 30,000 crore per year right now.
Today all the oil companies are going for investment in upstream. What has caused this?
Our selling prices are completely controlled but our production costs are market driven. So we have to look for a hedge by investing upstream. Presently, BPCL has 26-27 blocks in which we have participating interest. Plus now we have 2.5% stake in Oil India, which has several producing assets.
So our portfolio now looks a little more balanced with blocks from different stages of development —from wild cat exploration, post 2D, 3D portfolio to developmental drilling and now the producing blocks.
We are now in a consolidation phase in E&P. We are present in mostly proven regions, except for Mozambique, which is totally unexplored area. Most of these are phase-I commitments. Most of them will complete by end of 2010, when we will have to take call on where we want to go, where we want to get out of and so on. We have a separate company for focussing on the E&P business, since this is a very specialised business with high risk and the mind set needed there is totally different. The next target in this area is to move into being an operator. Apart from being an active investor in all our blocks, we already have a joint operatorship in a Rajasthan field. The learning from this block will enable us in taking up operatorship in future projects.
Wednesday, November 18, 2009
ABAN OFFSHORE: Debt liabilities no longer pose threat
ABAN Offshore’s successful qualified institutional placement (QIP) of equity shares comes as a major positive development for the debt-ridden company, which had recently rescheduled its debt obligations.
With an outstanding debt of over Rs 16,600 crore, the company’s debt-to-equity ratio stayed above 9.5 for the year ended March 2009. This will now ease to below 6, after the QIP placement. This equity infusion and earlier debt rescheduling signal an attempt by the company to overcome key hurdles to performance — both financial as well as relating to the stock market — over the past couple of years.
With oil prices rebounding above the $75 level, Aban Offshore has been able to deploy 17 of its vessels and has just three jack-up rigs idle presently. This, along with the improvement in the global E&P industry, has helped ease the concerns of the analyst community. Most brokerage houses are now offering a ‘hold’ or ‘buy’ recommendation on the company.
Over the past one year, the Aban Offshore scrip had been on a frenzied course — outpacing the market in both upward and downward directions. This was mainly due to significantly high trader interest and limited investor interest, as indicated by low double-digit delivery percentage. The scrip that was underperforming the benchmark Sensex in the first three months of 2009, has nearly quadrupled since April as against a 72% recovery in Sensex. This higher volatility has increased the company’s beta — a measure of volatility and risk compared to the benchmark Sensex — to 1.3 now as against just 0.77 in 2007.
Earlier this year, Aban rescheduled repayment of the mountain of debt it had raised to finance its expansion plans including the acquisition of Norwegian Sinvest in 2007. Now the debt repayment is spread over the next 10 years with an average of Rs 1,600 crore due every year.
The company has more than quadrupled its consolidated operating income to Rs 3,050 crore in FY09 from Rs 719 crore two years ago, while its cashflow from operations grew nearly seven-fold to Rs 2,108 crore from Rs 319 crore in FY07. Although the interest burden during this period has more than tripled to Rs 885.3 crore in the year ended March 2009 and could rise to Rs 1,000 crore for FY10, Aban Offshore appears well-poised to meet future debt obligations.
The scrip is currently trading at a multiple of 15.3 to its earnings of Rs 87.7 per share for the trailing 12 months. Considering the equity dilution following the QIP, the P/E works out to 17.6. Much will hinge on earnings growth or news of deployment of its idle vessels.
With an outstanding debt of over Rs 16,600 crore, the company’s debt-to-equity ratio stayed above 9.5 for the year ended March 2009. This will now ease to below 6, after the QIP placement. This equity infusion and earlier debt rescheduling signal an attempt by the company to overcome key hurdles to performance — both financial as well as relating to the stock market — over the past couple of years.
With oil prices rebounding above the $75 level, Aban Offshore has been able to deploy 17 of its vessels and has just three jack-up rigs idle presently. This, along with the improvement in the global E&P industry, has helped ease the concerns of the analyst community. Most brokerage houses are now offering a ‘hold’ or ‘buy’ recommendation on the company.
Over the past one year, the Aban Offshore scrip had been on a frenzied course — outpacing the market in both upward and downward directions. This was mainly due to significantly high trader interest and limited investor interest, as indicated by low double-digit delivery percentage. The scrip that was underperforming the benchmark Sensex in the first three months of 2009, has nearly quadrupled since April as against a 72% recovery in Sensex. This higher volatility has increased the company’s beta — a measure of volatility and risk compared to the benchmark Sensex — to 1.3 now as against just 0.77 in 2007.
Earlier this year, Aban rescheduled repayment of the mountain of debt it had raised to finance its expansion plans including the acquisition of Norwegian Sinvest in 2007. Now the debt repayment is spread over the next 10 years with an average of Rs 1,600 crore due every year.
The company has more than quadrupled its consolidated operating income to Rs 3,050 crore in FY09 from Rs 719 crore two years ago, while its cashflow from operations grew nearly seven-fold to Rs 2,108 crore from Rs 319 crore in FY07. Although the interest burden during this period has more than tripled to Rs 885.3 crore in the year ended March 2009 and could rise to Rs 1,000 crore for FY10, Aban Offshore appears well-poised to meet future debt obligations.
The scrip is currently trading at a multiple of 15.3 to its earnings of Rs 87.7 per share for the trailing 12 months. Considering the equity dilution following the QIP, the P/E works out to 17.6. Much will hinge on earnings growth or news of deployment of its idle vessels.
Friday, November 13, 2009
AGROCHEM: Rabi season bodes well for agrochem cos
BRAVING a soft exports market and erratic monsoon in the domestic market, a majority of the agrochemical companies in India have done well in the September 2009 quarter. The reason lies hidden in the various agriculture-oriented schemes introduced by the government over the past couple of years: debt waiver, NREGA and substantial increase in minimum support prices of various crops. The increased liquidity in the hands of farmers is enabling them to invest more in their farms resulting in growing consumption of agrochemicals.
That the aggregate numbers for the quarter don’t reveal the full story is another matter. A closer inspection shows that the fall in the industry’s aggregate profits is mainly from extraneous reasons while their core business grew in profits. Out of the nine large agrochemical companies, only three suffered profit erosion. Others posted profit growth — over 50% in case of some.
It must be noted that the September quarter this year, which is the most important quarter for the industry due to the kharip season, witnessed deficient rains and reduced acreage. The Southwest monsoon rains were 23% lower in the June-September 2009 period against the long-term average. The overall acreage under cultivation, for the season, also came down 6% against the year-ago period. At the aggregate level, nine leading agrochemical firms reported a 7.9% fall in profits to Rs 248.6 crore in September 2009 against Rs 270 crore last year. However, all the three companies that saw their profits decline — United Phosphorous, Meghmani Organics and Punjab Chemicals — had their own set of problems.
Meghmani Organics, which posted a 17.6% profit growth in its agrochemicals division, increased its standalone profit for the quarter. However, heavy losses in its overseas arms wiped out profits at the consolidated level. While in case of Punjab Chemicals, the company posted losses, as its plant remained partially shut down throughout the September 2009 quarter due to fire.
The largest amongst those did well — Bayer Cropscience and Rallis India — posted a double-digit sales growth, although their profit growth was in single digit. Nagarjuna Agrichem and PI Industries were the two companies to raise their profits by over 50% against the year-ago period, while Insecticides India posted a growth of 47.6%. Even companies like Sudarshan Chemicals, which derives more sales from products other than agrochemicals, registered profit growth in the agrochemical division during the September 2009 quarter.
With fresh bouts of rains in October and November, the rabi season is expected to be better for the domestic agriculture. This could increase the area under cultivation as well as the domestic agricultural production, which bodes well for agrochemical players, going forward.
That the aggregate numbers for the quarter don’t reveal the full story is another matter. A closer inspection shows that the fall in the industry’s aggregate profits is mainly from extraneous reasons while their core business grew in profits. Out of the nine large agrochemical companies, only three suffered profit erosion. Others posted profit growth — over 50% in case of some.
It must be noted that the September quarter this year, which is the most important quarter for the industry due to the kharip season, witnessed deficient rains and reduced acreage. The Southwest monsoon rains were 23% lower in the June-September 2009 period against the long-term average. The overall acreage under cultivation, for the season, also came down 6% against the year-ago period. At the aggregate level, nine leading agrochemical firms reported a 7.9% fall in profits to Rs 248.6 crore in September 2009 against Rs 270 crore last year. However, all the three companies that saw their profits decline — United Phosphorous, Meghmani Organics and Punjab Chemicals — had their own set of problems.
Meghmani Organics, which posted a 17.6% profit growth in its agrochemicals division, increased its standalone profit for the quarter. However, heavy losses in its overseas arms wiped out profits at the consolidated level. While in case of Punjab Chemicals, the company posted losses, as its plant remained partially shut down throughout the September 2009 quarter due to fire.
The largest amongst those did well — Bayer Cropscience and Rallis India — posted a double-digit sales growth, although their profit growth was in single digit. Nagarjuna Agrichem and PI Industries were the two companies to raise their profits by over 50% against the year-ago period, while Insecticides India posted a growth of 47.6%. Even companies like Sudarshan Chemicals, which derives more sales from products other than agrochemicals, registered profit growth in the agrochemical division during the September 2009 quarter.
With fresh bouts of rains in October and November, the rabi season is expected to be better for the domestic agriculture. This could increase the area under cultivation as well as the domestic agricultural production, which bodes well for agrochemical players, going forward.
Thursday, November 12, 2009
Lead StoryIndia Inc may have reported a slower rate of growth during the September ’07 quarter. However, the future doesn’t seem to be that gloomy
THE Indian bourses are vying for altitudes which many of us may not have even dreamt of, thanks mostly to the enthusiasm of foreign funds, which have been pouring money into the Indian equity market. Global investors are gung ho about India’s growth potential, given the robust estimates of GDP growth. Given this, it is a worthwhile exercise to track the quarterly performance of the Indian industry, which forms a major chunk of GDP if we combine the share of manufacturing and services.
Revenue and profit growth are tapering off since the March ’07 quarter and picture was no different in the September quarter. The latest aggregate results strengthen our view that the corporate growth has peaked. Both in incremental as well as percentage terms, corporate India is witnessing a gradual pullback. In the September ’07 quarter, aggregate sales of 1,747 listed companies that declared results rose by 17% and net profit grew by 22%. This was lesser than the corresponding figures of 31% and 54% during the September ’06 quarter. The oil companies and banks do not form a part of this sample, as given their size and volatility in earnings, the real picture could get distorted.
Sales growth is on a continuous decline over the last four quarters and during the September ’07 quarter it was the lowest when compared with any of the quarters since the December ’05 quarter. The slowdown may appear to be a result of a higher base effect as the year-ago growth rate was very high. To know the facts, we studied the incremental change (year-on-year difference between absolute numbers) in the aggregate topline and bottomline.
On an incremental basis, topline shows signs of fatigue. In the September ’07 quarter, nearly half of the companies reported a higher incremental jump in sales reckoned year on year. In the corresponding quarter of the previous year, roughly two-thirds of the companies were able to do so.
The growth rates in operating and net profits are also on a downward trend since last year. The rate of growth in operating profit has come down to 18.4% during the second quarter of the current fiscal from 42% in the September ’06 quarter. By similar comparison, net profit growth has tapered from 54.2% to 21.9%. On an incremental basis, however, corporate India is still able to keep up the tempo as half of the companies reported absolute year-on-year rise in net profit, similar to the yearago quarter. The slower growth in sales and profits can be attributed to sluggish performance by majority of companies in the sectors including automobile, cement, IT, metals and textiles. Operating margin weakened slightly from 18.8% in the year-ago quarter to 18.6% in the September ’07 quarter. Companies that witnessed a contraction in the margins were from various sectors such as sugar, textiles, non-ferrous metals, auto ancillaries, pharmaceuticals, dyestuff, and leather chemicals.
Other income continued to gallop and grew over 72% during the September ’07 quarter. This was mainly on account of the unrealised foreign exchange gains arising out of foreign currency borrowings. This notional other income boosted net profit, which grew 22% on a y-o-y basis despite rising interest and depreciation costs. Net margin expanded by 50 basis points to 12.3%. Do the second quarter results hint at the possibility of a slowdown in the future performance of Corporate India? The analysis of the quarterly results won’t be complete without answering this question.
Presently, the growth rates are indeed slowing down. However, we at ETIG believe that this is just a temporary phase – a so called ‘inflexion point’ – before the next phase of high-speed growth sets in. Corporate India is sitting on a huge work-inprogress as a number of capacity expansion projects are under way in almost all the industries, particularly in petroleum refining, cement, steel, and automobiles. At the same time huge investments are lined up for building the infrastructure in areas such as petroleum exploration and production, power generation and electrical equipments, construction, heavy engineering and similar industries. As these capacities come online, they will provide the impetus for Corporate India to take the next big leap. The aggregate y-o-y growth rates may decelerate marginally during the second half of FY ’08, but the same are expected to pick up with the start of FY ’09.
Further, some of the sectors continue to post robust performance. Capital goods and power generation companies reported improvements in operating profit margins during the quarter ended September ’07. Entertainment and electronic media – a relatively smaller industry considering the number of listed players – put up an impressive show led by the excellent performance of the industry leader Zee Entertainment.
The future appears to hold some challenges of global nature for Corporate India and wading through these may prove to be a daunting task. The US dollar is weakening steadily and India may witness a sustained rise in the rupee over the next few quarters. This will dent profitability of exporters. Global crude oil prices have crossed $95 per barrel levels and may soon touch $100 per barrel. Though the price regulation in the domestic market will keep the rise in fuel prices under check, impact of a higher energy price is expected to percolate through an increase in prices of crude oilbased commodities. It appears that the way ahead is rather tough at least in the immediate future. However, the things are likely to improve in FY ’09. Particularly, industries such as oil and gas, infrastructure, capital goods, telecom and power generation appear to hold a promising future ahead. There will be outperformers in other sectors also. However, they will have to be thoroughly researched.
Revenue and profit growth are tapering off since the March ’07 quarter and picture was no different in the September quarter. The latest aggregate results strengthen our view that the corporate growth has peaked. Both in incremental as well as percentage terms, corporate India is witnessing a gradual pullback. In the September ’07 quarter, aggregate sales of 1,747 listed companies that declared results rose by 17% and net profit grew by 22%. This was lesser than the corresponding figures of 31% and 54% during the September ’06 quarter. The oil companies and banks do not form a part of this sample, as given their size and volatility in earnings, the real picture could get distorted.
Sales growth is on a continuous decline over the last four quarters and during the September ’07 quarter it was the lowest when compared with any of the quarters since the December ’05 quarter. The slowdown may appear to be a result of a higher base effect as the year-ago growth rate was very high. To know the facts, we studied the incremental change (year-on-year difference between absolute numbers) in the aggregate topline and bottomline.
On an incremental basis, topline shows signs of fatigue. In the September ’07 quarter, nearly half of the companies reported a higher incremental jump in sales reckoned year on year. In the corresponding quarter of the previous year, roughly two-thirds of the companies were able to do so.
The growth rates in operating and net profits are also on a downward trend since last year. The rate of growth in operating profit has come down to 18.4% during the second quarter of the current fiscal from 42% in the September ’06 quarter. By similar comparison, net profit growth has tapered from 54.2% to 21.9%. On an incremental basis, however, corporate India is still able to keep up the tempo as half of the companies reported absolute year-on-year rise in net profit, similar to the yearago quarter. The slower growth in sales and profits can be attributed to sluggish performance by majority of companies in the sectors including automobile, cement, IT, metals and textiles. Operating margin weakened slightly from 18.8% in the year-ago quarter to 18.6% in the September ’07 quarter. Companies that witnessed a contraction in the margins were from various sectors such as sugar, textiles, non-ferrous metals, auto ancillaries, pharmaceuticals, dyestuff, and leather chemicals.
Other income continued to gallop and grew over 72% during the September ’07 quarter. This was mainly on account of the unrealised foreign exchange gains arising out of foreign currency borrowings. This notional other income boosted net profit, which grew 22% on a y-o-y basis despite rising interest and depreciation costs. Net margin expanded by 50 basis points to 12.3%. Do the second quarter results hint at the possibility of a slowdown in the future performance of Corporate India? The analysis of the quarterly results won’t be complete without answering this question.
Presently, the growth rates are indeed slowing down. However, we at ETIG believe that this is just a temporary phase – a so called ‘inflexion point’ – before the next phase of high-speed growth sets in. Corporate India is sitting on a huge work-inprogress as a number of capacity expansion projects are under way in almost all the industries, particularly in petroleum refining, cement, steel, and automobiles. At the same time huge investments are lined up for building the infrastructure in areas such as petroleum exploration and production, power generation and electrical equipments, construction, heavy engineering and similar industries. As these capacities come online, they will provide the impetus for Corporate India to take the next big leap. The aggregate y-o-y growth rates may decelerate marginally during the second half of FY ’08, but the same are expected to pick up with the start of FY ’09.
Further, some of the sectors continue to post robust performance. Capital goods and power generation companies reported improvements in operating profit margins during the quarter ended September ’07. Entertainment and electronic media – a relatively smaller industry considering the number of listed players – put up an impressive show led by the excellent performance of the industry leader Zee Entertainment.
The future appears to hold some challenges of global nature for Corporate India and wading through these may prove to be a daunting task. The US dollar is weakening steadily and India may witness a sustained rise in the rupee over the next few quarters. This will dent profitability of exporters. Global crude oil prices have crossed $95 per barrel levels and may soon touch $100 per barrel. Though the price regulation in the domestic market will keep the rise in fuel prices under check, impact of a higher energy price is expected to percolate through an increase in prices of crude oilbased commodities. It appears that the way ahead is rather tough at least in the immediate future. However, the things are likely to improve in FY ’09. Particularly, industries such as oil and gas, infrastructure, capital goods, telecom and power generation appear to hold a promising future ahead. There will be outperformers in other sectors also. However, they will have to be thoroughly researched.
Monday, November 9, 2009
Essar Oil: Aggressive plans
Essar Oil’s results for the September ‘09 quarter were important not for its quarterly numbers but more for the update on its various projects. The major amongst them is the progress on its wholly owned coal bed methane (CBM) block at Raniganj. The block, which is currently estimated to yield one trillion cubic feet of natural gas over its working life of 25 years, will start producing by end-March ‘10. This translates in cumulative earnings of Rs 20,000 crore over its lifetime or an annual average revenue of Rs 800 crore, assuming $4.2 per unit gas price. The company is currently preparing its development plan for the CBM block that envisages drilling 500 wells and deployment of innovative drilling techniques, which will be followed by financial closure by December ‘09. The company will also have to lay a 160-km pipeline to take the gas to its main consumption centre Kolkata.
The company also continues with its aggressive plan to expand capacity of its refinery on the west coast to 34 million tonnes in the next two years from current 10.5 MTPA. Financing of $1.5 billion has been tied up for the first phase, which will take the capacity to 16 MTPA by December ‘10. Another 18-MTPA expansion at the cost of $4.4 billion is scheduled for December ‘11.
In the expansion process, the index of a refinery’s quality - as referred by Nelson’s Complexity Index - would also double. This means the refinery would be able to produce fuels meeting most stringent Euro IV / V norms, eliminate low-value products such as fuel oil, and increase production of high-value products like petrol.
Apart from the organic growth, the company is actively pursuing acquisitions in the refining business. The company has already bought 50% stake in a 4-MTPA refinery in Kenya and is discussing with Shell to buy out its three European refineries with a combined capacity of 23 MTPA. The company, which sold over 0.62 million tonnes of fuel through its 1,278 retail outlets in the first half of FY09, is expanding its network to 1500 outlets by end FY10. Provided all its plans succeed, Essar Oil could emerge as a global petroleum major within the next few years.
The company also continues with its aggressive plan to expand capacity of its refinery on the west coast to 34 million tonnes in the next two years from current 10.5 MTPA. Financing of $1.5 billion has been tied up for the first phase, which will take the capacity to 16 MTPA by December ‘10. Another 18-MTPA expansion at the cost of $4.4 billion is scheduled for December ‘11.
In the expansion process, the index of a refinery’s quality - as referred by Nelson’s Complexity Index - would also double. This means the refinery would be able to produce fuels meeting most stringent Euro IV / V norms, eliminate low-value products such as fuel oil, and increase production of high-value products like petrol.
Apart from the organic growth, the company is actively pursuing acquisitions in the refining business. The company has already bought 50% stake in a 4-MTPA refinery in Kenya and is discussing with Shell to buy out its three European refineries with a combined capacity of 23 MTPA. The company, which sold over 0.62 million tonnes of fuel through its 1,278 retail outlets in the first half of FY09, is expanding its network to 1500 outlets by end FY10. Provided all its plans succeed, Essar Oil could emerge as a global petroleum major within the next few years.
Cairn India: Going gets better
Cairn India recently signed an agreement to supply crude oil to the Jamnagar refinery of Reliance Industries within days of receiving government approval for selling its crude to private refiners. The pricing terms, however, remain the same, implying a nearly $7.5-11 discount to the benchmark Brent crude price. The company recently arranged for a financing facility of $1.6 billion, half of which was used to repay earlier high-cost debt. Availability of additional financing is expected to boost the company’s ability to expedite its production schedule. Both these developments imply better flexibility for the company in marketing as well as operations. A number of extraordinary items dominated Cairn India’s September ‘09 consolidated numbers, as its net profit at Rs 470 crore stood at more than double its net sales. The company wrote back an earlier provision of Rs 164 crore towards an arbitration process, followed by a write-back of deferred tax provisions worth Rs 129 crore, plus another Rs 52 crore towards MAT (minimum alternative tax) entitlement and Rs 17.5 crore of FBT (fringe benefit tax). The company had no revenue during the quarter from sale of crude oil as it sold the maiden cargo of 210,000 barrels of Rajasthan crude oil to MRPL in the first week of October ‘09. The company is currently setting up a 600-km pipeline to transport oil to the Gujarat coast, only 5% of which is currently pending. Till the pipeline gets functional, it has to transport the crude oil by trucks, incurring nearly $7-10 per barrel of transport cost. The company is currently producing 11,500 barrels of oil per day and is on its way to ramp it up to 125,000 bpd by June ‘10 in three phases. Based on the current oil prices, this level of production could earn annual sales of over Rs 13,000 crore that can earn net profit of around Rs 3,400 crore. At the current market price of Rs 273 the company is being valued at nearly 15 times this number and looks fully valued. The movement in crude oil prices will continue to remain a key factor for Cairn’s performance.
Friday, November 6, 2009
Dolphin Offshore eyes mega deals
Stock Has Risen 275% In The Past One Year Against 50% Gains Logged By Sensex
THE shares of Mumbai-based Dolphin Offshore have significantly outperformed the market over the past one year — logging a gain of 275% against Sensex’s 50%. The scrip, which was underperforming the market in the first four months of 2009, got a boost when the company announced a bonus issue in May 2009. It has consistently outperformed since then. Although, in the recent market weakness post-Diwali, the scrip has fallen more than the Sensex, it remains substantially above its year ago level.
The company is now being valued at 11.7 times its earnings for the past 12 months. Dolphin’s poor performance for the September 2009 quarter too impacted its stock price. Its profit for the September 2009 quarter slipped 5% against the year ago period to Rs 11 crore as the turnover remained almost flat at Rs 66 crore. The September quarter has traditionally been off-season for Dolphin, as offshore construction work in India has to be suspended for monsoon. To keep its assets working, the company last year undertook contracts in China and Malaysia during these months — something which it could not repeat this year.
The company traditionally works as a sub-contractor on various ONGC offshore projects. However, last year it was able to register as the main EPC contractor with ONGC and bagged two contracts worth Rs 316 crore. This shift not only indicates at bigger-ticket contracts in future, but also an increase in margins. As a result, Dolphin’s profits for FY09 spurted 160% against previous year despite writing off nearly Rs 40 crore of outstanding debts. The company is currently executing projects worth Rs 380 crore — 10% higher than its turnover for FY09. ONGC, which is its principal customer, is in the process of awarding contracts of over $1 billion for laying new pipelines and setting up new platforms in its Bombay High field. Fighting hard domestic and international competition, Dolphin is eyeing these tenders to fuel its future growth.
Monday, November 2, 2009
Oil Country Tubular: Piping Growth
Growing E&P activity is likely to boost demand for Oil Country Tubulars’ products
OIL Country Tubular, which features second in ETIG’s list of 100 Fastest Growing Small Companies, has seen healthy growth, an improving balance sheet and a maiden dividend, hinting at bright growth prospects ahead. For investors with a risk appetite, this company could be a long-term play on India’s growing E&P sector.
BUSINESS: Hyderabad-based Oil Country Tubular (OCTL) is a producer of pipes and tubes required in the oil drilling and exploration industry. OCTL’s single plant has an installed capacity of 10,000 tonne per annum (TPA) of drill pipes, 50,000 TPA of casing pipes and 15,000 TPA of production tubing. It also provides services such as tool hardening, internal plastic coating for pipes and inspection, maintenance and reconditioning of drill pipes besides manufacturing accessories and spare parts.
The company has received necessary approvals from the American Petroleum Institute (API), making its products universally acceptable. In the last three years, on average, the company earned over half its revenues from exports.
GROWTH DRIVERS: The company plans to treble its casing manufacturing capacity to 150,000 tonne per annum by March 2010. It also has plans to double capacity of drill pipes to 20,000 tonne.
With oil prices recovering and hovering around $80 per barrel, global exploration and production (E&P) efforts, which had turned sluggish in the first half of 2009, are expected to revive. This will ensure steady flow of orders for the company, which is aggressively targeting various export destinations such as West Asia, South East Asia and Europe.
FINANCIALS: In the trailing five years, the company’s net profits have grown at a cumulative annual rate (CAGR) of 145% to Rs 65 crore in FY09. Net sales grew at 33% in the same period. In the year ended March 2009 the company’s operating margins weakened by 230 basis points to 24.2% of net sales compared to the previous year.
This was mainly on account of higher sales of casing pipes, where the margins came under pressure and a simultaneous fall the sales of higher margin drill pipes.
The company has repaid all its outstanding term loans during the year to emerge a debtfree company. In fact a major chunk of its FY09 profit growth came from significant cut in its interest burden. OCTL also paid its maiden dividend of Rs 1.5 per share for FY09.
VALUATION: At the current market price of Rs 101.2 the company is valued at 6 times its profits for the trailing 12 months. Other pipe manufacturers such as Maharashtra Seamless, Jindal Saw and PSL are trading in the P/E range of 8 to 10.
RISK FACTORS: Being a small company OCTL carries the risk of low level of transparency and operational disclosures and a lack of management interaction. The company’s future performance will depend on flow of orders and product mix.
Realty unit IPO to give Godrej’s growth a fillip
Investment In Realty Biz May Go Up To Rs 1k Cr
SHARES of Godrej Industries (GIL) have outpaced the market over the past six months by a wide margin. However, the weakness in the second half of October saw the scrip fall faster than the benchmark Sensex. At Rs 178.50, GIL shares are trading two-and-a-half times against year ago period compared to the 62% gains logged in by the Sensex.
GIL has been restructuring its businesses over the past several quarters. The company recently approved the merger of its wholly-owned subsidiary Godrej Hygiene Care with Godrej Consumer Products. After the merger, the holding of GIL in GCPL will go up to 24.8% from 21.6%. The company also bought back 21.3 lakh shares for Rs 28.9 crore.
Earlier, it had sold off its wholly-owned subsidiary operating in the pest control business — Godrej Hicare — to ISS Services and its BPO business under Godrej Global Solutions to Tricom India. The company also plans to divest its traditional business of vegetable oils by selling off its old refinery and develop real estate.
In the quarter ended September 2009, GIL signed a memorandum of understanding (MoU) with its 80% subsidiary Godrej Properties and its parent Godrej & Boyce to develop property in Vikhroli. To start with, in the first phase, it has plans to develop around 30 acres of land.
The company’s consolidated September 2009 quarter numbers were, as usual, dominated by its real estate and investment businesses apart from the extraordinary income on sale of Godrej Hicare. The company reported a three-and-a-half times jump in net profits after three consecutive quarters of profit fall.
At the current market price of Rs 178.50, the scrip is now trading at a price-to-earnings (P/E) multiple of 44.4. The company is being valued mainly for its asset pool — primarily the land bank — rather than its earnings. The current share price is around four times its book value.
GIL’s investment plans centre around its real estate subsidiary —Godrej Properties — which has received Sebi approval and is expected to approach the capital market soon with its initial public offer (IPO). The total investment in this business could go up to around Rs 1,000 crore over the next 12 months, provided its fund-raising plans fructify. This much-delayed IPO will unlock the value of GIL’s 80% stake therein and could provide a fillip for its future growth.
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