UNITED PHOSPHOROUS: Lower input cost, higher demand save the day

INDIA’S leading agrochemical player United Phosphorous posted a 37% growth in its fourth quarter profits at Rs 220 crore after a stagnancy in the first three quarters of the year. This enabled the company to end the year with 10% higher profit at Rs 530 crore.
The company’s performance in the earlier quarters was affected mainly due to its high cost raw material inventory and slowdown in the US and European demand. The March 2010 quarter saw the company benefiting from the raw materials purchased at lower prices, while the sales growth was driven by strong performance in regions other than the US, Europe and India.
In view of the economic slowdown, the company is highly conservative on its next year growth projections. While the sales in the US and EU, which together contributed over half of the company’s FY10 revenues, are expected to grow less than 5%, a double-digit growth in the India and rest of world can help it post around 10% sales growth. It also hopes to expand its EBITDA margins, thanks to its restructuring exercises this year. The growth in net profit could be higher as indicated by stagnating interest and depreciation costs of FY10.
The company, which had made a series of large-ticket acquisitions between FY05 and FY08 and spent last two years consolidating, has again started looking out for inorganic growth opportunities. It is currently carrying over Rs 1,800 crore of cash in its books and aims to complete at least one acquisition during FY11.
After a year of dip in dividend rate, UPL has again gone back to paying 100% dividend on its Rs 2 face value shares, which works out to 1.4% dividend yield. At the current market price of Rs 147.85, the scrip is trading 12.3 times its consolidated profits for FY10. For a company, which is a leader in its segment, this valuation appears inexpensive for long-term investors.

RELIANCE IND: Rise in volumes, margins brightens profit prospects

RELIANCE Industries’ (RIL) earnings rarely disappoint investors, but it did in the March quarter, blame it on lower refining margins. But the prospects are getting brighter, with rising oil and gas production. Also, the refining margins are climbing, though they remain way below the peak.
The exploration and petrochemicals business helped it more than double the revenues for the quarter, but the lower profitability from refining and other businesses led to a less-than-proportionate gain in earnings. Net profit for the March quarter rose to Rs 4,710 crore, from Rs 3,630 crore. That was short of the Rs 5,100 crore which analysts were estimating. Net sales more than doubled to Rs 57,570 crore. With about half its revenues coming from exports, the sluggish demand in global markets depressed the profitability in the refining business. The year gone by proved to be an exceptionally bad year for the refining industry, in stark contrast with a great year in FY09. RIL earned $7.5 margin a barrel, the difference between its cost of crude and the refined fuel compared with $9.90 a barrel a year earlier. But things are turning for better.
“I can go so far as to say that looking at the improving economic environment GRMs in FY11 will be better than FY10,” RIL’s CFO Alok Agrawal said in a post-results press conference. The earnings before interest and taxes, or EBIT, margins shrunk in almost all businesses. In the refining & marketing segment, they fell to 3.9%, from 10.8%. In oil & gas, it shrunk to 39.4% from 64% a year earlier and in petrochemicals, though, higher from the previous quarter, earnings fell to 14.4%, from 17.6% a year earlier.
With the twin benefit of doubled volumes and improved margins, it can improve the profitability this fiscal. One key advantage RIL enjoys is the spare capacity. The new SEZ refinery with a nameplate capacity of 580,000 barrels per day has been successfully tested to run at 700,000 barrels. RIL’s recent tie-up with Atlas Energy in the US for shale gas marks a significant growth area. The company spent almost the entire FY10 in consolidating and optimising its retail business. The company also has plans to ramp it up in coming years.

WELL OILED : RIL to emerge as most profitable co

Co May Surpass ONGC’s Last Quarter Standalone Profits By Over Rs 1,500 Cr

RELIANCE Industries (RIL) — India’s largest company by turnover and exports — is also set to become the country’s single-largest profitable company in FY10, thanks to its second refinery at Jamnagar and KG basin gas, when it publishes its results on Friday. On a consolidated basis, however, the ONGC Group, which includes ONGC and its subsidiaries Mangalore Refinery and ONGC Videsh, is likely to retain its leadership.
RIL, which reported a net profit of Rs 1,1526 crore for the first nine months of FY10 — around Rs 1,465 crore lower than ONGC’s — is expected to surpass the stateowned oil major’s last quarter standalone profits by over Rs 1,500 crore, according to various analyst estimates. Both companies report their quarterly numbers on a standalone basis while consolidating the numbers of subsidiaries in their annual results. ONGC Group’s consolidated net profit for FY10 is likely to remain above Rs 20,000 crore as in the previous two years.
The refining as well as E&P businesses would be the key drivers of profit growth, said Deepak Pareek, an analyst with Angel Broking. “RIL is likely to report strong performance during the quarter, primarily on account of increase in gas production and better refining margins,” he mentioned. In the past, only in FY08 had RIL’s profits surpassed those of ONGC’s, on account of extraordinary income of Rs 4,733 crore on sale of Reliance Petroleum shares. Excluding the impact of this extraordinary income, profits from operations were below that of ONGC’s. However, now, for the first time, RIL’s profits from normal business activities, that are considered sustainable in future, are set to cross Rs 16,700 crore on a standalone basis for FY10 — the largest for any listed Indian company. ONGC, which was the single-largest profit-making company so far, is expected to close FY10 with a net profit of around Rs 16,200 crore.
In the current year, RIL’s subsidiary raised over Rs 9,300 crore through sale of treasury shares, which will add to its consolidated numbers. Although extraordinary, these profits could take RIL’s consolidated profit to a historical high hitherto unseen in Corporate India.
RIL, which is also India’s largest company by market capitalisation with a 13.2% weightage in the Sensex, witnessed a strong 46% increase in volumes in the first nine months of FY10, as its second refinery gradually reached full capacity. Higher average crude oil price — at around $78 per barrel during the March 2010 quarter as against $45 in the year ago period — is also set to boost revenues. Fuelled by both volume and value growth, the company is expected to double its revenues in the last quarter of the year, with gross refining margins recovering from $5.9 in December 2009 quarter to $8-8.5 per barrel in March 2010 quarter. The company had recorded a refining margin of $9.6 per barrel in the March 2009 quarter. While all its segments are expected to contribute to the growth drive, the key impetus will come from the E&P business. “With gas volumes averaging above 60 MMSCMD during the March 2010 quarter, the E&P business would show the biggest profit growth against the year ago period,” mentioned Sandeep Randery, senior research analyst with BRICS Securities.
Independent advisor SP Tulsian concurs. He says that the firm is expected to report a 257% jump in its profits from the E&P segment for the March 2010 quarter on a Y-o-Y basis at Rs 1,690 crore, while the petrochemicals and refining businesses may post a modest growth of 24% and 12%, respectively.

Interview-Aloe Private Equity: ‘India one of the best recyclers in the world’

THE GREEN technology space is hotting up in India and private equity funds are getting excited about new companies here. Nikhil Menon & Ramkrishna Kashelkar speak to Vivek Tandon, general partner at Aloe Private Equity, about the funds’ plans for India and the sectors it’s keen to invest in.

What is Aloe PEs investment philosophy?
We are focused on investing in green tech. We always look at the environmental and social sustainability of all investments. Our goal is to find global technology leaders and to help them expand in India, China and Europe. The technologies are normally proven and tested and hence there is zero technology risk. Unlike most PE firms that have an average investment horizon of 3-5 years, we look for promoters and entrepreneurs to team up with us for 6-8 years to build solid global assets.

How are your investments in India shaping up?
We have three funds and are now investing from our second and third funds. These are focused on India and China. We typically do 6-8 deals per fund and the average ticket size ranges from $10-40 million. Aloe looks at product-based as well as service-based companies. The fund has two major investments in India today—Hyderabad-based Greenko Group, a renewable energy developer and producer, and Mumbai-based Polygenta, which has a disruptive PET recycling technology. Greenko has been listed on the Alternate Investment Market of London Stock Exchange and its current m-cap is over 12 times our initial investment cost.

While investing in a company, how much stake do you normally pick up?
We are majority stakeholders in most companies. Most people say Indian entrepreneurs are fixated on being majority stakeholders and are interested only in the valuation you give them. I don’t agree. Aloe has not had this problem. People confuse management control, profit share and ownership. Just because a party owns 60% of the shares in a company, does not necessarily mean that it has 60% of the profits and 60% control. We make a distinction between the three and are aware of the frustrations of promoters in having their ownership in a company diluted as the company grows. We recognise that as a company grows, the promoters should increase ownership of the business.

Do you look for entrepreneurs with relevant experience only?
Lack of experience in the particular sector is not such a concern but we don’t want to work with someone who just wants to jump on to the green bandwagon to make quick bucks. We have worked for 8-12 months with the promoters before we actually invested.

Within environment technology, what areas do you find interesting?
India is one of the best recyclers in the world—very little waste is discarded into landfill sites. Most waste generated in India is collected and recycled but in a disorganised manner and little technology is used to treat the waste. So most products produced from waste are of an inferior quality and are used as low value by-products. Aloe owns technologies that create high value products from recycled material. Take batteries for example. We have tech which can recycle batteries from mobile phones, laptops, electric cars into high-grade metals for use by battery makers as a direct replacement for lithium, cobalt and manganese. We will also start discussions with Indian firms to recycle steel dust generated by steel plants.

Realty to drive Supreme’s growth

Sale Of Co’s 17 Office Blocks In Mumbai & Excess Land Bank Will Spice Up Future Show

THE 30% profit growth reported by leading plastic product manufacturer Supreme Industries has failed to impress investors as its share has remained more or less stagnant since the company declared its March 2010 quarter numbers last Friday. Lacklustre operating performance and the company’s inability to complete the sale of its office property in Andheri in western Mumbai appear to be the main reasons behind the lukewarm investor response.
The company has 18 office blocks available for sale out of which it has been able to sell only one so far. In the December 2009 quarter, Supreme Industries had clocked Rs 20.5 crore revenues from the sale of 13,106 sq ft of premises at an average realisation of Rs 15,600 per sq ft from its commercial complex in Andheri. At this rate, its 2.5-lakh sq ft commercial complex is valued at Rs 390 crore and investors expected a steady flow of revenues from the sale.
The profit growth during the quarter was primarily driven by extraordinary gain from the sale of company’s land in Sewri in central Mumbai for Rs 3.72 crore. Excluding this, the company’s operating performance was not very impressive. Despite a 15.4% sales growth at Rs 512 crore, operating profits grew a mere 3.3% as margins shrunk. Halving of interest cost to Rs 8 crore was the other key driver of profit growth.
In line with its restructuring efforts over the past couple of years, the company recently shifted its manufacturing unit for protective packaging from Nandesari in Gujarat to Pune in Maharashtra, which has left it with another piece of land worth Rs 1.5 crore that can be sold in future.
The company’s operative performance, although uninspiring currently, could improve in future, as global polymer prices come under pressure with higher supplies from West Asia and China. Despite the strain on margins, the company has been consistently achieving volume growth.
Going forward, the sale of the company’s Andheri property and excess land will continue to spice up its financial numbers. At the current market price of Rs 510, the scrip is trading at a price-toearnings multiple (P/E) of 9, which appears reasonable. Investors can continue to hold the scrip for higher returns.

RIL’s Atlas stake buy is a high-cost but low-risk play

THE successful signing of joint venture deal with US-based Atlas Energy marks a major positive development for Reliance Industries after earlier attempts to acquire LyondellBasell in Europe and Value Creation in Canada failed. However, considering the deal size, the potential for similar joint ventures is high.
The Atlas Energy deal envisages RIL paying upfront $339 million for its 40% stake, followed by $1.36 billion out of Atlas’ share of exploration expenditure over a period of seven-anda-half years. In addition, towards its own share of exploration expenditure, the firm will shell out $3.4 billion over ten years. For a company that generated cash profit of $4.2 billion in the first nine months of FY10, and was carrying $3.4 billion as on December 31, 2009, these investments will hardly strain the company.
Since the initial payout under the deal can be easily met out of the company’s existing cash balances, RIL will not need to raise any debt for financing the deal. Similarly, the payment towards future exploration efforts too can be met through recurring cash flows from its existing assets. According to Goldman Sachs, RIL could have generated $25 billion in excess of its committed capex over the next four years and left the company cash surplus and debt-free by as early as FY13.
While RIL has signed the deal at a fair valuation, access to shale gas exploitation technology is a crucial strategic benefit to the company. RIL has retained the option to operate in certain project areas, although Atlas will serve as the development operator for the joint venture. RIL also gets the right of first offer in case Atlas plans to sell any more of its shale gas acreages not covered under the current agreement.
Similar to the coal-bedmethane (CBM), shale gas is an unconventional source of natural gas. Exploiting the shale gas became possible over the past decade due to development of innovative drilling techniques, including horizontal drilling and hydraulic fracturing to create fractures in the rocks to allow permeability. Exploiting shale gas is costlier to conventional gas due to the use of better technology, but the risk of failure is substantially low.
In the contracted area, Atlas and Reliance have already charted a five-year development plan to drill 45 horizontal wells during the remainder of 2010, increasing to a total of 300 wells in 2013. The development opens a new chapter for the Indian energy giant, which also recently completed setting up the solar power plants in New Delhi for the Commonwealth games. Apart from just studying the financial impact, investors should view this development as addition to the energy portfolio of the company improving its diversity.

OIL MARKETERS: Underrecoveries hinder OMCs’ investor appeal

AFTER staying at close to $80 per barrel, oil prices have once again started to move up over the past few days on expectations of a economic rebound. Crude is now trading at close to $87 — an 18-month high. However, this could be a dampener for local stateowned oil marketing companies (OMCs) which have to sell some of their products at a below cost due to a government fiat.
Although domestic oil marketers — Indian Oil, BPCL and HPCL — are currently using crude bought at an average of $75-78 per barrel level last month, they are losing close to Rs 200 crore daily due to the subsidised pricing of petrol, diesel, kerosene and LPG. Once the impact of the current rise in crude oil prices kicks in — over the next 4-6 weeks — OMCs’ burden will rise on account of underrecoveries.
It’s, therefore, hardly surprising to note that these companies have underperformed the market even during the recent rally. Over the past 30 days, when the Sensex gained 5.5%, the stocks of Indian Oil, BPCL, HPCL lost between 4.5% and 9%.
Despite huge cash losses, these oil majors’ capital expenditure programmes are progressing unhindered, thanks to their ability to raise debt. IndianOil, for example, awarded major contracts for its upcoming 3-lakh-barrels-per-day Paradip refinery in the past couple of weeks worth at least Rs 4,800 crore. HPCL, too, awarded contracts worth nearly Rs 650 crore to upgrade its Vizag refinery.
After unveiling a well-thought out subsidy-sharing plan for FY09, the government is yet to work out a similar plan for FY10-11. In fact, after having issued Rs 1,40,000 crore worth of oil bonds between FY06 and FY09, the government chose to pay its share of subsidies at Rs 12,000 crore in cash to oil marketing companies for FY10. Although the Kirit Parikh Committee recommending deregulation of petroleum product prices, the government is yet to act on it. Despite their low valuations, oil marketing companies may not be attractive to investors unless the government acts on the issue of underrecoveries.

GeeCee offers little for retail investors

There’s No Incentive To Buy In Open Market To Sell To Co In This Buyback

GEE CEE Ventures, formerly known as Gwalior Chemicals, may appear to have outperformed the market by doubling in the past one year against BSE Sensex’s 79% gain. However, the company has grossly underperformed the Sensex since June 8, 2009, when it announced sale of its entire business to Lanxess India for Rs 536 crore — valuing the company at over 43% premium to its earlier market capitalisation. Since the announcement, the scrip has actually fallen 15%, while the Sensex gained 21%.
At the time of the sale, the company had announced distributing Rs 100 crore to shareholders by way of a large one-time dividend and/or share buyback. The company had also mentioned investing in power generation and high value speciality chemicals at its Ankleshwar site as its future growth plans. The company’s share buyback offer opened on April 1, 2010 for 40.5 lakh shares at a price of Rs 120 each, which is at a steep 30.7% premium to its latest market price. However, unlike other buyback offers, GeeCee’s promoters with nearly a 60% equity stake are also offering their 1.48 crore shares for buyback. No wonder then, the offer has failed to enthuse retail shareholders, who are effectively crowded out.
In other words, even if all the nonpromoter shareholders tender their shares in this buyback, at least 60% of Rs 48.6-crore, the total corpus earmarked for the buyback, will go to the promoters, since shares in buyback will be accepted on a proportionate basis. A retail shareholder, who tenders 100 shares in the buyback, could get money for only 16.4 shares, provided all 2.47-crore shares turn up for the buyback. As a result, there is no incentive to buy in the open market to sell back to the company in this buyback. Whether the company later distributes another Rs 50 crore in dividends as promised on June 9 is yet to be seen. However, retail investors, who already hold stake in the company, have little option, but to enter this lottery.

NATURAL GAS: Mega capex to rev up supply

THE natural gas industry has entered a high investment phase to create infrastructure to handle increasing volumes. The domestic availability of natural gas has jumped by more than 50% in the past 10 months to 175 MMSCMD, thanks to RIL’s KG basin gas fields. This is forcing companies in the sector to create infrastructure to handle the increased volumes.
The lead has been taken by Gail, which plans to invest nearly Rs 50,000 crore in five years with nearly 70% of it going towards expanding the natural gas pipeline network. As a result, its cumulative investments in fixed assets (gross block), which was growing at a CAGR of 5.3% in the past five years, will grow at a CAGR of over 30% in the next five years.
Gujarat State Petronet has expanded its pipeline network aggressively within Gujarat over the past five years. It operates an over 1,500-km pipeline network with a gross block of Rs 2,800 crore and volumes expected to touch 40 million metric standard cubic meters per day (MMSCMD) by end March 2010. The company’s current expansion plans envisage investment of around Rs 1,500 crore in FY11.
Several companies are also investing in the city gas distribution (CGD) projects across the country. Mumbai’s Mahanagar Gas will double its gross block in the next three years from current Rs 705 crore as it expands beyond Mumbai and suburbs to adjoining Navi Mumbai and Thane districts.
While Delhi’s Indraprastha Gas, has planned a capex of Rs 1,600 crore in the next three years, effectively tripling its Rs 817 crore of gross block as it moves beyond National Capital Region (NCR) to nearby satellite towns. However, Gujarat Gas, the largest city gas distribution (CGD) company in terms of gas volumes, has been unable to draft its investment plans due to lack of regulatory approvals.
The company, which supplies gas to Surat, Bharuch and Ankleshwar, with a gross block of Rs 767 crore, as on December 2008, invested Rs 155 crore during 2009. It plans to maintain the annual capex at around Rs 150-200 crore till it receives the regulatory approvals.
These investments will completely change the face of this industry in the years to come. While their asset base expands, these companies will no longer remain debt-free, cash-rich as in the past.
The companies’ borrowings will shoot up as they start investing more cash than what they generate through operations. Gail alone is expected to borrow over Rs 28,700 crore, or 58% of its capex programme, over the next five years.
Though the pipelines business is highly capital-intensive, it enjoys low operating costs and high operating margins, resulting in strong operating cash flows. Considering the huge unmet demand for natural gas in India, capacity utilisation will not be a problem.