ONGC: Co’s Sept nos way below expectations

INDIA’s largest petroleum producer ONGC threw up disappointing figures in its September 2010 quarter results, reporting a profit growth of just 6% despite higher oil production, gas prices and higher realisations. What dragged it down was the spurt in the cost of dry wells, while the appreciation of the rupee also added to its woes.
ONGC’s subsidy burden grew 14.8% to . 3,019 crore bringing down its net realisation to $62.75 per barrel, from a gross billing of close to $79.21 per barrel. Still the net realisation was 11.2% higher y-o-y. Considering the impact of the rupee appreciation, however, the growth was reduced to just 6.8% at . 2,918 per barrel.
The company also wrote off close to . 2,441 crore of dry-well cost — 273% more than the year-ago period — which increased the depreciation burden by 87% to . 4,400 crore. While in FY10, the company had to write off a substantial amount on the failed Kerala-Konkan expedition, the current year’s losses were on ultra-deep exploration efforts in the Krishna Godavari basin. The company’s total gas production too came down 3.1% to 6.25 billion cubic meters during the quarter against the year-ago period, mainly due to reduced production from the Panna, Mukta and Tapti fields.
These negatives effectively nullified most of the positives. The company enjoyed the first full quarter of deregulated gas prices, which brought in additional revenues of around . 1,759 crore. These revenues, after adjusting for royalty, directly boosted pre-tax profits. In the meantime, output from the Rajasthan’s Barmer oil field, in which ONGC controls 30% of the equity, enabled the company report a growth of 3.3% in oil production to 6.85 million tonnes.
The quarter’s net profit was 6% higher at . 5,388.8 crore on a 20% rise in net sales at . 18,430 crore. The company also managed to improve its operating margins thanks to a reduction in other expenditure. But for dividends, other income for the quarter might have been substantially lower from the year-ago period, when the company had received interest income of . 230 crore from ONGC Videsh. This quarter, the dividend from Indian Oil, in which ONGC has an equity stake of 8.77%, rose nearly 3.5 times to . 277 crore.
The ONGC stock ended slightly up at . 1,308 before the company announced its results for the September quarter. The company is set to get nearly . 1,500 crore with the dismantling of the gas pool account, while the excessive write-offs remain a non-recurrent feature. Similarly, the government appears keen on coming up with a formula for subsidy-sharing ahead of the FPOs of Indian Oil and possibly of ONGC. The scrip’s p/e at 17.6 appears to discount much of these factors that can boost its profits in the near term.

UNITED PHOSPHOROUS: Sept nos don’t back up co’s high valuation

THE results of United Phosphorous showing a doubledigit profit growth failed to cheer the market as the scrip tumbled over 7%. The company has been showing a muted growth over the last several quarters, which does not support its current high valuations. Considering the results of the September quarter, the scrip is now trading 17.4 times its earnings for the trailing 12 months.
Over the last four quarters, UPL has been facing pressure on its sales growth, which has always remained in single digits. In the September 2010 quarter, too, the trend continued, with the consolidated sales growing 9.6% against the year-ago period. This was mainly due to the rupee’s appreciation.
The company’s revenues in the two key geographies of North America and Europe, which together contributed 37% of its total sales during the September quarter, fell in comparison with year-ago period. The contribution from India grew substantially to 35% as domestic revenues showed a huge jump of 45%.
The company improved its operating margins by 150 basis points to 18.5% in the quarter as raw material and staff costs stagnated. The 47.7% growth in other income, which stood at . 25.9 crore, pushed up the PBDIT by 20.8%. However, a 61% jump in interest cost and a substantial jump in the effective tax rate limited the growth in net profit to 13.3% at . 114.7 crore.
The company is currently carrying cash or equivalents amounting to nearly . 2,100 crore on a consolidated basis and is scouting for acquisition targets. Its latest acquisition was Mancozeb, the fungicide business of DuPont, in June 2010. The September quarter was the first quarter of this business contributing to the company’s revenues.
Going forward, the company is expecting to achieve around 8% to 10% organic growth in its topline, excluding this newly acquired Mancozeb business. If Mancozeb is also included, the growth could touch 15% for the whole FY11. Increasing volumes will mainly lead this growth. It appears that the key to its high valuations remains in the success of its M&A strategy.

Flying High

After facing headwinds in the past few quarters due to slowdown, the aviation industry is seeing a revival with demand growing faster than supply. But will this enable the industry to continue generating superior returns in future? Rajesh Naidu finds out

NDIA’S aviation sector has come a full circle. After the opening up of the industry and the phase of growth, competition and consolidation, airlines, which have racked up losses, are now seeing a revival with demand growing faster than supply. Strong economic growth, range-bound fuel prices and the return of pricing power signal an uptrend for the industry.
The fortunes of the aviation industry are linked closely to the state of the economy. And with growth being more or less broadbased, business as well as leisure travels are expected to pick up further, a far cry from the scenario a few months ago when several airlines had piled up huge losses and in some cases payment defaults.
What would be weighing high on investors’ mind are the prospects for the industry and whether airlines would be able to sustain profits. Can airlines still create value for its investors? The ET Intelligence Group did a reality check on the industry and found out that the answers were reassuring.
COPING WITH CONSTRAINTS
Airline companies have learnt the hard way, the lessons to optimise profits during the past five years. The huge investment that the industry attracted, thanks to the India growth story, led to excess capacity, which resulted in a price war. During the five year period — FY04-FY08 — the industry players faced consistent losses or profits, which were erratic and generated mainly in the form of nonbusiness income. This was followed by the financial meltdown.
In this situation, it was natural to see a shake-out. Over the past two years, Jet Airways acquired Air Sahara, while Kingfisher took over Air Deccan. The government went on to merge Air India and Indian Airlines. A few other insignificant players faded out of the scene. However, this process of consolidation did not have a deep impact apart from an increase in market share, as both the topline and bottomline of airlines continued to stagnate.
Airlines companies — especially the fullservice carriers — also realised that in order to boost their topline, it was crucial to focus on two areas. First, apply the brakes on capacity addition and secondly giving primacy to a low-cost carrier (LCC) service to create a hybrid business model.
LCC IN VOGUE
LCC has now become an integral part of the business model of Indian airlines. It is a key positive for airlines’ future, as the industry remains highly cyclical. The cheaper ticket price of an LCC ensures a better passenger load factor and in turn a good topline for many airlines. Among the cost-conscious Indian travellers, an LCC player, such as SpiceJet, Go Air and IndiGo would remain the first preference. Most often, it is only when they fail to obtain a seat in a no-frills airline, do they opt for full-service carriers. Realising this, purely full-service carriers, such as Jet Airways and Kingfisher Airlines, also started LCC services. Jet Airways launched JetLite and Jet Konnect services, while Kingfisher Airlines kicked off its service — Kingfisher Red. These initiatives that work on low costs have helped enhance their revenues and earnings tremendously. A rapid adoption of the LCC model has enabled Jet Airways to report consistent profits during the past three consecutive quarters. In contrast, Kingfisher, which was late in adopting this, continues to report losses and now has a negative net worth.
On the sidelines, pure LCC players, such as SpiceJet, IndiGo and GoAir, continue to thrive with the three of them commanding close to 34% of the market share today. In fact, SpiceJet was the first among the three listed players to bounce back after the slowdown and post a net profit for FY10. A rising debt burden and interest outgo have weighed down these full-service carriers. In FY10 alone, both Jet Airways and Kingfisher Airways paid almost 1,100 crore each towards interest costs, while carrying a pile of debt several times their equity base. As a result, such players chose to adopt a leaseback model to acquire new aircraft without adding to the debt burden. Take for instance, Jet Airways. The company now has 60% owned and 40% leased aircraft. It has dryleased three long-haul Boeing 777-300ERs to Thai Airways and THY Turkish Airlines.
HOW THE THINGS HAVE CHANGED
With growth back on the fast track and passenger traffic growing, there is not much of a change which is expected on the supply side. During the first nine months of 2010, the airlines passenger growth stood at a strong 20% according to the latest data published by the DGCA. This has greatly improved the load factor of the industry. From an average of 65% two years ago, the load factor has risen to 80%. And considering the upcoming holiday season, this is likely to improve even further. Better occupancy is also helping airline players increase their ticket tariffs, or revenues per passenger per kilometre. The improvement in sentiment has prompted Jet Airways to convert 60% of its flights to fullservice mode. Crude oil prices, that had wreaked havoc on the industry couple of years ago due to high volatility, have remained range-bound over the past one year. This has helped the three listed players to a large extent. The benign situation is expected to continue for the next 12-15 months, thanks to high inventories and spare production capacity in OPEC countries.
The buoyancy in the stock markets will also encourage some of the debt-laden airlines to raise funds through equity offerings. There have been media reports on QIP of Jet Airways, which, if it completes, could help it reduce its debt burden, bring down its interest outgo and improve balance sheet. There are no further capacity additions planned for the next few months as companies, such as Jet Airways and Air India, have deferred some of their earlier orders for new aircraft. At present, there are around 380 aircraft in the industry and analysts estimate if the continuing passenger growth continues within 15to 18%, around 150 aircraft can be accommodated over next five years.
VALUATIONS
On the valuation front, Jet Airways India is, at present, trading at an EV/EBIDTA of around 12 times on a trailing basis. Based on expected numbers for the FY11, the multiple will improve to around 8.5-9. The flexibility in its business model — when demand weakens it pushes its LCC services JetLite and Jet Konnect and leveraging its full-service carrier when demand improves — will be a key advantage. Investors could hold onto the company’s stock as of now.
SpiceJet, on the other hand, is trading at an EV/EBIDTA of around 12 times. The company’s successful LCC business model and a better balance sheet justify the premium. The challenges before Kingfisher appear daunting at present and apart from just the improvement in operational environment, a debt restructuring or equity infusion appear inevitable to get the company fully on track.
WHAT’S NEXT…
The coming two quarters would be good for all airlines companies considering the fact that the December and the March quarters are holiday seasons. This will ensure their yields grow and capacity utilisation improves. This will be reflected in improving numbers in their quarterly financial results and makes the industry attractive for investors. Another LCC IndiGo Airlines is also contemplating approaching capital markets for fund raising. While the industry has also been lobbying with the government to allow foreign airlines to pick up minority stake in domestic airlines, any development on these matters also will be positive news for the industry.

With inputs from Ramkrishna Kashelkar

Kajaria to shine on capacity growth

Strong Results, Current Low Valuation And Expansion Moves To Add To Its Glaze

TILES-maker Kajaria Ceramics has seen its share price rise by over 80% in the past one year, sharply outpacing the Sensex, which gained 16%.
Substantially improved operations and consistent financial results over the last five quarters have helped the growth.
For the recently completed September quarter, the company reported a smart 52% jump in net profits to 13.3 crore as it curtailed its fuel costs and reduced the interest burden. The company’s net sales growth stood at 19.6%, while its volume growth increased 4.4% to 7.08 million square metres (msm) of tiles. The operating margin weakened slightly by 70 basis points to 15.7% on account of lower capacity utilisation of the ceramic floor tile unit at Sikandrabad and the need to offer more discount to dealers for pushing sales due to heavy rains and floods in the northern parts of the country in the months of July and August.
The company witnessed a steep rise in the sale of high-end glazed vitrified tiles, which it currently imports. This resulted in a 78% jump in its cost of traded goods.
The company cushioned the fall in its margins through 16% reduction in its fuel cost and 21% cut in other manufacturing expenditure. The supply of natural gas at its Gailpur plant in Rajasthan starting May helped it curb the fuel costs.
Of the 6.9 msm ceramic floor tile capacity at its Sikandrabad plant in Uttar Pradesh, 4.2 msm was for dry-grinding technology, which couldn’t succeed in India.
After scaling down the production, the company finally closed the unit in July. The company is in the process of converting this capacity into a vitrified tile plant by adding some balancing equipment by February 2011.
Except for this plant, the company has been running its other plants at nearly 90% capacity level.
The company is also in the process of adding six msm capacity of high-end polished/glazed vitrified tiles at its Gailpur plant to be commissioned by January 2011. Once commissioned, this will replace the company’s imports and help improve operating margins. The company is aiming to achieve about 950 crore of turnover in FY11 with operating margins above 16.5%.
Considering the recent results, the company’s current valuation is 12.4 times its earnings for trailing 12 months. Considering the various efforts that the company is taking to expand capacities and augment margins, the valuations appear attractive.

L&T Top show,but slow growth in orders a worry

L&T SURPRISED the street with a better-than-expected set of numbers for the September 2010 quarter. Sales and profit growth for the last quarter was in sharp contrast to its performance during the last few quarters, which was a source of worry for analysts. A slowdown in the growth of the order book, should it persist, could be a worry going forward. Yet the company appears well placed to achieve its growth targets for the year. The strong revenue growth coupled with margins improvement was the main highlight of the company’s September 2010 quarter results. L&T’s topline for the quarter grew 17.8% to 9,331 crore — almost twice the growth rate achieved in the 12-month period till June 2010 quarter. Its operating margins improved slightly by 20 basis points to 10.8% despite rising commodity prices, and it registered a healthy 22% jump in its net profit excluding the impact of extraordinary income. The growth tempo continued for the company in its main business segment of engineering and construction with a revenue growth of 17% and 110 bps improvement in the segment margins. This hints at a pick-up in the speed of conversion of order book into revenues. Machinery and industrial products’ segment emerged as the second largest segment for the company with a 37% jump in revenues to 698 crore. The electricals and electronics segment registered a 5% dip in revenues to 672 crore.
The company had registered a 63% jump in order inflow during the June 2010 quarter, but the order inflow during the September quarter was only 11% higher on y-o-y basis at 20,464 crore. The company reported a slowdown in the process of awarding contracts to its customer industries. According to its estimates, contracts worth nearly 40,000 crore that were to be awarded during the September quarter were pushed to the second half of the year. A slowdown in the Middle East also impacted the company’s overseas order book. Although the current unexecuted order book stands strong at 115,393 crore — more than three times its FY10 revenues — investor sentiment could dampen if the growth of order inflow continues to be slow in the coming quarters.
Taking into account the latest results, L&T’s valuation is now 34 times its earnings for the past 12 months. The company is expected to improve its execution speed going forward and is likely to achieve a higher turnover and profit growth. However, the rich valuations capture most of this upside.

Rallis may be a pricey pick for new investors

PESTICIDES maker Rallis India’s growth drive continued unabated as the company posted a 28.4% growth in its net profit at 58.7 crore in the quarter ended September 30, 2010. The company has been performing well in the past three years with improving profitability.
The rise in the company’s September quarter numbers were driven by a 14.7% growth in net revenues at 368 crore. Operating profit inched up by 80 basis points to 24% despite a jump in trading activity, as the company curtailed its other expenditure. A dip in depreciation and interest costs boosted the profit growth to 20.8% at the PBT level. However, 2.1 crore of extraordinary cost towards VRS in the yearago period meant the growth in PBT appeared 24.4%.
Tax provisioning at a slightly reduced rate raised the profit growth further to 28.4%. The company’s performance in the September quarter was helped by a better monsoon this year. While the overall acreage under cultivation increased around 7% across the country, the acreage of high pesticide consuming crops, such as paddy, pulses and cotton, grew particularly higher. Even heavy rains resulted in an increase in weeds and fungal diseases, which also favoured the company’s growth.
The company is currently in the process of completing its greenfield agrochemicals plant in Dahej by the end of November 2010. The plant, which is being set up at a capital cost of 150 crore, is expected to generate revenues of 500 crore over a three-year period. This will add nearly 50% to the company’s gross block. While the first phase of the new unit will be primarily used to meet Rallis’ captive requirements, it is contemplating a second phase for expanding its contract manufacturing portfolio. Rallis has utilised its strong operating cashflows over the past couple of
years to pay off its debt.
The outstanding debt, which stood at 82.5 crore as on March 31, 2009, has fallen to 9.2 crore as on September 2010. This improved cash generation, out of better working capital management, has enabled the company raise dividends over the past six years. The favourable conditions have induced it to consider an interim dividend this year. In accordance with the company’s strategy to give specific emphasis on new products, it launched three new products in the first half of FY11.
Considering the recent results, the company is being valued over 23 times its earnings for the past 12 months. This is the highest among leading domestic agrochemicals players. The company’s growth for the past few years and improving financial health indeed justify a premium valuation. However, for a new investor, the scrip is no longer attractively valued.

CASTROL INDIA: Co holds its own, but raw material costs are a worry

CASTROL India, the leader in the lubricants business, has reported a healthy 22.3% growth in its September 2010 quarter’s net profits, which stood at 16.9 crore, as its revenue growth was aided by improved operating margins, reduced depreciation charge and a lower effective tax rate. This, however, failed to meet the market expectations; the scrip fell by 0.6% on Wednesday, in an otherwise buoyant market when Sensex jumped 2.4%.
Castrol’s September quarter numbers saw sales growing 13.5% to 643 crore with a 100 basis points improvement in operating profit margin to 26.4%. The margin improvement came despite rising raw material costs, as the company aggressively reined in its other expenditures such as staff cost and selling & admin costs. The company’s raw material cost to net sales ratio jumped to 52.4% this quarter, from 47.5% in last September. In fact, it was the highest in the last six quarters. The company achieved an absolute reduction of 11% in its expenditure on staff, selling & administration and manufacturing in spite of the rising turnover.
An 11% fall in its depreciation provisions and reduced effective tax rate at 31.2%, further helped the bottomline in achieving a higher growth rate.
For the company, brand-building and consumer-connect initiatives remain the key to its success besides developing novel products. In this regard, the company launched extensive marketing campaign with the punchline “instant protection from the moment you turn on the key”. It also launched Castrol Safe2GO programme to promote importance of vehicle safety. Sanjeevani, a rural-outreach programme for tractor owners, achieved a milestone by reaching two million tractor owners within a year of its launch.
In the last couple of quarters, the company has seen an upward trend in raw material costs, denting its margins. Its efforts to maintain and even grow its profit margins so far have proved effective. However, it could become difficult going forward, if the trend in raw material costs continues. Its future volumes growth will also depend on the performance of the automobile industry.
The company has outperformed the markets over the last one year, nearly doubling in value, while Sensex gained a little over 21%. It continues to remain a stable cash-generating company with little debt and healthy dividends.

PETROLEUM: Cos likely to put up healthy nos this round

THE Indian petroleum players are expected to report healthy growth numbers for the September 2010 quarter although several key concerns remain. The numbers public sector oil companies report will continue to hinge on how much subsidy the government apportions to each of them and how much it decides to bear itself. Stable oil prices during the quarter and the deregulation of petrol and natural gas prices by the government bode well for these companies.
For Reliance Industries, India’s largest company by market capitalisation, the performance is expected to be significantly better compared with the year-ago period, although it could be lacklustre vis-a-vis the June 2010 quarter performance. A marginal improvement in the refining margins during the quarter is expected to bring back cheers for the refiner. On the other hand, pressure on petrochemical margins and stagnant oil and gas production will restrict its upside. “September 2010 is expected to be a subdued quarter for RIL on a QoQ basis due to weakness in petrochemicals margins and lower contribution from E&P segment due to lower volumes at Panna-Mukta-Tapti, and flat gas volumes at KG-D6,” said a Motilal Oswal report, which predicted a 29.6% y-o-y growth in net profits.
ONGC’s numbers for the quarter are also likely to show healthy growth. However, it won’t be due to any production increase, but on account of the reduced subsidy burden and deregulated APM gas price. “ONGC is likely to report average crude realisation of $78.4/bbl at the gross level; we expect the company to bear subsidy of $15.6/bbl leading to net realisation of $62.8/bbl,” Angel Broking’s report on the results expectations said. Natural gas companies such as Gail, GSPL, Indraprastha Gas and Gujarat Gas are likely to witness flat volumes compared with earlier quarters. However, Gail will benefit from the additional marketing margins from sale of APM gas. Petronet LNG is set to report higher volumes thanks to import of spot LNG cargos to meet the rising demand.
The outlook for the sector remains mixed. The overcapacity situation in the refining industry remains uncorrected, which can lead to sustained pressure on the gross refining margins. Even petrochemicals and polymers will face margin pressure due to increasing lowcost production from the Middle East.

SINTEX: Other income, arms help co post strong show

THE performance of the Gujarat-based plastic products producer, Sintex Industries, in the September 2010 quarter has been its best quarterly performance in the last couple of years. Its net profit for the September quarter jumped 72% to 100.2 crore on a consolidated basis. A strong performance of its subsidiaries boosted its plastics division, while its technical textiles division, too, continued to do well. The net profits of the company’s subsidiaries jumped 2.6 times during the September 2010 quarter to 26.7 crore. In comparison, the company’s standalone net profit grew only 56% to 73.4 crore. Apart from the improved performance by the subsidiaries, the company also gained from the multifold jump in other income to 27.2 crore as against Rs4.8 crore in the year-ago period. A fall in the effective rate of tax also added to the profit growth. For the September 2010 quarter, the company provided for tax at 26.6% of pre-tax profits, as against 29.4% in the corresponding quarter of last year. The revival in its textiles business added lustre to the company’s quarterly results. The technical textiles business, which saw a steep fall in profits during FY10 after stagnating for three previous year, nearly quadrupled its profits to 12.9 crore in the September 2010 quarter. The plastics segment, too, reported a strong 48.8% jump in profits to 138.4 crore, while the sales grew only 29.6%.
Under its plastic products segment, the monolithic construction business continues to grow at a fast pace with sales more than tripling in the last four years. The company carries a 2,600-crore order book to be executed by FY12. Similarly, in the prefabricated structures segment, the company is planning to grow through geographical expansion from its five plants across the country.
The company’s scrip, which had gained nearly 15% in the last one month, rose 1.3% on Monday after the results were published — higher than the 0.35% rise in the Sensex. Considering these results, the earnings of the company now stand higher at 28.6 per share. The current market price of 434 is around 15.2 times the EPS, which appears fairly attractive considering the healthy growth prospects.

Cairn- Interview: Exploring Growth Avenues

From $6 billion in 2006 to $14 billion today, Cairn India’s valuation has gone up strongly. But the road had been full of hurdles. The company’s Executive Director & CFO Indrajit Banerjee talks about the company’s future growth plans and the challenges of the past in a telephonic interview with ETIG’s Ramkrishna Kashelkar. Excerpts:

What were the key challenges involved in executing the Rajasthan project?
Developing the Rajasthan field in the middle of desert was an enormous task. In 2007, it was one of largest onshore developments globally. And implementing it, while balancing out various uncertainties, was a huge challenge for the management. We had several key regulatory issues that lacked clarity. There was total uncertainty on evacuation of oil. On top of it, the project cost started soaring. Then there was the economic turmoil, credit crunch and crash in oil prices that created hurdles for fund raising. All this had to be considered while devising the best exploration and development methods. A lot of efforts went into tackling these issues. We spent a lot of time explaining the necessity to set up evacuation pipeline to the Gujarat coast and include its cost in field development plan to the government. With our JV partner ONGC firmly by our side, we managed to get the permission. We could have decided to wait for full clarity on all these issues before risking our capital. However, it was a conscious decision to go ahead. Importantly, we kept all our stakeholders informed of what we were doing. Finally, the efforts paid off.

How were your experiences in arrangement of funding?
The IPO had left us with cash of around $600 million, while there was $850 million debt facility contracted before the IPO. However, further funding became necessary as our project cost went up. Firstly, the global spurt in oil exploration increased the cost of commodities and oilfield services. And subsequently, the scope of the project increased to include the 690-km pre-heated pipeline to evacuate crude oil. By the time we felt the need for further funding, the world had entered the financial crunch and global banks were unwilling to lend. Indian banks, which were used to security-based lending, were not accustomed that time to fund the development of E&P assets. Even interest rates were going up. And this was the time our project was progressing at a ferocious speed and the pipeline had to be built up. The first thing we did was to relook at the financing options. In April 2008, we got an opportunity to raise $625 million by placing equity with a couple of long-term investors — a Singapore-based fund and Malaysia’s Petronas. This gave us a breather. At the same time, we optimized our capex plans to prioritise only that capex, which was absolutely essential to commence oil production. The priority was to aim for oil production at the earliest and meet our 2009 target. For example, rather than building all our processing trains simultaneously, we focused on building the first 30,000 bpd processing train, which was small but cheaper and quicker. We started selling oil since August 2009 by trucking even at high cost. This opened the tap of cashflows. By May 2010, when our pipeline partially commenced operations, we had sold nearly 6 million barrels of oil.

What hurdles did you face while raising debt from domestic banks?
It was a rare occasion of reserve based lending of such a large scale was being tied up. The main asset we have was oil in the ground. However, Indian banks then were not ready to accept that as security. We had to create a security, which was acceptable to them. Finally, a consortium of banks led by SBI took an extremely proactive view and accepted our participating interest in Rajasthan field as security. At that time, this was a novel thing in India. We raised 4,000 crore of debt from the consortium and another $750 million loan from Standard Chartered Bank in October 2009. We replaced earlier loan arrangement with this.

What has been Cairn’s capex on Rajasthan project so far? What is the planned capex for the next couple of years?
We have already spent nearly $3 billion on Rajasthan fields so far and plan to spend another $2 billion in 2010 and 2011 together. This will take care of our entire planned development work at the Rajasthan field to reach the plateau production level of 175,000 bpd. The capex, thereafter, will depend on lot many factors such as success of our EOR pilot, further exploratory successes and the government’s nods. Considering the growing cashflows from oil sales, we are well funded to see us through our current capex cycle. In fact, we may not need the entire $1.6-billion debt line arranged last October. These funding arrangements were done in times of uncertainty and with crude oil assumptions at much lower level than what they are now.

What are the challenges before the company in future? Where will the future growth come from?
Immediate challenges for us are reaching the plateau of 175,000 bpd production as early as possible. We are already at 125,000 bpd and Bhagyam and Aishwarya fields need to be operationalised. We have a vision to reach a production level of 240,000 bpd from the Rajasthan field. This will involve implementing enhanced oil recovery (EOR) techniques, exploiting oil reserves in the Barmer Hill formation and developing other smaller discoveries. We are taking all stakeholders with us to meet this vision.Similarly, we have all along maintained ourselves as low-cost efficient producer.
At Ravva and Cambay offshore fields, the direct production cost is around $2-2.5 per barrel, which is comparable to most efficient producers in the world. For Rajasthan field also, we need to achieve this distinction. During the quarter ended June 2010, this stood around $4 against our desired target of $3.5. With the production increasing, the average cost should come down.Future growth of the company will come from our ability to make the most out of Rajasthan field, where further exploration work is continuing. Our other exploration blocks will also provide another growth avenue. For example, we had a discovery in our KG basin block recently. Exploratory drilling in other couple of blocks is set to begin soon.

How do you view the proposed change in the promoter group of the company?
As this was a decision at the shareowners’ level, Cairn India had no role to play in this deal whatsoever. However, we believe this is a positive development particularly for retail shareholders. Vedanta’s willingness to acquire Cairn India and the price they are paying for it, are actually a great endorsement to the quality of our assets, the management capabilities and future growth prospects. As for the management, we are as focused on the company’s growth and committed to value creation as we ever were.

PACKAGING: Rising demand heralds better times for most

STOCKS of India’s flexible packaging companies have gained substantially over the past few months outpacing the broader market by a wide margin. A sudden spurt in global demand has boosted the BOPET film prices, which appears long-lasting. The industry players are expecting a couple of years of supernormal profits ahead of them before the supply finally catches up with the growing demand.
The market capitalisation of companies such as Jindal Poly Films, Garware Polyester, Ester Industries and Polyplex Corporation have all jumped up between 1.6 and 2.8 times in the past three months, while Sensex rose by 23%. The prices of biaxiallyoriented polyester (BOPET) film, which is the main product of these companies, have more than doubled thanks to its increasing usage.
“BOPET film prices, which stood at around 98/kg in April, are currently ruling around 225/kg,” said an official from a leading company. The jump in BOPET film prices has come after years of range-bound movement. The global demand for BOPET film jumped due to its usage in solar power cells, touch-screen panels of mobile phones and flat screen TVs. “An installation to produce 1 MW of solar power requires nearly 30 tonne of BOPET film,” said another official.
Along with the usage in solar power and touchscreen panels, other innovative applications too have driven the demand. For example, in India nearly 35,000 tonne of BOPET film is used annually by garment embroiders. The traditional demand for packaged food is also growing rapidly. India has emerged as the third largest consumer of BOPET with 330,000 tonne of annual demand. Industry sources estimate that there is nearly 10% gap between demand and supply, which is unlikely to fill in too quickly.
Last couple of years’ recession led to the closure of around 125,000 TPA capacity globally, out of the total capacity of around 3 million TPA.
The high prices of BOPET film are making some users to shift to alternate packaging materials such as BOPP film (biaxially-oriented polypropylene films). Since BOPP film prices have not matched the rally seen in BOPET prices, companies such as Cosmo Films which manufacture only BOPP, have not seen any run up on the bourses.
The jump in the BOPET film prices is yet to reflect in the financials of these companies. The September quarter numbers, which will be announced over next few weeks, will be the first quarter when investors will get to see expanded margins and profit growth.