ONGC: Problem of ad hoc subsidies continues to dog ONGC

ONGC’s December quarter results were peculiar. The company’s profit figure was substantially higher than what people had guessed. The ONGC management had given an indication in the past about its attempts at getting its dues out of the Gas Pool account — a relic from the era of administered price mechanism (APM) for natural gas sales. That the largesse would arrive in this quarter was something unknown. But it probably had more to do with the timing of ONGC’s followon public offer (FPO), which the government is bent on bringing out before the financial year ends. Even though a one-time income, technically this 1,898 crore received from the pool account may not be regarded as ‘extra-ordinary’, as it was created out of the company’s past revenues. Still for the normalisation purpose, if one were to remove its impact, the company’s quarterly profit stood at around 5800 crore. This, too, was around 5-10% higher than what the Street was expecting.
The company’s other income for the quarter also appeared substantially higher, mainly due to the reversal of 460 crore of interest from ONGC Videsh in December, 2009 due to conversion of its loans to interest-free loans. At the same time, a 22% drop in its depreciation provisions, which includes amortisation or impairment losses, helped.
It seems as if the government has been fulfilling ONGC’s minor wishes ahead of its FPO, while being unable to grant the major ones. Compared with an almost three-fold jump in the company’s subsidy burden in the first half of FY11, the subsidy burden grew just 21% in the December quarter, despite rising under-recoveries for the domestic oil sector. In fact, the net realisation in rupee terms, which was 7.7% lower in the first half, turned out 8% higher in the December quarter against the year ago period.
Earlier this financial year, the APM was dismantled for ONGC’s natural gas sales after it argued for years that natural gas had turned a loss-making proposition for it. Now, it gets its dues from the Gas Pool account.
ONGC’s plea to bring in a formula-based subsidy sharing mechanism has been falling on deaf ears. This has built an inherent fear factor among the company’s investors, as they can’t rightfully predict its future performance. The ONGC chairman’s comments that oil prices above $70 a barrel hurt the company and the underperformance of the scrip in the past one-and-a-half months, when global oil prices gained consistently, has not been a coincidence after all.
The second major item on ONGC’s wishlist is, of course, a redressal of its liability towards 100% of royalty payments for crude oil produced from Cairn’s Rajasthan blocks, in spite of holding only 30% equity stake. This arrangement came into being when ONGC was granted the stake in the discovery free of cost. This has left the company in a position where growing sales volumes out of the Rajasthan fields are not adding to its net profit in any meaningful manner. No wonder, ONGC today wishes it had paid for that 30% stake once and for all, instead of carrying over the obligation for its entire life.
But one good thing that the December quarter results quietly underlined is the company’s steady production growth from nominated blocks, which had stagnated for a long time. It produced over 6.2 million tonne of oil from the nominated blocks, which was 1.7% higher than last December and 0.9% higher from the September 2010 quarter. This is surely a good sign for the company’s future. The results are sure to fire up the ONGC scrip on Monday when the markets open — something the government would be keen to watch particularly as it plans for further stake sale. The bonus and stock split will prove to be other attractions for the investors. While the stock remains fundamentally good for long-term investment, investors must not forget that the company’s fundamental problem of ad hoc subsidies remains unaddressed.

Gail: Blazing A Trail

The dip in market sentiment has opened a window of opportunity for long-term investors to participate in Gail’s growth story

THE fall in Gas Authority of India’s (Gail) valuations in the first month of 2011 makes it once again attractive for fresh investments. The company is going to be the primary beneficiary of increasing availability of natural gas — a cheaper and better alternative to liquid fuels — in India. With a strong balance sheet capable to fund its aggressive growth plans, Gail can double its size within the next three years. Long-term investors should buy on every dip.

BUSINESS
Gail is India’s largest natural gas transporter with 7,200 km of pipelines and capacity of 155 million cubic metre per day (mmscmd). It also produces around 1.4 million tonne (mt) of LPG and 0.42 mt of polyethylene.
Apart from transporting natural gas, the company is also trading in it that enables it to earn both transport and marketing margins. Gail connects all major demand and supply centres of natural gas in western and northern India and is setting up pipeline network in the southern and eastern parts of India, besides expanding existing pipelines in the north.
The company is also working actively to expand its presence through entire value chain of natural gas. It has picked up stakes in 27 petroleum exploration blocks, of which hydrocarbon discoveries have been made in six blocks.
Gail owns promoter’s stake in natural gas importer Petronet LNG and seven city gas distribution companies, including Indraprastha Gas. It plans to enter city gas distribution (CGD) business in around 50 cities within the next three years.

GROWTH PROSPECTS
In view of rising crude oil prices, natural gas is fast gaining acceptance as the preferred fuel for industrial, automotive and domestic use. Today, usage of natural gas is constrained in India only by its limited availability. However, the scene is set to change in the next few years as various new gas fields are starting production and imports are also rising. Industry analysts estimate the domestic availability of natural gas to grow at a cumulative annualised growth rate (CAGR) of 17% from around 86 mmscmd in FY09 to 215 mmscmd in FY15.
Petroleum and Natural Gas Regulatory Board (PNGRB) has recently approved tariffs for Gail’s existing pipelines, which are distance-based and higher for new ones. This means new pipelines will be able to generate higher revenues from same volumes.
The company has planned an investment of 29,000 crore in three years till FY13, which is more than its entire gross block at the end of FY10. These aggressive expansion plans will double its gas carrying capacity to 300 mmscmd by FY14 in phases. Its polyethylene capacity, which was recently raised to 0.45 mt, will also be doubled to 0.9 mt by FY14. Its 70% subsidiary Brahmaputra Cracker is also expected to commission its 0.28 mt polymer plant by the end FY12.

FINANCIALS
The company’s lower than expected December 2010 quarter results, which caused the recent correction in its share price, were mainly due to a 3-week-long shutdown of its petrochemical plant for debottlenecking. Subsidy burden remains a key uncertainty for the company’s financial performance. However, its impact has come down from nearly 9% of revenues in FY07 to 5.1% at present.
The company enjoyed a debtfree status till recently, but needs to raise around 15,500 crore over the next couple of years to finance its expansion plans.

VALUATION
Gail is currently trading at a priceto-earnings multiple of 15.8 considering its profits for the past 12 months. This is lower compared to its smaller peers, such as Indraprastha Gas and Gujarat Gas. Nearly 15% of the company’s market value is represented by the value of its investments in other listed companies such as ONGC, Petronet LNG etc.

Chennai Petroleum: The worst may be over for Chennai Petroleum

Stable Outlook, Improving Numbers Make It A Safe Bet

CHENNAI Petroleum’s net profit in the December quarter was lower than in the year-ago period. This was despite a greatly improved industry outlook and the scrip, which is trading below its book value, didn’t react much to the results.
The stable outlook for the refining industry is expected to help the scrip gain lost ground. The profit fall was mainly due to some extraordinary adjustments of last December. The standalone refiner had then posted a huge jump in net profit even though refining margins dipped to a multiyear low. This was mainly on account of a huge . 114 crore tax write-back. As a result, even with improved gross refining margins — the money it earns on refining each barrel of oil — the company did not report higher profits in the December 2010 quarter compared with the year-ago period.
The company, which has the lowest valuation per tonne of refining capacity in India, has been range-bound on the bourses for 15 months. A crash in its share price in August 2010 in particular resulted in the company underperforming the BSE Sensex.
However, the December quarter results hold promise of a revival in the company’s profitability over the next few quarters. The company reported net losses in the March and June quarters of 2010. A stable outlook for the industry means over the next couple of quarters, the company may report healthy profits and wipe out the losses. In view of the uncertainties prevailing over the public sector oil companies regarding underrecoveries and subsidy sharing, etc, analysts are betting on Chennai Petroleum being a safe play.
A result update report on the company by Elara Capital, for instance, said: “Apart from the prolonged stagnancy in refining prior to Oct ’10, CPCL shares have fallen from . 280 levels due to company-specific issues such as lower utilisations. However, with the turnaround in global refining and higher utilisation we believe FY12 earnings would be robust.” It has given an ‘accumulate’ rating for the scrip.
Based on the company’s dividends of . 12 per share for FY10, the dividend yield works out to 5.4%. However, its profits in the first nine months of FY11 are 70% lower than in the corresponding period last year. Hence, the dividend rate could diminish.
The company is working on several projects to improve its profitability. These include . 2,616-crore auto fuel quality upgradation project, which is in an advanced stage of completion, and a . 65-crore, 42-inch crude oil pipeline from Chennai Port to Manali Refinery. To increase the distillate yield of the refinery and reduce fuel oil production, CPCL plans to install a . 3,350-crore residue upgradation unit by end 2013. A 9 million-tonne brown-field refinery is also on the cards at Manali, to replace the 2.8 million-tonne refinery, at a cost of . 10,000 crore by end 2015.
In view of its low valuations, the company could be a sustained value-creator in the coming quarters as outlook for the industry improves.

RIL: Margin push, KG-D6 gas key to RIL’s growth

Margin push, KG-D6 gas key to RIL’s growth
Clarity On Future Growth Prospects Can Drive RIL Stock’s Journey Forward

THERE was hardly any surprise in the quarter to December 2010 numbers of India’s largest company by market capitalisation — Reliance Industries, including the growth in profits of 28%. But a few things stand out, like the slowdown in the YoY growth rate in revenues. In the 12-month period ended September 2010, the company’s topline growth was 73% compared with a year ago. The profit growth in the same period was just 23%, highlighting the importance of volume growth in higher profits.
The sales growth in the December quarter was just 5.2% YoY, an indication that the growth benefits of its two new mega-projects commissioned at the beginning of FY10 and gradually ramped up by the end of last year, have petered out.
In other words, there will not be much of volume growth in future to drive its bottomline. A lot will hinge on the company’s ability to improve margins and to scale up gas KG-D6 production . Uncertainty over both these could well explain the underperformance of the RIL stock over the past few months. The company’s KG-D6 gas production declined to close to 57(MMSCMD in the December quarter from close to 60 MMSCMD in the September quarter. RIL, which was originally planning to ramp up production to 80 MMSCMD, has put off the plan indefinitely, citing some geological problems. The company was also able to improve operating margins during the December quarter as both its refining and petrochemical divisions witnessed improved profitability. One could argue whether it was a decisive turn of the commodity cycle or just a lucky quarter. Although both the refining and petrochemical businesses appear to be out of the woods, margins are expected to stagnate in the coming quarters. What this means is that till the time any of its new businesses start contributing, RIL’s quarterly profits are likely to remain range-bound close to its December 2010 level. A recent report by broking firm Elara Securities, for instance, pegs the company’s FY12 expected profit growth at 10.8% higher compared with estimated profits for FY11, which is likely to grow 33% over FY10. Reliance has invested close to $3.5 billion in shale gas assets in the US, runs over 1,000 retail stores across 85 Indian cities, is putting money in exploration besides holding licences to launch broadband wireless access pan-India, among other initiatives.
However, there is little clarity on when and how much these businesses would contribute to the company’s bottomline. The RIL scrip, which gained almost 2% on Friday in a volatile market ahead of the results, is now trading at a P/E of 16.5. It is likely to drift sideways until there is some clarity on its future growth prospects.

PETRONET LNG: Growth hurdles cleared, co set for robust future

PETRONET LNG has benefited from reduced domestic production of natural gas during the quarter to December 2010, as reflected by its robust volumes and earnings growth. The company has, in fact, doubled its quarterly profit. Its stock now trades at 19 times its earnings for trailing 12 months, which appears reasonable considering its healthy growth prospects.
Petronet’s sales volumes during the quarter grew about 32% to 111 trillion British thermal units (TBTUs) from 84 TBTU in December 2009 quarter. A monthlong shutdown at Panna-Mukta-Tapti in October and stagnating production from Reliance’s KG basin fields meant that a chunk of demand had to be met through imported natural gas. This resulted in 62% higher net sales for the company at . 3,628 crore. Operating margins improved slightly due to higher scale of operations. Despite other income falling substantially, pre-tax and post-tax profits were twice as against the year-ago period because of stagnant interest and depreciation costs.
The company, which has been a regassifying company, has decided to test the waters in natural gas trading. Petronet LNG will import 1.1 million tonnes of LNG for which there will not be any back-to-back sales agreement with firms such as Gail that offtake it. Since the company will be earning marketing margins besides regassification charges on these volumes, its operating profit margins are expected to inch up in future. Petronet's growth constraints are also easing. The pipeline capacity constraint, which was haunting the company last year, has reduced with the partial expansion of Gail’s Dahej-Vijaypur pipeline. The company is setting up a second jetty, which will help it handle a number of vessels every year. All these will enable the company to extract 25-30% more than the nameplate capacity from its existing facilities.
In 20 months, the company’s Kochi terminal, with a 2.5 million-tonne capacity, will commence operations. Within two to three months of commencement, the capacity will be scaled up to 5 million tonnes. The company has sufficient cash balance to fund its . 1,200-crore capex plan of FY12.
In the current scenario where the US has stopped LNG imports due to the advent of shale gas and new LNG capacities are coming up, Petronet appears comfortable depending on spot cargos or short-term contracts to bridge the capacity-utilisation gap. Petronet LNG imports spot cargos for about $10/MMBTU. The scenario is likely to play out over the next couple of years. This means, Petronet’s future growth outlook is robust.

Reliance Industries: RIL likely to report 30% jump in Q3 profit today

Higher Oil Demand In US, EU To Help Co, Refining Margins Too Seen Up

INDIA’S largest company by market capitalisation, Reliance Industries (RIL), is likely to maintain its profit-growth momentum when it reports quarterly earnings on Friday, helped by improved refining and petro-chemical margins. Its natural gas output, however, has been under pressure.
Refining and petrochemicals segments, which together represent nearly 94% of its sales and 75% of profits, will boost the numbers, analysts said. But, despite expectations of good numbers, the scrip has continued to underperform the overall markets.
A Bloomberg poll of 11 broking firms expects Reliance Industries’ net profit for October-December to be . 5,220 crore, up 30% year-on-year. They forecast net sales at . 62,990 crore, up almost 11% YoY. In the first half of the year, the company had posted 30% growth in net profit, while revenues rose 48% compared with the year-ago period.
“We expect private refiners to benefit strongly, as increased oil demand from the US and Europe on account of a strong winter there has led to a sharp improvement in spreads,” said ICICI Securities in an earnings preview report.
“Light-heavy spreads have also improved, leading to increased advantage for complex refiners. RIL would be the biggest beneficiary of this trend,” said the broking firm.
Analysts see the company’s gross refining margin (GRM) in October-December period improving to $8.7-9.3 per barrel from $7.9 in the previous quarter and $5.9 per barrel reported in the quarter ended December 2009, due to higher diesel and gasoline cracks. Refining margins in the December 2009 quarter was the lowest in several years for the refining industry globally. Gross refining margin is the differential between the sales proceeds of refined products and the cost of crude oil required to produce them.
“Petrochemical margins are also expected to benefit from expansion in polyester intermediate margins,” said Edelweiss Securities.
Reliance Industries’ natural gas output from D6 block in the Krishna-Godavari basin (KG-D6) declined to around 55 million metric standard cubic metres a day (mmscmd) in the December quarter from 60 mmscmd in the previous quarter.
In spite of expanding net profit by 30% YoY in the first half of FY11, the RIL scrip has grossly underperformed on the bourses. While the BSE Sensex has gained around 7% since April 2010 so far, RIL lost a little over 10%. The high earnings growth estimates of December 2010 quarter have done little to revive it. The scrip has remained range-bound between . 950 and . 1,100 for the past 20 months, even as Sensex moved from around 12,000 to 18,800.
Investors will closely track management’s update on gas production from KG-D6, which is likely to rise to 60 mmscmd in April, and achieve its peak production of 80 mmscmd in 2012-13.

GAIL: Aggressive capex will ensure robust growth

NATURAL gas major Gail’s stock has fallen over 3.1% after it announced results that were below the market’s expectations. The maintenance shutdown of petrochemicals plant, mainly, dented profits. However, this is a non-recurring aspect and the company’s future growth prospects remain robust. Hence, a further slide in its share price appears unlikely.
Gail’s 13% net profit growth during the December 2010 quarter was much below analysts’ and investors’ expectations. After the subsidy burden fell 8% against the year-ago period, a robust profit growth only seemed natural. However, the petrochemicals division, the second-largest profit-making unit for the company, proved to be a spoilsport with profits falling 43% while sales came down 30% in comparison with the last December quarter. A three-week shutdown at its polymer plant to add another gas cracking furnace, combined with annual maintenance, was the primary reason behind lower production, sales, revenues and profits from this business during the quarter. But, the good thing is that the company’s polymer production capacity now stands 10% higher at 450,000 tonnes per annum. From the March quarter, the company can expect to benefit from higher polymer volumes.
Another important aspect of Gail’s numbers was the fall in its operating profit margins to the lowest level in eight quarters. Besides the petrochemicals division, the natural gas transmission business, which is the largest profit-making segment of the company, also witnessed margin erosion.
Higher interest and depreciation costs also impacted the company’s earnings as its capex projects kicked off.
All this while, the company continued to expand its transmission volumes, which crossed 120 million cubic metres per day during the quarter — 10% higher than the year-ago period. The sales volume of its gas was 3% higher at 83.4 million cubic metres per day.
Gail continues with its aggressive capacity expansion drive, which will see it invest over . 29,000 crore between FY11 and FY13, effectively doubling its gross block from the FY10 levels.
During 2011, the company expects to commission at least 1,500 km length of new pipelines, which will be a 20% addition to its existing network.
The addition to its transmission capacity will be much higher at 40% from around 150 million cubic metres per day today.
The recent correction has brought down the company’s valuation to 16.1 times its profits for the trailing 12 months from over 18.8 just two weeks ago. In view of the growth prospects over the next 2-3 years, the current valuation leaves scope for appreciation in the long run.

HITTING A RAW NERVE

HITTING A RAW NERVE

With commodity prices hitting their all-time highs, margins of manufacturing companies are under pressure. Though companies use a variety of measures to protect their bottom lines from rising raw material prices, these are not enough to mitigate the risk. ET Intelligence Group analyse the impact of rising input costs on companies

THE commodities cycle has yet again turned bullish. Although better placed than their retail counterparts, manufacturing companies are not insulated from the impact of rising raw material prices. There is little relief from the rising wholesale price inflation. The inflation index has moved up to 8.4% in December from 7.5% in November. If these numbers are any indication, prices of most basic items of consumption have shot up (see the table). Prima facie, this indicates an inflated raw material bill for manufacturing companies but it is not bad news for all.
Companies use variety of means to protect their bottom lines from escalating input costs. Some enter into forward contracts by booking the price of a key commodity in advance for the next few quarters. There are others, which hedge their commodity exposure by taking a position in the futures market equivalent to their physical market requirement. Some other companies ensure supply of raw materials at competitive prices through contracts with farmers or producers. While all these measures do help in mitigating the risk of input prices, none of these is enough to ensure a complete insulation. Though companies from almost all sectors are impacted, some sectors bear the brunt more so than others. Even within a sector, some companies end up getting severely impacted than others due to their distinct product profiles. To understand this better, ET Intelligence Group studied the impact of rising costs on a sample of companies that feature in the BSE 500 index.
We analysed the impact of increasing input costs on companies, which spend more than 40% of their revenues to cover raw material costs. We excluded corporate producers of commodities. Read on to know more about the impact of higher costs on these companies and which of them could still be able to maintain their profitability.

CAPITAL GOODS: These companies typically spend 60-70% of their revenues on sourcing raw materials like ferrous and non-ferrous metals. Capital goods players such as ABB, Siemens, Thermax, Voltas, Cummins India, Crompton Greaves, Havells India, BEML and Bhel figure in our study. Rise in input costs has a negative impact on capital goods companies. But the companies that command a premium on products would be in a position to pass on higher input prices to customers. Also, those who enjoy flexibility in contracts with their clients could reduce the impact of cost escalation by revising the contract prices upwards. Companies such as ABB, Siemens, Thermax and Suzlon that have fixed price contracts are likely to adversely impact due to a rise in input prices. On the other hand, Bhel, which mostly has long-term projects in its order book, is likely to be less impacted. Cummins is also not likely to have a significant impact because of its high pricing power due to superior product profile. Voltas, with high pricing power in selected markets, will also be among the less affected ones.

AUTO: Input costs constitute 65-75% of total revenues of automobile manufacturers. These include Maruti Suzuki, Ashok Leyland, Bajaj Auto, Hero Honda, M&M and Tata Motors. Despite firm input costs, Tata Motors (on a consolidated basis) has been able to withstand a difficult operating environment over the past few quarters. This is largely due to revival in sales volumes in emerging markets for its Jaguar Land Rover brands. In addition, the company’s earlier cost-cutting plans have paid off. This trend is expected to continue in the coming quarters. In contrast, Maruti Suzuki’s operating profit margins have been under pressure as it has not been able to fully pass on higher input costs to customers. Its margins for the December quarter are expected to fall by 350 to 400 basis points.

CONSUMER GOODS: Inflationary environ ment is conducive for the growth of the consumer-oriented sector. It is partly due to a rise in consumer buying during a period of high inflation. The other key reason is companies with branded products can afford to increase prices without impacting sales. The only concern is that rise in the product price may not be proportionate to the increase in input costs. Asian Paints, HUL, Castrol, Nestle, Godrej Consumer Products, Dabur, Tata Global Beverages and Marico are the companies that figure in our list. While these companies may register contraction in their profit margins on account of high input costs, they will also report higher revenue growth. HUL, the industry leader, is likely to gain the most.

BEARING THE BRUNT
TYRES
Leading tyre companies, MRF and Apollo Tyres, have reported shrinking operating margins due to higher rubber prices. To meet the rising cost of production, these companies have increased prices of their products by 15-20% last year. But the measure has proved inadequate. Though toplines may show some buoyancy, these companies are expected to report further contraction in profitability.

OIL REFINING
Petroleum refineries use crude oil as input for producing a range of petroleum products, such as LPG, petrol, diesel and kerosene. It is a case of producing a chunk of heavy products that command a price lower to that of the raw material itself. In such a situation, rising crude oil prices may impact the refining business.
However, that is not the case always. Just like crude oil, refined products are independently traded commodities in the international markets.
If prices of refined products gain in line with the crude oil prices, refining margins are safeguarded. For instance, during the December quarter, the crude oil prices hit their $75-85 per barrel range and moved past $90. In spite of that domestic refiners are expected to post strong refining margins as demand for refined products improved.
In the coming quarters, the profitability of the oil refiners will depend mainly on the demand-supply forces rather than movement in the crude oil prices. A number of economists expects the global economic growth to slow down in 2011 as the impact of economic stimulus packages in various countries wane off. This could result in a slower growth in demand for oil products.
Refiners’ margins, hence, are expected to remain at modest levels. Reliance Industries, Indian Oil, HPCL and BPCL are the oil refiners in our sample.
Companies are better prepared to manage bottom lines during the period of a steady rise in commodity prices rather than the time of volatility in prices. In the long run, almost all companies pass on the cost rise to consumers. However, when prices increase sporadically, it’s impossible for companies to pass it on to customers.

Subsidiaries perk up Sintex’s nos

For The First Time, They Contribute Over 30% To Co’s Net Profit

THE Ahmedabad-based plastic goods manufacturer, Sintex Industries, came out with another strong result on the back of improving performance of its subsidiaries. The consolidated net profit for the December 2010 quarter jumped 55% to . 112.8 crore, as its subsidiaries more than doubled their profits to . 35 crore. For the first time, the subsidiaries contribution to the company’s net profit was more than 30%.
The company mainly operates in three business verticals — building products, custom moulding and textiles. The building products business, a relatively new segment, represents monolithic and pre-fabricated structures and is proving to be a great revenue growth driver for the company. During the quarter, the segment became the company’s single-largest revenue generating centre with 76% jump to . 609.5 crore against the year-ago period.
The custom-moulding business, which caters to industries such as automobiles, pharmaceuticals and packaging, posted a 15% revenue growth to . 459.4 crore. The margins of the plastic products — custommoulded as well as building products — widened during the quarter, as the segment’s profit rose 67%. The company’s textiles business also did well to record a 148% jump in its preinterest-and-tax profits to . 16.1 crore.
For future growth, the company is betting heavily on its plastics business. In the building products segment it is carrying an order book of . 2,600 crore, which is nearly a whole year’s revenue for the segment. The company is expanding geographically and introducing new products. It recently acquired 30% stake in a construction company to benefit from the execution skills in building activities.
The company had faced stagnation in profit growth during FY10 as its overseas subsidiaries as well as textiles business suffered. But with these businesses back on track and the building products business achieving a sizeable position, the company has done increasingly well during the first three quarters of FY11. The company’s net profit in the nine-month period ended December 2010 has jumped 52%. Despite this, the scrip has, so far in FY11, failed to match the kind of returns it gave in FY10. The scrip had doubled between April 2009 and March 2010, but has hardly gained since then. In fact, the Thursday’s closing price of . 167 is just 3% higher than its April 2010 level.
The scrip’s recent underperformance on bourses has lowered its valuations considerably. Its current priceto-earnings multiple of 10.6 appears low on a historical basis, considering the company’s consolidated profits for the past four quarters.

SUM OF ITS PARTS
The building products business, a relatively new segment, is proving to be a great revenue growth driver for the company.
In the December
quarter, the segment became the company’s singlelargest revenue generating centre with a 76% jump

Indraprastha: Indraprastha set to gain substantially from capex

Co Has Aggressive Expansion Plan, To Triple Gross Block By End Of FY12

INDRAPRASTHA Gas has posted a modest 14% net profit growth in the December 2010 quarter, despite a strong spurt in sales, mainly due to pressure on margins, higher interest and depreciation costs and low other income.
The cost of the gas Indraprastha’s sells has doubled after the government deregulated prices in May 2010. Even though the company has, to a large extent, passed the increased cost to its customers through price hikes, its margins have come under pressure. During the December quarter, while sales grew 60% to . 457 crore, the company’s raw material cost more than doubled, bringing down the operating profit margin to 28.3% from 36.7% in the year-ago period.
The Delhi-based city gas distribution company’s volumes growth at 22.5% during the quarter was marginally low compared with the first half of FY11, when the growth was almost 26.5% against the corresponding period of the previous fiscal. This was, however, substantially better than the 17% cumulative annualised growth rate (CAGR) the company witnessed between FY07 and FY10.
On bourses, the company has consistently outperformed the overall market in the past one year. The scrip gained nearly 67% against the just 10% rise in the broader market benchmark, BSE Sensex. BSE Oil & Gas index has underperformed, remaining almost flat in the period.
Like other companies in the natural gas industry, Indraprastha Gas has also embarked on an aggressive expansion plan. During FY10, the company added nearly . 300 crore to its gross block, the highest single-year addition in the company’s history. Additionally, it has planned . 700-crore capex programme for FY11 and plans to invest a similar amount next year. As a result, the company is expected to triple its gross block by the end of FY12, compared with March 2009 levels.
But the plans have increased the company’s interest and depreciation costs, which ate into almost 39% of the company’s profit before interest, depreciation and tax against the 28% last year. An over 80% fall in its other income was also one reason for this.
The company, which was debt-free in the last four fiscals, was carrying a debt of around . 250 crore as on December 31, 2010. It paid . 4.1 crore as interest during the December quarter. Considering the heavy capex programme for FY12, which is nearly double the company’s annual cash generation, the company is likely to raise further debt in the coming months.
Indraprastha Gas is set to grow substantially in the coming years as the assets it is creating start generating revenues. The impact of its capex programme is already becoming visible in terms of higher sales volumes.

Interview-Tata Chemicals: Worth Its Salt

FROM traditionally being a chemicals and fertilisers company, Tata Chemicals has moved decisively in consumer products while expanding its portfolio of farm inputs. The company’s young managing director R Mukundan is all enthused to lead the company through this transformation, which will see the company further strengthening its farm and consumer segments. Talking candidly on the things that didn’t go as planned in the past, he took a stock of the situation and shared the growth plan for future in an interview with ET Intelligence Group’s Ramkrishna Kashelkar. Edited excerpts:

With the recent launch of pulses in retail market under the i-Shakti brand, Tata Chemicals is set to become a ‘farm-to-fork’ company in true sense. How did you plan for this?
We look at the company operating in three verticals — living essentials, industrial essentials and farm essentials. In each of these verticals, we first look at the depth, our scale, strength and significance of presence in each of the offerings. Our living essentials business was mainly centred on branded salt for long. Its strength was its consumer reach. Tremendous distribution channel built up over a period of time. While in the farm essentials, we had a strong position in fertilisers, which was supported by a service vertical Tata Kisan Sansar and also Rallis’ Kisan Kutumb.
Because of this service business, we had a great relationship with farmers. We also have a great relationship with consumers in the living essentials business. And what we are trying to do is connecting the two with supplychain to benefit from both of them. This is what means the ‘farm-to-fork’ model.
Our first attempt to achieve this was Khet Se. Pulses were our second attempt. We are very happy with the progress in pulses we have made. There I think we have gone in the right direction from day one. Fresh food is bit more challenging, but it’s just a matter of time. On all these initiatives, we have been working for the past 4-5 years, it is only now that the results have become visible.

What will be the next steps in this regard?
We have set a modest target for ourselves. We will go crop-by-crop or product-by-product. For each one, we will stabilise, build scale and then we will move ahead. For pulses also it’s early days. With supply centres in Punjab and Tamil Nadu, we are opening centres in Maharashtra, Karnataka and Madhya Pradesh. In terms of sales, we have been test-marketing in Tamil Nadu and have just entered Mumbai region. We have to take this to all India level, which should take at least 8-12 months. Once those systems and supply chains stabilise, we will move on to our next products. This is not to mean that work is not going on right now. We already know what those next products would be.
Within fresh fruit and vegetables, we are focusing on bananas. Any new perishable products will be added under Khet Se, while there is a whole range of other products like food grains etc. We will take a decision based on where we can add more value.

Can you share your experience with the ‘Khet Se’ initiative?
Based on our understanding and prioritisation, we focused on fresh vegetables and fruits initially, because there is a lot of wastage in transportation and storage. If we could improve that, there is a lot of value created for everyone. So we entered into a joint venture with Total Produce of Ireland named ‘Khet Se’. However, this has proved to be a tough challenge. We have launched just one centre in Punjab so far. In accordance with our initial plan to set up 24-25 centres across India, we should have had four centres in place by now. However, we thought of first making a success of our first centre before rolling out others. This will probably be the first year when we are seeing some early signs of reaching our goal. We have a very good business model and a good partner, so I think it is just a matter of time.

Your recent acquisitions were made to fill some strategic gaps. Does the company have any more such gaps that can be filled through acquisitions?
All our acquisitions have been guided by a clear vision as to their strategic necessity. In farm essentials, our strength was in fertilisers. We also wanted the whole portfolio of the products. So we acquired Rallis to get into crop protection. The acquisition of Metahelix filled up the gap in seeds area — even more so in research in seeds area. They are a researchfocused organisation with a strong portfolio of germplasm for developing new hybrid seeds. So now we have in our portfolio what I call Brahma, Vishnu and Shiva of the farm industry.
One aspect of farm productivity is embedding the necessary components in the seed itself, rather than adding it to external environment. Acquisition of Metahelix will help us in that. With acquisition of British Salt, the vacuum we had in Brunner Mond’s raw material
sourcing is now fulfilled. It will also allow us to enter food space in the UK. It also gives us access to gas storage business, but that is some time away. In terms of gaps, we continue to monitor what things we can add. As and when the options become available, we keep filling in. One such gas we perceive is in potash business. India imports a lot of potash for fertiliser use as there is no local availability. SO WE have tied up with Central Salt and Marine Chemicals Research Institute to develop a technology to produce sulphate of potash from seawater. The pilot plant is expected to come up in around 18 months.

Tell us about your research efforts. How has that helped you launch new products?
We have a nano and biotechnology lab in Pune and an agricultural technology lab in Aligarh. Our recently launched products like the water purifier, Tata Swach, and customised fertilisers have their origins in these laboratories. In the case of Tata Swach, if you look at its heart — the bulb, which does the purification — it is made up of nanocoated rice husk ash. This is something we developed in our innovation centre. Rice husk ash as a filtration medium is something TCS had started working on more than 12-13 years ago. The only issue with it was that it could purify only till 90% extent. We wanted it to go up to 99.99%. Our scientists were able to encapsulate it with nano-silver, which acts as anti-bacterial agent and achieved the desired result. Our first customised fertiliser plant at Babrala has been running now for some two months and has launched some 4-5 formulation targeting sugarcane, potato, wheat in the nearby region. All these formulations came from our Aligarh lab. We have done soil mapping of the area around Babrala and know the cropping patterns. Based on that, we have developed the customised formulations. And the response has been tremendous. We are currently in the process of identifying the location for our second unit. We have shortlisted three high priority sites and I think it will take us three months to announce the final location. These plants with small capacity of 150,000 tonne per annum will cater to areas within 100 km of distance.

Going by the financial numbers, the past couple of years have been tough for Tata Chemicals. What were the reasons behind that?
We faced a number of issues in the past couple of years that affected our performance at the bottomline level. If you look at the EBITDA number of the company, it has grown from around 1,000 crore some four years back to 1,800 crore now. But what has not grown that smartly is PAT numbers.
The reason for that is there were a number of adjustments we had to account for. There was a structuring cost of shutting down our Netherlands operations. There was AS11 adjustment for foreign currency loans on our books as rupee weakened. Initially, the hit had to be taken in the year of impact, but now according to the new modification, it would spread over three years. So this year would be the last when we need to write off on this count.
Then a crash in the stock market resulted in pension fund adjustment, for our UK and US-based subsidiaries. Beginning of this year, we have switched the adjustment to balance sheet. Most of these adjustments were non-cash, but had to be accounted for. So we had a strong and growing cashflow. But at net profit level, there was stagnation.

What are your plans for the soda ash and related business?
In terms of capacity addition in soda ash, it will mainly happen in the US, as it is the lowest cost producer. We are in the process of debottlenecking our unit in the US, which will add 100,000 tonne capacity. We are also looking at adding more capacity there. We continue to do minor debottlenecking across all our plants but major investments at Mithapur are centred on salt.
Till a few years back, you were a ‘soda ash company with couple of fertiliser plants’. Now you are fully present in farm inputs and have several consumer products. Where will Tata Chemicals be five years from now?
All our three segments would continue to grow, however, increasing proportion of revenues will come from consumer products and the farm segment. In industrial chemicals, we already are the second-largest globally, so we will continue growing at the industry growth rate of 5-6%. Certainly our focus will be on consumer facing as well as farm facing activities. Our biggest investments are also going in this direction.
The new products coming from our innovation centre would also play a big role. You will see us introducing more products that satisfy the needs of the homemaker. In future, we see this company playing a prime role in three areas such as food, energy and water. Our initiative in bio-fuels has not come into play so far. When I say water, it is not just drinking water. There is an even bigger challenge in agricultural water. As regards the industrial chemicals, it will continue to maintain global leadership position.

2010’s FASTEST-GROWING COMPANIES

BOTH Eucalyptus and Sal trees are sources of timber and other uses, but they don’t have equal standing. So are growth stocks. While the fast-growing eucalyptus is derided for being invasive water sucker and causing ecological imbalances, Sal, that take years to grow, preferred and even worshipped by some. With over 2,000 traded stocks and almost every company growing in the 9% economic growth, it becomes difficult to identify which one is sustainable and which one is not. In a bull market, good quarterly earnings numbers can keep pushing stocks up. But when the tide turns, as Warren Buffett said, investors will know ‘who has been swimming naked.’ ET Intelligence Group helps you find out a few steadily-growing companies that may not throw up some nasty surprises and also can generate healthy returns in 2011 and beyond.

SESA GOA
Although a number of events — such as 20% stake buy in Cairn India, Karnataka’s iron ore exports ban and logistic problem at Orissa — have hit Sesa Goa’s stock in the past few months, the company enjoys a sound financial and operating atmosphere. Sesa Goa’s production cuts in China, where it exports 70% of its output, due to energy norms and reduced government subsidy, appears discouraging. This has impacted its valuations, which at 9-10 times its annual earnings, are at a discount to its peers. Though its
short-term outlook remains bleak, an improvement in iron ore prices could be the next trigger for its earning growth.

KABRA EXTRUSIONTECHNIK
Kabra Extrusiontechnik is a domestic leader in extrusion machinery used for producing plastic pipes and packaging films. It has recently launched a new product to manufacture drip irrigation tube lines in collaboration with Drip Research Technology Services of the US. It is also planning to launch new high-speed multi-layer blown films plants by the end of FY11. The company has embarked on an investment plan of 85 crore, which will more than double its gross block by FY12. India’s plastic consumption is likely to double within the next six years from 8 million tonne in 2009. Industry experts believe that investment of nearly $10 billion would be required in the plastic processing industry to create the necessary capacity. This investment spree in the plastic processing industry will be a key growth driver for Kabra Extrusion’s machinery in future.

TITAN INDUSTRIES
Titan is India’s leading manufacturer of jewellery and
watches. Jewellery accounts for three-fourths of its sales and twothird of profits with watches accounting for the rest. In jewellery segment, the company has been able to grow higher than the industry, thanks to its well-established Tanishq brand. The company’s other two brands, ‘Gold Plus’ and ‘Zoya’, apart from its various relationship and loyalty programmes, enabled its strong performance during higher gold prices. The company has 60% share of India’s organised watch market and exports watches to 26 countries. It has also entered the business of eyewear. Leveraging its various brands, the company is also entering businesses of travel accessories. Considering its past success at establishing brands and its retail reach, these new initiatives can be expected to become success stories in going forward.

TATA SPONGE IRON
Tata Sponge Iron’s strong performance on the bourses was in tandem with its equally strong financial performance as its sales grew at a cumulative annualised rate of 23% over the past threes years and net profit at 82%. The company has no debt on its books. This gives financial flexibility for it in terms of capex plans. It procures iron ore from Tata Steel under a long-time pricing pact, while coal is either imported or sourced from Coal India. It has obtained 45% stake in a coal block in Orissa, where commercial operations are expected to begin in FY12. Besides, it is also set to double its captive power plant to 50 mw over the next few years. Both these factors will improve its profitability in future. Its stock fell as its September 2010 quarter numbers were affected by one-off items. Its valuations are cheaper compared to its peers such as Usha Martin and Monnet Ispat.

EXIDE INDUSTRIES
Exide Industries is growing on the back of the strong vehicle sales that improved its margins and enabled a double-digit growth in sales and profits in 2010. Being leader in power storage solutions business with a 70% market share, it also enjoys the pricing power enabling it to safeguard operating margins even in a downturn. Backward integration for inputs in the past few years, which accounts for 80% of total operational cost, has improved its operating margin to around 18%, which is higher than its peer group. With the expectation of rise in demand for automobiles, Exide is expected to post sustainable earnings in future. Rationalisation of cost through use of captive sourcing will further add to operating margins. So, investor with low-risk appetite and expectation of reasonable return can take exposure for at least 1-2 years.

HOW WE DID IT
WE checked five parameters for three consecutive years — debt-to-equity ratio, interest coverage ratio, return on capital employed, operating cash flows and dividend paying history — to select our sample. So all our companies hold a debt-equity ratio of below 1.5, interest coverage ratio of above 5, return on capital employed at above 15%, positive operating cashflows and a good dividend paying record for the past three years. After ensuring the fundamental soundness, we checked their growth numbers, for the past three years and also for the 12-month period ended September 2010. FAST FORWARD

VINATI ORGANICS
The specialty chemicals company Vinati Organics is the world’s largest producer of isobutyl benzene (IBB) — a key raw material for widely used anti-inflammatory drug ibuprofen — and second-largest producer of specialty monomer ATBS. The company has a number of further capex plans, including backward integration, to produce isobutylene raw material of ATBS and forward integration into polymerisation of ATBS. Similarly, it is setting up a plant to produce PAP, which is required for manufacturing of another widely-used drug paracetamol. However, delays in execution of these capex plans have resulted in a slowdown in growth of the company in the past three quarters.

OPTO CIRCUITS
Opto Circuits has been one of the fastest-growing companies in the healthcare sector. This export-oriented undertaking has been charting strong growth through sale of invasive cardiovascular and peripheral devices. Strong performance of Eurocor, its German subsidiary, and Criticare, US subsidiary, has also contributed to the company’s growth. Through its German acquisition, the company has been supplying the invasive devices across Europe and Asia at a lower cost. The invasive business segment is the long-term growth driver for the company. Opto commands premium valuations on the bourses, which are justifiable in view of the high growth prospects. Its stock is trading at a consolidated P/E of 16.5.

PAGE INDUSTRIES
Page Industries, which holds exclusive licence to manufacture and market Jockie brand of innerwear in India, has been one of the biggest beneficiaries of the growing consumerism and changing taste of Indian consumers. Its sales and profits have grown by over 33% in the past three years when compounded annually. It has grown its presence through multi-format retail stores across major cities in India. The company’s stock price has more than trebled since its listing in 2007, currently valued at P/E of over 33. Page’s higher stock valuation reflects its better margins and stronger growth.

(With contribution from Shikha Sharma, Jwalit Vyas, Ranjit Shinde, Abhineet Singh and Kiran Somvanshi)

ON FIRM GROUND

Over the past decade, commodities have evolved into a unique asset class that is difficult to ignore. The recent boom in the commodities markets has given rise to a new class of investors who bet singularly on price movements in commodities. Commodity prices tend to follow the cyclical pattern of underlying commodities which is why it is important to understand the demand-supply factors. Kiran Kabtta Somvanshi & Abhineet Singh help you find out the best commodities where you can invest this year.

Precious Metals
GOLD
The bull-run in the yellow metal, which has emerged as an intrinsic part of the portfolio of investors after a global financial crisis in 2008 is expected to continue in 2011. The ongoing uncertainty on the global economic front and growing investment demand to hedge risks strengthen the case for higher gold prices. Gold has provided returns of 25% in 2010 in the wake of the sovereign crisis in Greece and Ireland. The trend is likely to continue, given the weak economic scenario in other countries in the region. Although the US economy is expected to recover in the later half of 2011, the US dollar is expected to remain weak until then which could support higher gold demand.

SILVER
Silver has outperformed most commodities in 2010. It is expected to keep pace in 2011 as well. Silver has a higher industrial usage compared to gold. It is used in dentistry, photography, electronic motherboards and pharmaceuticals. Silver reserves are fewer than gold and are depleting faster. Unlike gold, silver is not recycled because of its much lower value. In a way silver is like petroleum – once consumed, it’s gone forever. Many analysts anticipate the gradual return of a more robust economy in 2011. As manufacturing and production increase, the industrial demand for silver should go up as well. The increased demand and limited supply may help the price of silver per ounce grow faster than gold in 2011. Base Metals

COPPER
Copper is expected to be the best performer among several other base metals due to a demandsupply mismatch. The launch of financial products with copper as the underlying, higher and weak dollar may lead to all-time high prices of copper in 2011. Copper inventories on the London Metal Exchange fell by 30% in 2010, marking a low since October 2009. According to the International Copper Study Group, there will be a deficit of 435,000 tonne in the metal in 2011. The introduction of an exchange-traded product with copper as the underlying will put added pressure on supply. All this indicates a boom time for copper.

ALUMINIUM
Aluminium has been trading in a tight range and is expected to remain in that range in 2011. While demand has improved, so has supply. But the price of the white metal could find support considering the rising risk appetite of commodity traders and a weaker US dollar. Gains, however, would also be capped due to increased supply. The downside risk for aluminium is limited since prices are already near the marginal cost of production in China due to the increased power tariff. The New Year can be the year of consolidation for aluminium with a slightly upward momentum. Agro Commodities

SUGAR
Sugar prices are likely to remain volatile for at least first three months of 2011, as the crushing season is yet to conclude in the top two producing nations Brazil and India. During the quarter ending December, sugar prices at 28 per a kilogram were favourable for the domestic market with a year-on-year increase of 10 %. It was due to the downward revision of sugar production by one million tonne to 24 metric tonnes for the current sugar season (October 2010-September 2011) against the consumption of 23 metric tonnes by recent industry estimates. International raw sugar prices have also inched up due to the 28% drop in sugarcane production in the current sugar season of 2010-11. In the long-term, the outlook for sugar prices looks promising as the next sugar season (October 2011 to September 2012) would be a deficit year again due to its cyclical nature.

SOY OIL
Soy oil was one of the best performing commodities in 2010. This agro commodity is likely to extend its gains during the better part of 2011. Soy oil futures on the Chicago Board of Trade in the US logged gains of 35% last year. Indian refined soy oil futures have also tracked international prices. Despite the bearish fundamentals of higher inventory in the domestic market, the bullish price outlook of the US soy crop and heavy buying from China and rising palm oil futures have provided a fillip to the prices of edible oil in the Indian futures market. The next sowing season in June 2011 will provide further price pointers. They are likely to remain firm until then.

Energy
CRUDE OIL
Global crude oil prices have moved in the range of $85-95 per barrel recently, after staying range-bound at $75-85 for nearly a year. Apart from the weaker US dollar, the demand recovery in the western countries — both due to economic recovery and a cold winter —contributed to this increase. The forecasts for economic growth as well as oil demand have been raised for 2011. Crude oil prices are expected to stay on a steady growth path in next few months provided the economic growth keeps pace with demand growth. A steep runup in prices is, however, unlikely, considering its impact on the still fragile recovery process across the world’s leading economies.