Diesel Subsidies Benefit the Haves More than Have-nots

Continuation of subsidies likely to put oil cos in a financial crisis and increase the burden on the govt

    Soaring diesel consumption by fleet owners, telecom companies to keep their towers running and malls to pamper their affluent customers is blowing up the theory that continuation of diesel subsidies is intended to help farmers and truckers in order to keep inflation low.
Diesel consumption is growing at a rapid pace that is lining the pockets of the business community rather than the government’s intention to help poor farmers and truck owners which are mostly individual businesses rather than companies.
The continued subsidy could lead IOC and HPCL to a financial crisis that will raise the burden on the government in future to save them from going bankrupt like its bailout for Air India.
“A good portion of the diesel subsidy is used by sectors where it is not intended to be spent,” said Debasish Mishra, senior director, Deloitte India. “Nearly . 8,000-crore subsidy is consumed by power generating sets in malls and big buildings while around . 3,000 crore of subsidy is spent in powering telecom towers.”
Nearly 16% of diesel is consumed by passenger vehicles, 4.6% by gensets and 2% by mobile towers, translating into a likely subsidy of . 23,000 crore for this fiscal, a calculation by ETIG shows. In the April-July 2012 period, India’s diesel consumption grew 10.9%, although the total petroleum consumption was up just 6.2% underlining the overall trend of economy’s dieselisation. The Indian petroleum industry is set to suffer under-recoveries exceeding . 1-lakh crore on diesel alone for FY13.
Continuation of diesel subsidies has become sensitive for investors and the political class as it is creating a crater in the government’s finances where fuel subsidies are set to touch a record high this year.
Subsidies, intended to keep the cost of operations low for farmers and truckers, are being enjoyed by the rich who drive around utility vehicles produced by Mahindra & Mahindra and Toyota Kirlostar, the top-selling models. There have been many recommendations, including one by the Kirit Parikh Committee, to free up fuel prices.
“The increase in under-recoveries can also be attributed to increased consumption of regulated fuels like diesel by private car owners due to a significant difference in prices compared to other alternate fuels like petrol,” says Rahul Prithiani of ratings firm Crisil.. “The difference between the running cost for a petrol car vis-à-vis a diesel car has gone up by nearly 85% in the past 7-8 years. Therefore, diesel cars have become more lucrative for buyers.”
The proportion of diesel cars in total car sales has increased to 38% in 2012, from 20% in 2006, which has pushed up the share of diesel in the overall petroleum product consumption to 44%, from 36%. Policymakers have been debating about many ways to continue with subsidies and eliminating the undeserving from benefiting because of the scheme. “In India, nearly 80% of diesel sales happen through retail outlets,” says a director at Petroleum Planning and Analysis Cell under the petroleum ministry, who did not want to be identified. “There has been no tracking mechanism to check the final usage of diesel sold through petrol pumps. The estimates we have are based on dealer feedback. Still, there is no doubt that the diesel consumption is growing in areas where subsidies are not justified. We plan to conduct a scientific study over the next one year to establish the consumption pattern with more clarity.”
But the damage to the country’s fiscal position and oil companies’ finances may well be done before a mechanism is evolved.
The under-recovery on diesel — the shortfall between the domestic price and what it would have cost to import — contributed to merely 44% of the industry’s overall under-recovery in fiscal 2011, but rose to 58% in the following year. In the first half of this year, it was at 60.7%. Oil companies are losing . 13.76 per litre on diesel.
If things continue at the same rate, the under-recoveries on diesel alone will cross . 1-lakh crore for FY13, provided the year’s consumption volumes stay restricted to the projected figure of 68.5 million tonne. If the diesel consumption maintains at the 10.9% growth rate seen in the April-July 2012 period till the year end, this figure may cross . 115,000 crore, according to ETIG estimates.
If the subsidies are not ended, it is trouble for the government.
“The government will be left with no option but to borrow additional funds to compensate OMCs during the year, thereby adversely impacting the government’s fiscal position, assuming other factors remain constant,” says Crisil. “This, in turn, could exert further upward pressure on interest rates and will also limit the government’s ability to fund critical social and infrastructure projects.”

High Debt, Refinance Cost Add to Aban Stress

Even after five years of its highly leveraged buyout of Sinvest, debt-laden Aban Offshore is not fully out of 
the woods yet as its operating cash flows fall short of its debt repayments. The company actually ended FY12 with higher debt compared to the year-ago period, according to its consolidated balance sheet. In the background of a tepid June ’12 quarter, some action towards deleveraging or higher charter rates for its rigs will boost the scrip.
While Aban Offshore has brought down its debt-equity ratio from 20.4 at FY07 end, it still remains high at 4.1 at March ’12 end. The company has been paying more than half of its EBITDA towards interest on loans ever since. Heavy interest outgo means the company has less cash left to repay its debts. This means it needs to refinance its maturing debt by raising more debt. Aban’s consolidated debt grew 16% y-o-y to . 11,701 crore.
Higher cost of refinancing has also taken its toll on Aban’s financial performance as its interest charge at . 312 crore increased 42.8% yo-y. Emkay’s report on the quarterly results mentioned higher coupon rate for Aban’s refinanced bond issues — first bond issued at a coupon rate of 12% and the second bond redemption at a coupon of 14.25% vs earlier 9.3% — as a key reason. The net profit for the quarter was down 41.1% to . 52.1 crore.
The company is hoping for external commercial borrowings to refinance its domestic loans at substantially lower rates. Similarly, it has enabled its board to raise up to $400 million by issuing equity or quasi-equity instruments. However, considering the current market conditions, this is unlikely to mean much.
Now, a lot will depend on the company’s ability to secure long-term deals for rigs, improve utilisation rates and ensuring higher rates. Its FY12 show remained subdued as three of its vessels remained off-stream for an upgrade.
The company appears optimistic about its future. “We expect to have all our rigs deployed through FY13 (except FPU Tahara) at relatively attractive rates across fairly long tenures, which should translate into revenue and profit predictability,” said its MD Reji Abraham in the annual report. 

Specialty Chem Stocks Rise up to 60% in a Yr

    India’s specialty chemicals companies have generated returns ranging from 10% to 60% over the last one year, when the BSE Mid-cap and Small-cap indices have given negative returns and the benchmark Sensex generated barely 3% returns.
The specialty chemicals segment benefits from the fact that unlike commodity chemicals, they are not exposed to profit volatility.
Not all companies can be equally agile in launching new products, but unveiling a specialised product in which the scale of operations can be built is good enough to help them remain ahead of the pack.
For instance, Mumbai-based Vinati Organics has emerged as the world’s biggest manufacturer of IBB — a specialty chemical used in the manufacture of anti-inflammatory drug ibuprofen — and the second biggest manufacturer of ATBS — a monomer used in the petroleum industry to secure crude oil out of deep wells. Similarly, Camlin Fine Sciences has emerged as a major player in food anti-oxidants, a segment in which it wants to grow capacities further.
The benefits of specialty chemicals are also luring traditional bulk chemical makers. Gujarat-based Atul Limited, a colorants and agrochemicals company, recently commissioned the world’s biggest plant to manufacture p-Cresol — a specialty chemical used in the fragrance and personal care industry.
Down South, Thirumalai Chemicals, a traditional supplier of phthalic anhydride to the paint industry with a plant near Chennai, has ventured into this segment by making food acids. It is now one of the world’s top four producers of malic acid with a capacity of over 6,000 tonnes. “Malic acid is naturally found in apple and is better than citric or tartaric acid as a food additive. We are now the only producer in
    Asia,” says R Parthasarathy, MD, Thirumalai Chemicals. The specialty chemicals business is driven by specialised assets and knowledgebased applications that make it more complex and provide higher and more stable margins, says Rajendra Gogri, vice-chairman and MD of Aarti Industries.
“Thanks to our robust research and development, we come out with three to four new molecules every quarter. Often our products are new to the Indian market. Our strategy is to avoid such products which even others can make,” says Pravin Herlekar, CMD, Omkar Specialty Chemicals. The investment scenario may be bleak, but that has not taken the sheen off the specialty chemical industry. FDI into this sector was among the highest in 2011-12, says Kumar Kandaswamy, senior director, Deloitte Touche Tohmatsu India, according to whose estimates $7 billion of foreign flows have come in already.
Even local firms are investing heavily. Omkar Specialty has outlined .100 crore of investments over the next two years, more than tripling its gross block. Similarly, Atul is planning to expand p-Cresol capacity within months of commissioning it. Tata Strategic Management Group’s chemical and energy practice head Manish Panchal says, “Substantially lower penetration, increasing globalisation and higher disposable income are fuelling growth of end-user industries. This industry is expected to grow at 13-17% over the next five years.” Deloitte’s Kandaswamy also projects a 14% growth over the next five years for the sector. The industry is also benefiting from macro-economic trends. “In the last few months, depreciation of the rupee, appreciation of the yuan and increase in production cost in China have helped Indian companies to garner more market share. These firms are likely to continue outperforming in the next one year,” Sunil Jain, head of equity research – retail, Nirmal Bang Securities, said. 

Worst may be over for Essar Oil, but Debt a Worry

Refining company Essar Oil’s profit numbers for the quarter to June was one of the worst in its history. But the worst appears over for the company. That is because of the capacity expansion which has been completed and significantly improves its ability to earn higher margins, a signal perhaps that this could well be the last loss-making quarter for the company. Its huge debt pile remains a major hurdle now, but recent events indicate some improvement on that front. So far, the company had a history of mostly losses and mounting debt as long delays in project execution led to it missing the bull run in the refining industry, cost escalations and the recent trouble with Gujarat over the state’s refusal to extend sales tax benefit hit it hard. However, it has successfully completed its planned capital expenditure taking its refinery capacity to 20 million tonne annually and a complexity level to match that of the local big daddy — Reliance.
The refinery’s improved complexity — a trade terminology which measures the ability to convert worse types of crude oils to make better grades of fuels — will prove a key to better margins and help it remain profitable even during the down cycle. It is confident of earning $7-8 on each barrel extra over the benchmark Singapore refinery margins calculated by the International Energy Agency.
The losses it incurred during the Jun ’12 quarter were due to the stabilisation period that its newly commissioned units needed. And the company has not wasted any time in making full use of its facilities. Essar Oil's MD and CEO, LK Gupta said that the company was now operating the refinery at 20 MTPA, which is its rated capacity. “The losses through the April-June ’12 quarter were mainly attributable to inventory losses of . 700 crore as global oil prices crashed. The rupee depreciation led to a loss of around . 150-200 crore, while interest and depreciation jumped on projects commissioning,” said CFO Suresh Jain. The company’s recent exit from the CDR mechanism and its ability to arrange $1 billion worth of loans to pay Gujarat as sales tax dues underline the credibility of the company’s future cash generation. The stock, although volatile, has not fallen much in 2012. These facts support the overall positive view on the company’s future. 

ONGC Oil: Find a Big Boost, But Subsidy a Worry

After years of production stagnation, ONGC’s huge new discovery in western offshore is something that can really end its production woes. Since the full benefit of this incremental production will come in FY14 and there are other discoveries set to begin production in FY15 and onwards, the current fiscal could very well be the last year of stagnating production for the oil behemoth.
Along with the June 2012 quarter results, ONGC also announced discovery of an additional reservoir in an already producing D1 field in western offshore. Since the field is already producing, the new discovery can be quickly put to production. The output expected jump will add nearly 1.15 mt to ONGC’s annual production, which is 4.8% of its FY12 production at the standalone level. This will be a very big moment for the company, which has seen its production steadily fall from 26.05 million tonne in FY07 to 23.71 million tonne in FY12 – a decline of nearly 2% annually. Its woes seem to exacerbate in the first quarter of FY13, with the production falling 4.9% to 5.64 million tonne. It was surprising for ONGC to post a resounding 48% jump in profit for the June 2012 quarter. Not just that its production was down, the company also had to bear a bigger burden of subsidies while the average international oil prices were down.
The profit rise was made possible by a heavily-depreciated rupee. ONGC’s net realisation – what it is allowed to retain after giving mandatory discounts to oil marketing companies – was 16% higher at . 2,527 per barrel, although in dollar terms it fell 4.4% to $46.62. For the quarter, the company extended discounts of . 12,346 crore – . 300 crore more than what it gave in the June ’11 quarter. Similarly, its overall expenses were up nearly . 1,200 crore from the year-ago period due to oil cess. With oil prices risng and the outlook positive for ONGC’s production, its future should be considered bright, barring for one thing – its share in petroleum sector under-recoveries. The government’s limited ability to fund these losses and a lack of political will would raise retail fuel prices, a rising proportion of this burden could be transferred to the upstream firms like ONGC. Due to uncertainty over this key matter, market’s reaction to ONGC’s strong results and the new discovery should remain muted. 

KEY POINTS The expected jump in production will add nearly 1.15 mt to ONGC’s annual production
It’s surprising for ONGC to post a resounding 48% jump in profit for the June 2012 quarter

INDIAN OIL: Losses to Take the Sheen Off Navratna Co

The country’s biggest petro-retailer, Indian Oil, posted its largest-ever quarterly loss in the June 2012 quarter on heavy under-recoveries, inventory as well as forex losses. This loss has also wiped out nearly 40% of the company’s net worth at the end of FY12. If things don’t change fast, the Navratna PSU will end up as a sick company with negative net worth is another two quarters.
Indian Oil’s net loss for the June quarter was an unprecedented . 22,451 crore — a six-fold increase from the year-ago level of losses. This erased all the profits it had made over the last three years — . 4,226 crore in FY12, . 7,831 crore in FY11 and . 10,713 crore in FY10.
The company lost over . 17,485 crore by selling diesel, LPG and kerosene at government-regulated prices that are way below the cost, becoming the biggest factor for the company’s huge net loss in the June quarter. The loss could have been higher had it not been for the discounts of . 8,041 crore that the upstream companies like ONGC, Oil India and Gail extended. The fall in crude oil prices towards end June might have helped the company reduce its under-recoveries, but they knocked . 4,062 crore off its inventory value, which was worth $7.54 per barrel. Since this was significantly higher than the company’s gross refining margins (GRM) for the quarter, it posted a negative GRM of $4.81 per barrel. On top of these two mega-losses, the company also took a . 3,187-crore hit on foreign exchange as rupee depreciated over 11% through the quarter.

Growth Prospects Bright but Diverse Play a Valuation Hurdle for Aditya Birla Nuvo

A strong show by telecom firm Idea and also smaller segments such as financial services, rayon yarn and BPO & IT enabled Aditya Birla Nuvo (ABNL) to post a 5% growth in the quarter to June. The performance of the carbon black, fertilisers, garments and insulators segments were dismal due to various reasons.
For ABNL, the telecom subsidiary, Idea, represents its single-largest business segment, accounting for 26% of its consolidated revenues and 29.1% of its preinterest-and-tax profits (PBIT) in the quarter. A strong performance in this segment was the key positive for ABNL’s consolidated performance.
ABNL’s second-biggest segment, financial services, also did reasonably well although the revenues from its insurance business slipped 4.6% to . 1,088.4 crore yo-y. Other financial services performed better with a 46.5% revenue growth at . 229.8 crore, while the segment’s profits more than doubled to . 35 crore. This was supported by Aditya Birla Money’s growing market share in retail cash equity broking, which rose from 1% a year ago to 1.5%, and in commodity broking, which grew from 0.28% to 0.44%. Similarly, Aditya Birla Finance’s loan book more than doubled to . 4,250 crore from a year ago. The company’s smaller divisions such as rayon yarn and textiles did well as raw material costs softened while realisations improved. Profit of the BPO and IT segment more than doubled to . 19 crore on faster order book conversion and due to a weak rupee. The carbon black and insulators businesses were the worst hit as sales volumes dropped y-o-y due to dumping from China. The fertiliser segment’s performance was dismal due to a 20-day planned maintenance shutdown in its urea plant. Aditya Birla Nuvo trades at 9.9 times its 12-month trailing profits. This valuation is more in line with its commodity chemical and fertiliser businesses than the telecom or financial services businesses, which should command a better multiple. Although the company’s growth prospects appear promising, its presence across several industries will hamper its valuations.

It All Doubles Up

The investment scenario is gloomy with equity markets stagnating across the globe. India is no exception. Be it the poor monsoon, weak economic numbers, policy paralysis or a dispirited results season, investors have had little to cheer about so far. However, there are some winners in the quarterly show — companies that have more than doubled their profits. ET Intelligence Group checks out some of these stars to determine if their stellar performance makes them eligible to be part of your portfolio

    Although the overall results season has not been exciting so far, there have been a number of companies which have done substantially well. This doesn't mean just 50-60% profit growth. These companies have more than doubled their profits from the year ago level. A few have posted strong profit figures after reporting several continuous quarters of losses. We believe identifying and presenting such sparkling performances is important to investors as it offers a view on investment opportunities rather than academic number crunching on India Inc's overall results. Out of the 1,000 companies that have published quarterly results in July, we have chosen a dozen whose profit figures have more than doubled. In many cases some rode the wave higher than others when certain trends benefited their entire sector. In other cases profitability of the companies has shot up regardless of how their peers have performed.
When it comes to the entire sector gaining, a number of mid-size IT companies have come out with strong numbers although bigger players like Infosys and Wipro have disappointed. Cement players have also posted healthy profit growth for the June 2012 quarter on higher volumes and realisations. Similarly, lower rubber prices have benefited the tyre industry.
Another common theme running across most of these winners is the healthy gains they have made on overseas operations or substantial exports thanks to a weaker rupee.
Investors may have already noticed the spurt in the share prices of these companies after the results announcements. However, it is difficult for most to decide what they should do with such companies now. Was it just some one-off event that boosted the company's performance and should one use the rise in the share price to exit? Does the strong jump in profits mark a turnaround quarter and should one buy more shares? Or has the share price surge made the company expensive once again and there is nothing more to gain. ET Intelligence Group analyses the performance of the dazzling dozen to find out the answers. 

JP POWER VENTURES 
Jaiprakash Power Ventures' profit jumped by 163% in the June quarter as it benefited from its 1,200 MW Karcham Wangtoo project (KWP) that had become operational last May and thus contributed for only 45 days in the June quarter last year, apart from lower tax.
The company sold most of the power generated from this project in the merchant market (which provides higher selling price per unit) than through long-term agreements. The company has two other operational plants —BASPA II (300 MW) and Vishnuprayag (400 MW).
In the current fiscal, the company will benefit fully from its KWP project (last year it was operational for 10 months.) Besides, the company will add another 500 MW of capacity with its Bina project expected to commission in the third quarter. However, generation will be partly impacted by the weaker monsoon.
Despite the doubling of profit, the company's stock has corrected 10% in last one month and is trading close to its 52-week low. There is not much downside risk, but the upside is also limited. Investor's should avoid this stock.

MRF Profits for tyre manufacturer MRF have more than doubled during the June quarter, though on a lower base. The fall in rubber prices has lowered operating costs for the company. As a result it was able to improve margins over the past two quarters. In the June quarter, operating profit margin increased from 6.4% to 11% year-on-year. This was on the back of a 17% increase in sales to 3,006 crore. Lower rubber prices will continue to work in the company's favour. At the same time, the slowdown in vehicle sales and cutback in OEM demand is a concern.
At the current market price, the stock trades at 9.4 times its trailing twelve-month earnings, which is at a discount to its competitor Apollo Tyre which trades at 10 times. Long-term investors can accumulate the stock on account of sustained growth.

MINDTREE 
Mid-tier IT exporter MindTree has staged a strong recovery over the last four quarters. The company reported double-digit net profit growth on a sequential basis in each of the last four quarters boosted by robust demand.
In the June quarter, its net profit rose by 157% to 89 crore from the year ago. Increase in revenue from top five clients and favourable rupee-dollar movement were the main factors for the robust show. After adding just six clients in the March 2012 quarter, the company reported 19 additions in the June quarter, which reflects visibility of future revenue growth. Considering the traction, MindTree is expected to perform well in the coming quarters. But it needs to be noted that the currency movement will play a crucial role in the extent of growth. Investors with a horizon of over two years can consider the stock.

KPIT CUMMINS 
Past acquisitions have turned favourable for Pune-headquartered KPIT Cummins. The tier-2 IT player that offers product engineering and enterprise solutions to global clients has posted a strong double-digit sequential growth in each of the four quarters to June 2012.
The company has acquired three companies in the last two years. After taking over Germanybased In2Soft and US-based CPG Solutions in FY11, it acquired Systime, an enterprise services provider from India in June 2012. The inorganic strategy has started paying off for the company as the acquisitions helped to improve its presence in the manufacturing and energy verticals across geographies.
The company has shown a sustained trend in client additions over the last few quarters. The momentum is expected to continue in the near future. The company reported cash equivalents of 195 crore as of June. This can be put to use for further inorganic expansion. The stock can be accumulated with a long-term horizon.

TATA COFFEE Tata Coffee, a subsidiary of Tata Global Beverages, is one of the leading exporters of coffee from India. The jump in profits of its US subsidiary Eight O'Clock boosted the company's bottom line in the June quarter making it the best in the last six quarters. With the international business contributing 64% to the company's total revenues, the depreciation of rupee helped boost realisations.
The company's US business, which earlier was under stress due to high raw material costs, posted a net profit of $1.43 million in the June quarter against $0.17 million in the corresponding quarter last year. Profit performance of this business will remain critical for Tata Coffee's overall growth.
The company's agreement with US-based Starbucks to supply roasted coffee beans to its retail outlets in India as well as overseas is a key growth driver. The outlook for coffee prices remains positive for this year, which augurs well for this plantation company.
The company's stock has already run up by 26% in 2012 so far. Although the growth momentum is likely to continue in the coming quarters investors should be wary of high valuations.

BLUE STAR 
Ending its sequential loss-making streak of the past three quarters, Blue Star's net profit more than doubled for the June quarter. With the company having kept its costs in check, especially that of raw material, operating margins improved marginally by about 70 basis points y-o-y. At 73.7%, Blue Star's material cost as a percentage to sales was the lowest in the last two years.
The gradual improvement in the company's profitability has attracted the interest of institutional investors. Mutual fund shareholding in the company has moved up from below 10% in the June 2011 quarter to over 12.2% now. The FII shareholding, which was declining between June and December 2011, has also increased to over 7.1% now. With the company's stock having lost over 30% in the last one year, long-term investors should start accumulating, especially since its financial performance is showing signs of a turnaround.

SPICEJET 
After losses in five consecutive quarters, SpiceJet has bounced back with an encouraging performance in the June 2012 quarter. Even after excluding one-time income on sale and leaseback of aircraft ( 39 crore) and claims of engine warranty ( 12.9 crore), it still made profits.
This strong financial performance was helped by a 26% growth in its passenger traffic, which enhanced its revenue per passenger to 4,068 from 3,283 in the year-ago period.
The company has a market share of 18.6% while Indigo Airlines has a 27.4% share and Jet Airways India is at 26%. One fourth of the company's 47 aircraft are Bombardier, which have a capacity for close to 80 passengers. This will help it focus on regional connectivity. 
The company recently got approval to fly to the Gulf and Southeast Asia. It will fly 49 flights, which lesser than its peers Indigo and Jet. Although its balance sheet is one of the best in the industry, the need to fly more international flights may lead to more aircraft purchases and strain the balance sheet. Investors should hold this scrip, particularly because approval to directly import fuel is saving it costs and the possibility of FDI being allowed in the industry will be a booster.

JK LAKSHMI CEMENT 
A 23% year-on-year growth in volumes helped drive a 36% rise in JK Lakshmi Cement's net sales in the June quarter. Average realisations were around 11% higher against the year-ago period, which boosted its operating profit margins by 300 basis points to 22.9%. This was also helped by high capacity utilisation and improved operational efficiencies.
The company's new 2.7-million tonne per annum plant in Chhattisgarh will commence operations later this fiscal. This will enable it increase volumes when demand grows ahead of assembly elections in FY13 and FY14. It will also take total capacity to 8.1 MT with 90% sales in the northern and western regions, which saw a demand growth of 14% as against the industry average of 7%. Its client base including L&T, Reliance, Airport Authority of India and Essar and involvement in big projects of the like of Golden Quadrilateral and Sardar Sarovar are strong growth drivers. The company's broad product portfolio and expansion plans are expected to help it sustain its growth story in the coming quarters. The company's valuations don't appear expensive. Long-term investors should accumulate.

DEVELOPMENT CREDIT BANK 
Net profit more than doubled for Development Credit Bank (DCB) from 8.8 crore in June 2011 quarter to 18.9 crore this time. The growth was driven by a 23% rise in net interest income, which is the difference between interest earned and interest paid, as well as lower provisioning. The bank has over the past four quarters been lowering provisions — a sign that it is managing its assets better. The improvement in its asset quality has also been reflected in the decline in the percentage of non-performing assets to total advances (net) from 1.19% in the June 2011 quarter to 0.75% in June 2012. The bank has also improved its net interest margin from 3.10% in June 2011 to 3.18% now. It has also become more cost efficient in its operations as seen in the fall in its cost to income ratio from 78.07% in June 2011 to 72.85%. Investors should accumulate.

ATUL Chemical maker Atul's net profit more than doubled in the June quarter — the second consecutive quarter in which its profit has doubled. The company has steadily improved its capacity utilisations and moved up the value chain to make specialty chemicals.
During the June quarter, Atul's operating profit margin improved 350 basis points from the yearago period to 13.5%, which helped its operating profits grow 65% although net sales grew a modest 22.8%. A forex gain of 5.6 crore boosted other income, which was almost 10-fold up from the year ago. This helped the company to absorb the 69% jump in interest costs and still double its profits. Even though the scrip has more than doubled in 2012 so far, its valuations don't appear expensive. Long-term investors would do well to accumulate. For a detailed report on Atul, please check out the Stock Idea on Page 2.

DISHMAN PHARMA 
Ahmedabad-based contract manufacturing and research services company Dishman Pharma's June quarter performance was largely influenced by the strong performance of its overseas subsidiaries — Carbogen Amicis and Dishman Netherlands. However, the company's domestic operations posted a drop in revenues and net profit due to a delay in starting production of vitamin D3 and the absence of orders from a major client - Abbott Laboratories.
In view of its volatile performance in the past, sustaining this growth momentum is critical for the company. Commissioning of the Vitamin D3 facility, overseas operations coming back on track and resumption of orders from Abbott are likely to help it meet targeted revenues of 1,250 crore in FY13 — 9.6% higher than FY12 and an EBDITA margin of 21%. The company's debt as on June 30th stood at 850 crore which makes deleveraging a priority. After falling from 264 to 36 in the two years from 2010, Dishman's stock has doubled in 2012. Investors can accumulate the stock, but need to be wary of any signs of volatility in the company's performance.

THIRUMALAI CHEMICALS 
The spurt in the June quarter profits at Thirumalai Chemicals came on the back of years of subdued performance. The stock has gained over 35% since the results.
The rise in profits is a result of measures the company has taken in the last few months to improve cost efficiency, capacity utilisation and competitiveness. A safeguard duty of 10% imposed in January 2012 on its key product phthalic anhydride also helped. Its loss-making subsidiary in Malaysia also turned around. The company is expanding its specialty chemicals division, which should help to improve overall margins.
Although the company cannot be expected to repeat its June quarter profit figure in the coming quarters, its FY13 profits should remain significantly above the FY12 numbers. The company's valuations are still inexpensive. Investors should buy into the scrip with a one-year horizon.

PETROLEUM: Lack of Reforms, High Global Crude Prices to Up Subsidy Bill

The Indian petroleum sector continues to suffer from a lack of policy reforms that are piling up the subsidy bill as global crude oil prices stay above $100 per barrel and the rupee stays weak near 56 against the dollar. The subsidy bill has already reached an estimated 47,811 crore for the June 2012 quarter and would touch the highest-ever annual figure of 1,50,000 crore for FY13.
The biggest item on the subsidy bill is diesel, where the retailers are suffering under-recovery of almost 12.1 per litre now. This is down from an average per litre discount of 13.2 in the April-June quarter, but still very high. As diesel prices have been artificially maintained low for a prolonged period its demand has started growing substantially in 2012. The petroleum ministry's research wing, Petroleum Planning and Analysis Cell (PPAC), reported recently that diesel, which was earlier replacing just petrol and fuel oil, has now started substituting CNG as well. The country's petroleum consumption pattern is thus getting distorted in favour of cheap diesel. In the Delhi region, the price gap between a kg of CNG and a litre of diesel, which was 8.45 a year back, has narrowed to below 3 influencing the preference of new car buyers. According to PPAC, India's petroleum consumption increased 4.9% in FY12 to 148 million tonne. Diesel alone represented 67% of the additional volumes for the entire year. Even in the first three months of FY13, diesel demand has grown nearly 10% year-onyear. Diesel represented over 58% of the petroleum sector's total under-recoveries in FY12, which moved up to 60.7%in June ’12 quarter. The fast-growing consumption of this heavily subsidised fuel could increase the ultimate burden on the exchequer. On the other hand, India's petroleum production continues to stagnate. For the first quarter of FY13, oil production at 9.53 million tonne was 2.3% below target and 0.5% below the year-ago level. Natural gas production during the quarter at 10.86 billion cubic metres also was down 11.1% against the year-ago period.
As domestic demand grows and production stagnates India's dependence on imports is growing. For the June quarter, the country's petroleum imports - net of exports and excluding LNG - are up around 5.6% against the yearago period at 33.3 million tonne. However, the import bill is up nearly 23.5% at 1,35,224 crore. This has proven to be a key factor in weakening the rupee's value. In a positive step, the petroleum ministry has come out with the draft shale gas exploration policy and is inviting comments on the same. However, unless some structural reforms are introduced the industry as well as the government's budget will continue to suffer.

ATUL: Steady Growth in Revenues, Margins to Boost Profits

Inexpensive valuations, steady growth plans, improving margins and healthy financial numbers make Atul Limited a good long-term investment. Promoters raising their stake steadily adds to its attractiveness. 

BUSINESS Gujarat-based Atul is a Lalbhai group company manufacturing various types of chemicals such as agrochemicals, pharmaceuticals, dyestuff, epoxy resins and colorants. It also makes intermediate chemicals needed by various sectors like aromatics, cosmetics, construction, paints, textiles, polymers etc. 

GROWTH DRIVERS With rising demand for most of its products the company is looking at growing over 15% annually and aims to cross the 2,500-crore turnover mark in FY14.
The company's FY12 performance was dull as it couldn't fully pass on higher raw material costs. Forex fluctuations and interest costs also hurt, and fixed costs were higher. However, the impact of these factors is seen receding in FY13 and with incremental revenues profitability should take a boost. This was visible in its March and June 2012 quarters when profits more than doubled on modest sales growth.
The company is gradually growing its portfolio of value-added specialty chemicals in its portfolio, which earn better margins. During FY12, aromatics and pharmaceuticals — APIs and intermediates — were the fastest-growing businesses.
The company is expanding its capacity of para-cresol, a key product under the aromatics division, which can double the segment's turnover in FY13. 

FINANCIALS Atul's turnover has increased at a cumulative annualised growth rate (CAGR) of 14% in last five years while pre-tax profit has grown at a CAGR of 36%.
The company's return on capital employed has improved from 9.3% in FY08 to 27% in FY12. Its debt-equity ratio has been steadily declining in last few years and was 0.3 at FY12 end. It has steadily expanded its operating profit margins to 13.5% in June 2012 quarter. The company's promoters have consistently raised their stake over last three years from 39.43% in March 2009 to 50.21% at end June 2012. 

VALUATIONS The scrip is being valued at 8 times its profits for the trailing 12 months and 1.5 times its book value. This is in line with other comparable chemical companies like Sudarshan Chemicals, Aarti Industries etc.

GAIL INDIA: Subsidy Uncertainty, Low Volumes a Worry

The rise in Gail India’s June quarter net profit beat market expectations, though it was mainly on account of a relatively lower subsidy burden. The dwindling gas volumes remain a worrying factor given the unpredictability of future subsidies and the interest cost on aggressive capital expenditure. Gail’s net profit grew 15% to . 1,133.8 crore in the June quarter while its subsidy share stood at . 700 crore. The upstream share of subsidy (contributed by ONGC, Oil India and Gail) is down to 31.5% of the total under-recoveries of the industry in the June quarter from 40% in March. The other positive was higher marketing margins on spot LNG sales.
Its natural gas trading business reported a 28.3% jump yo-y in revenues and a 58.3% spurt in EBIT in the June quarter. The segment’s margins gained 110 basis points to 5.4%. However, Gail’s natural gas sales dropped 6.1% to 109.8 mmscmd from the yearago quarter, while traded volumes were 1.6% down at 83 mmscmd. Similarly, it reported a 25% drop in production of polymers at 66,000 tonnes, while the production of LPG & other hydrocarbons was down 7.7% at 322,000 tonnes.
While these statistics show a weakness in Gail’s core business, aggressive capex plans are adding to costs. The interest burden has jumped 183% to . 58.8 crore y-o-y.
The advent of natural gas regulator PNGRB also adds to the operational uncertainties faced by Gail. Earlier this July, PNGRB slashed transmission tariff for Dadri-Bawana-Nangal pipeline by 57% to . 11.85 per mmBtu. Such moves can reduce its return on capital employed in its upcoming pipelines as well.
Dwindling domestic natural gas production is expected to keep the growth in natural gas transmission low. For FY13, it has kept its target at 120 mmscmd, unchanged from last year. The scrip now trades at a P/E of 11.9, which may be seen as inexpensive considering its historical valuations.
However, there are concerns regarding the uncertainty over the subsidy burden and stagnating core business, which will continue to weigh on its valuations.