IOC, BPCL & HPCL: Govt bailout to decide oil cos’ future course

THE results of India’s three state-owned oil marketing companies (OMCs) IndianOil, BPCL and HPCL were below market expectations for the September 2009 quarter as the government did not fully compensate them for selling fuel below cost.
The three OMCs trimmed their losses substantially to just Rs 11 crore for the September quarter compared to the astronomical loss of Rs 12,891 crore they had together posted in the year-ago period.
IOC, HPCL and BPCL, which had received special oil bonds worth of Rs 20,559 crore in the September quarter last year, did not receive any bonds this September. The players were fully compensated for their under-recoveries last year despite extreme volatility, but now they will have to wait for a bailout in the second half of FY10. These companies had several things going for them during the September 2009 quarter. Firstly, retail auto fuel prices were revised upwards at the start of the quarter. Similarly, the three players booked a total of Rs 67 crore as forex gains during the quarter as against a loss of Rs 2,947 crore in the corresponding quarter of previous year. Reduced working capital requirements due to lower prices as well as lower interest rates resulted in the three companies saving nearly 58% of their interest costs or nearly Rs 1,200 crore compared to the year ago period.
IndianOil posted a small profit for the quarter mainly due to its growing petrochemicals business. For the smallest among the three — HPCL this was the fifth loss in the preceding eight quarters. The discounts extended by ONGC, OIL and Gail at Rs 3,442 crore also were lower by 76.5% y-o-y. Besides the lower discounts and non-issuance of oil bonds, the poor refining scenario hit the industry, which saw gross refining margins erode sequentially. All three companies registered a fall in margins in the September quarter vis-à-vis the June 2009 quarter. The profit of the players was also impacted due to the fall of close to 2.5% in their refinery production to a total 21.4 million tonne (MMT) for the quarter, as all three companies produced less compared to the year ago period.The future prospects of these three companies hinge on how the government decides to compensate them. All the companies have ongoing long-term capital expenditure plans and badly need visibility on future earnings for their funding.

RELIANCE: Petrochem,oil & gas are the ones to watch out

DESPITE doubling the refinery capacity and commissioning of natural gas production, India’s largest private sector company Reliance Industries posted a 6% dip in its net profit to Rs 3,852 crore in the September 2009 quarter. However, the new businesses took the company’s gross profit and pre-tax profit to their highest-ever levels, only to be hampered by a rise in depreciation due to new projects going live and MAT-induced tax.
Although its refinery throughput nearly doubled over the yearago period, the profits from refining halved, denting the company’s bottomline, which could not be repaired by higher margins in the petrochemical business and doubling of oil & gas profits. Global oversupply of refined products on the one hand and a crash in the differential between best and worst quality crude oils resulted in pressure on RIL’s refining margins. RIL’s refineries are better-equipped to process the worst quality crude oil, which have traditionally been available at a significant discount to the best quality ones, thereby earning a better margin compared to peers. RIL’s gross refining margins (GRM) dipped to $6 per barrel, the lowest in at least five years.
The company’s petrochemicals business, however, did much better against the market expectations, showing margin growth and recording its highest-ever quarterly profit in history at Rs 2,195 crore. Strong domestic demand and an 11% depreciation in rupee value against the year-ago period helped the company improve its realisations. RIL’s sales from petrochemicals business fell 14% despite a 8% y-o-y growth in volumes due to overall lower prices.
The oil & gas segment of the company, which is fast gaining prominence with growing gas volumes from KG basin fields, reported a three-fold rise in sales. Still, an erosion in margin resulted in restricting the profit growth at 90% y-o-y at Rs 1,226 crore.
Going forward, the ramping up of KG basin gas will keep propping up the company’s profitability while the refining business continues to suffer. The petrochemical business, too, is likely to witness increasing margin pressure over the next 2-3 quarters. However, the company would be able to reap full benefits of its expanded capacities once these cyclical businesses see an upturn.

ONGC: Natural gas price revision long overdue

RECOVERING from four consecutive quarters of profit fall, ONGC reported a marginal net profit growth of 6% for the September 2009 quarter taking its quarterly profit beyond Rs 5,000 crore mark, which proved to be its third-best historical performance. A 79% y-o-y drop in its subsidy burden allowing it a 21% higher price for its crude oil and rupee depreciation against the year-ago period were the key reasons.
The portion of under-recoveries that the government of India directed ONGC to share was Rs 2,630 crore for the September 2009 quarter, compared to Rs 12,663 crore in the year-ago period when oil prices had peaked at $147. As a result, the company’s net realisation on sale of crude oil stood at $56.42 per barrel, as against an average of $70.5 in the open market.
ONGC, which is mainly operating ageing oil fields in their natural decline phase, reported a 3.4% decrease in oil output to 6.63 million tonnes while its gas production inched up marginally.
Giving effect to ONGC’s discontinued trading business of MRPL’s products, ONGC’s net sales for the quarter were 2% higher y-o-y to Rs 15,192 crore. The company wrote off Rs 475 crore as drywell expenditure during the quarter towards a well drilled in KG basin increasing other expenditure 14%. As a result, the company could report only a minor improvement in operating margins pushing its operating profits 4% higher. However, an 18% fall in other income and 8% higher depreciation resulted in a flat pre-tax profit. Slightly lower tax rate enabled the company to show an improved profit for the quarter.
Going forward, the company is likely to benefit from a longawaited revision in its natural gas prices, which it sells below cost. Under the administered pricing mechanism (APM), the company sells nearly one-third of India’s total available gas at around $1.8 per million British thermal units (mmBtu). The proposed price revision to $2.6 could boost its annual profit by around Rs 2,200 crore or 11% of its FY09 consolidated profit.
The next three years will also see three of the company’s main diversification projects commissioning — ONGC Mangalore Petrochemicals (OMPL) by mid-2011, ONGC Tripura Power Company by early 2012 and ONGC Petro-additions (OPaL) by end-2012. Besides, the company is also involved in setting up two special economic zones — one in Dahej and other in Mangalore.

Higher base takes steam out of Gail’s spectacular show

GAIL’S otherwise excellent operating performance for the September 2009 quarter appeared dismal compared to the year-ago period, mainly on account of a higher base effect. The quarterly profits at Rs 713 crore were 30% lower only due to the abnormally high profits in the September 2008 quarter. Gail had enjoyed the benefit of higher LPG realisations, alongside a benign subsidy burden, which had boosted its quarterly profits beyond Rs 1,000 crore for the first time in its history.
The company, however, wrote off an additional Rs 258.5 crore in the subsequent quarter towards underprovisioning of subsidy in September 2008 quarter. The main highlight of Gail’s September 2009 quarter results was the spurt in volumes of natural gas transported. The transmission volumes jumped 30.5% to 106.58 million standard cubic metres a day (mscmd) for the first time crossing a three-digit level.
The revenues from this segment jumped 39% with profits growing 58% to Rs 616 crore, which was two-thirds of its gross profit. With the volumes of gas transported growing within the country, the importance of this segment will continue to grow. Till FY09, the natural gas transportation business, which has traditionally been its single-largest profit earning segment, had contributed around 40% of profits, which jumped to 50% in the quarter ended June 2009.
The company also indicated a significant fall in its expenditure written off on its exploration efforts. The spending on dry wells stood at Rs 17.7 crore, nearly one-third of the year-ago period. The company had written off around Rs 87 crore on an average in the preceding three quarters. This reduction does not indicate any reduction in E&P activity, but only that the results are not out. Hence, there is a possibility that the coming quarters could see a jump in this expenditure.
Going forward, Gail will continue to benefit from rising volumes of natural gas in India. The company’s proposal on revised pipeline tariff is pending with the Petroleum and Natural Gas Regulatory Board. However, no significant change is expected in its tariff structure.
The scrip, which lost over 11% in preceding five trading sessions, currently values the company at 19 times Gail’s profit for trailing 12 months. Considering the steady growth prospects ahead, the valuation appears reasonable.

RIL feels refining margin pinch, may log lower net

ETIG Poll Sees Op Profit Fall 5.6%, But Treasury Share Sale To Boost Profit Nos

INDIA’S largest private sector company, Reliance Industries, is unlikely to post a growth in operational profits over a year-ago period when it publishes its quarterly numbers tomorrow (Thursday, October 29, 2009).
Commissioning of its two world-class projects — the 28-million tonne RPL refinery and KG-D6 natural gas — may not count much, as the company faces immense pressure on its refining margins. An ETIG poll of seven brokerage houses pegs the company’s net profit from operations to fall 5.6% y-o-y to Rs 3,889 crore. The one-time income earned on sale of treasury shares last month will, however, boost the company’s net profit number. Amitabh Chakraborty, president (equities), Religare Securities, said, “We are expecting 20% fall in RIL’s sales this quarter due to lower oil prices. It could see a slightly higher operating margin, thanks to a higher proportion of E&P profits. Still, gross refining margin (GRM) at $6.5 and lower petrochemical margins mean our net profit target is 7% lower y-o-y at Rs 3,827 crore.”
Sharekhan concurs: “RIL’s higher E&P profits and merger of RPL will get offset by lower GRM and marginal decline in petrochemicals margins.” It added that the interest and depreciation costs, too, would shoot up due to commissioning of the two mega projects. The global petroleum refining industry witnessed margin pressure, further worsening from preceding quarters in the September 2009 quarter. “Benchmark Singapore complex refining margin weakened to $3.3/bbl (-20% q-o-q; -44% y-o-y) led by weaker middle distillate cracks,” according to a results preview report by Motilal Oswal.
The pressure could push RIL’s refining margins to somewhere between $6.6 and $7.4 per barrel of crude oil processed — a historic low level. The refining business, which contributed more than half of the company’s consolidated profits in FY09, is likely to represent just around a quarter of its profits in the September 2009 quarter.
Still, some suspense hangs over the performance of the newlycommissioned refinery. The refinery enjoying a better configuration than RIL’s first refinery had earned a net profit of Rs 105 crore in the June 2009 quarter. Sandeep Randery, a research analyst with BRICS Capital, said, “The performance of the new refinery could be a surprise factor, when RIL publishes its September 2009 numbers. We don’t know what refining margins it will post.”
RIL’s petrochemical business, which contributed nearly half of the company’s June 2009 profits, is also likely to witness margin pressure. “We expect RIL’s petrochemical margins to decline marginally in polypropylene (PP). However, better integrated margins in polyethylene could offset some of the fall in the segment margins,” said Deepak Pareek, a research analyst with Angel Broking. BRICS’ Sandeep opined that the future may not be bright for this segment. “The petrochemical margins may remain flattish for the September quarter, but are likely to weaken going forward.”
The E&P segment will be the star performer for the quarter, which is expected to see its share in the company’s total profits soar from less than a quarter in the preceding quarter. The company’s natural gas production is likely to have crossed 30 million cubic metres per day (MCMD) from around 19 MCMD in June 2009 quarter. Going forward, the immediate future of the refining and petrochemical industries appears clouded with both industries facing overcapacity globally. Still not many analysts are bearish on Reliance Industries.

New pipelines fuel GSPL growth

Co Likely To Repeat Its Sterling September Quarter Show In The Second Half Of FY10

THE Gujarat government-controlled Gujarat State Petronet (GSPL) has outperformed the benchmark Sensex by more than three times since mid-July 2009. The scrip is up 75.7% in the past three months compared to the 25% rise in the Sensex during the period. The company is currently valued at 19.2 times its profits for the past 12 months.
This better-than-expected performance has been attributed to a spurt in GSPL’s financial numbers following the commissioning of new pipelines and new supply contracts. The company registered a 147% jump in its June 2009 quarter profit and a growth of 288% in the September 2009 quarter. The company doubled its revenues in this period on the back of doubling its gas volumes. This performance is expected to be repeated in the second half of FY10 also. Particularly so, as the company had witnessed a fall in natural gas volumes in the corresponding period of last year due to the crash in naphtha prices.
GSPL’s board of directors as well as its shareholders had approved a contribution of 30% of its pre-tax profits to the Gujarat Socio Economic Development Society in FY09. However, the company did not make any provisions as no project was identified. The society also could not obtain a registration with income-tax authorities. The possibility of such a contribution will continue to remain a major concern for the company’s shareholders in future.
GSPL’s recently-published results for the September 2009 quarter were remarkable as its operating margins nearly doubled during the period. However, the spurt was mainly on account of writeback of excess provisions for salary hikes and hence, such high level of margins appear unsustainable.
The company, which currently operates 1,280 km of gas pipelines, plans to double its network to connect all 25 districts of Gujarat in coming few years. Low debt level, strong operating margins and high cash generation capacity are big positives. However, the distribution of 30% of its pre-tax profits for social services could play spoilsport.

SRF Ltd: Coming of Age

The expansion projects in the last two years are set to lift future profits of SRF

LOW valuation, attractive dividend yield and an expansion spree make SRF a compelling buy, but lack of clarity on carbon credits means the investors can invest only for medium term and review their decision based on the company’s future growth.

BUSINESS: SRF is a Gurgaonbased diversified company that manufactures technical textiles, chemicals and packaging film. The company is India’s largest manufacturer of nylon tyre cord fabric (NTCF) and specialised fluoro-chemicals including refrigerants. Its other products include chloromethanes and polyester film. The company made two overseas acquisitions in FY09 augmenting its current lines of technical textile business – Thai Baroda Industries in Thailand that manufactures NTCF and Industex Belting in South Africa that manufactures belting fabrics.
It also purchased the engineering plastics and industrial yarn business of its sister concern SRF Polymers during the year. With these acquisitions, the company now operates 11 plants including three overseas. The company is taking deliberate steps to reduce its dependence on NTCF business, which brought in over 55% of the company’s FY09 revenues. Similarly it is going for backward integration to ensure high margins.

GROWTH DRIVERS: The company has been steadily expanding its production capacities in the last couple of years, the benefits of which will become available in the next few years. Particularly, the company has invested around Rs 70 crore to add over 1000 tonne of fluoro specialty capacity. It added 14,500 TPA polyester industrial yarn capacity that can cater to the increasing demand for radial tyres, besides debottlenecking and modernising its facilities.
The company has acquired nearly 850 acres of land in Dahej to set up fluoro-chemical plants over next five years. It is also setting up a laminated fabrics plant in Uttarakhand with annual capacity of 48 million square metres to commission by March ‘10.
The company has commissioned over Rs 600 crore investment projects in last 18 months and projects worth Rs 725 crore are presently under way.
India imposed anti-dumping duty on NTCF imported from Belarus and China in May 2009. This, besides the auto sector revival, stands to benefit the company, which derives nearly half of its revenues from sale of NTCF.

FINANCIALS: The company’s net profit has grown at a cumulative annual growth rate (CAGR) of 29.4% in last five years while its net sales grew 17.5% during the period. The company has a strong history of operating cash flows and dividends. Last three years witnessed its interest coverage ratio on a consolidated basis deteriorate to 4.6 in FY09 from 12.5 in FY07. In the same period, its debt-equity ratio has jumped to 1.1 from 0.6. The ongoing investment phase of the company has taken its net block including capital work up 56% in this period to Rs 1,859 crore.
The company’s chemical business producing fluorine-based refrigerants, speciality chemicals, chloro-methanes and engineering plastics, is the largest profit making segment representing over 80% of the company’s FY09 profit. Packaging film segment contributed 11.6% and technical textiles accounted for just 4.6%. In FY09, the company completed a buy-back of its shares which led to around 5.3% reduction in its equity capital to Rs 61.88 crore. The company’s board has now approved another buy-back scheme at Rs 160 per share, which will remain open till July 2010.

VALUATIONS: The company is currently valued at 6.1 times its profits for the trailing 12 months. The company had paid Rs 10 per share dividend for FY09 translating in a dividend yield of 4.9%. Its peers Century Enka (P/E 9.2), Gujarat Fluorochemicals (P/E 4.9) and Jindal Polyfilms (P/E 4.8) are trading at around similar valuation.

RISK FACTORS: The company does not publish revenues and profit from sale of carbon credits, which boosts the profits of its chemicals business and may face profit erosion depending on the price and quantity of carbon credits sold. At the same time, there is little clarity on future of carbon credits after the first phase of the Kyoto Protocol ends in 2012.