Rallying ahead - 20th July 2009

Rallying ahead

Unaffected by the delayed and deficient monsoon, Rallis India came out with substantially better results for the June ‘09 quarter. The net profit for the quarter more than doubled to Rs 9.4 crore despite a 5% fall in its net sales to Rs 166.45 crore. The company improved its operating margins to 11.8% from 9.7% in the corresponding period of last year. This, apart from a spurt in other income and fall in interest and depreciation costs helped it record 30% growth at the PBT level excluding extraordinary items. However, the accelerated depreciation written off during the June ‘08 quarter meant that the current quarter’s financial performance was twice as good of last year. However, the first quarter is not the best indicator of the company’s annual performance, as the agrochemicals business is seasonal. The company is setting up a new plant at Dahej and will be investing around Rs 150 crore over next twelve months. At the same time, it is also expanding capacities at its Ankleshwar facility with an investment of around Rs 50 crore. After a couple of years as a debt-free company, Rallis has borrowed Rs 50 crore from banks in FY09 to fund these expansion plans. The company has increased its net sales at a cumulative annual growth rate of 11% over the last five years, while its net profit has grown 27.5%. The financial strength of the company is also visible in the improving return on capital employed, debtequity and interest coverage ratios. With a spurt in the June ‘09 quarter profit, the company’s EPS for the trailing 12 months now stands at Rs 63.8, which discounts its current market price of Rs 730 by 11.4 times. Based on last year’s dividend of Rs 16 per share, the dividend yield works out to 2.2%. The scrip has gained 117% since the start of ‘09, more than twice that of the benchmark Sensex, which has risen 53%.

FACING A HOST OF WOES - 20th July, 2009

20th July, 2009

FACING A HOST OF WOES

After commissioning two mega-projects, Reliance Industries has hit a few roadblocks which could affect its profitability
RAMKRISHNA KASHELKAR ET INTELLIGENCE GROUP

Although Reliance Industries (RIL) finally succeeded in commissioning its megaprojects — natural gas production from KG basin and Reliance Petroleum refinery — they both seem to have run into a stormy weather. A large chunk of the KG basin gas continues to remain embroiled in legal hassles, while the RIL-RPL merger may get delayed due to shareholder objections. The recent Union Budget carried some bad news for the company, the global outlook for its business remains weak and its other businesses — Retail and SEZ — are going nowhere. The scrip has already lost a sixth of its value over last one month, but in view of these recent developments the valuations still appear rich and long-term investors should consider buying it only on dips.

RECENT EVENTS
Over last three months, RIL has commissioned his two mega projects – RPL refinery and KG basin gas – involving investments of around $18 billion. However, since then the things have progressed adversely for the energy giant. The Mumbai High Court granted an unfavourable verdict to RIL in its row against RNRL over the supply of 28 million cubic meters per day (MCMD) of natural gas at a price 44% lower to its current price. The matter is now being debated in the Supreme Court. The company is also fighting a similar court battle against the power major NTPC over another 12 MCMD of gas. At the same time, the company’s proposed merger with Reliance Petroleum is getting delayed following objections raised by some shareholders. The Union Budget for FY2010 introduced income tax exemption on production of natural gas, however, restricted it to blocks awarded under the 8th round of NELP. This deprived all earlier blocks — including RIL’s KG-D6 block — of tax exemption. To add to the woes, the Budget also proposed an increase in the Minimum Alternative Tax (MAT) to 15% from earlier 10%. And while the company is battling these odds, the business environment for refining as well as petchem continues to weaken. RIL’s only solace is thatRNRL’s power plants are not yet ready, which would allow it to sell natural gas at current prices for next 2-3 years.

BUSINESS
The company currently operates 33 million tonne per annum (MTPA) refinery at Jamnagar and has recently commissioned another 29 MTPA refinery under Reliance Petroleum. With both the refineries running concurrently, they now represent world’s largest single location petroleum refining complex. As the new refinery is set up in SEZ, the company has surrendered its status as an Export Oriented Unit (EOU) from April 2009. Over last few years RIL has entered aggressively in organized retail opening around 900 stores across 80 cities - an industry, which is witnessing entry of too many players and low profitability. The company is developing special economic zones in Haryana and Gujarat –another line of business, which has fallen out of favour.

GROWTH DRIVERS
The only hope for incremental growth comes from the company’s portfolio of E&P blocks. It is investing in exploration blocks in India as well as abroad and has also bagged a coal-bed methane (CBM) block. The potential hydrocarbon discoveries from these blocks will add value to the company. The newly constructed refinery, being more complex compared to the first refinery, will help command a better margin for the company. The company’s full integration from petrochemicals to refining to E&P will allow it to perform better in the times of uncertainty.

FINANCIALS
For the year ended Mar 09, the company reported a net profit of Rs 15607 crore marginally better than previous year afte.r removing the extraordinary items. The company’s operating profit margins weakened reflecting the weak economic conditions. The capacity utilisation at the company’s refinery too came down in the second half of the year with weakening gross refining margins. The company, which reported $15 a barrel GRM in FY08, could post only $12.2 in FY09. Similarly, the production of polymers too was 9% lower in FY09 at 3.07 million tonne.

VALUATION
At the current market price of Rs 1934, the scrip is trading at 19.4 times its earnings for the year ended March 2009. However, its per share earnings (EPS) is set to jump to Rs 130 for FY10, which discounts the current market price by 14.9 times.
ramkrishna.kashelkar@timesgroup.com

Oil cos may slip on subsidies, high refining costs in Q1 - 13th July 2009

13th July 2009

Oil cos may slip on subsidies, high refining costs in Q1

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

PETROLEUM companies, particularly oil marketers, are expected to report a fall in sales and profits when they come out with their results for the June quarter later this month in a sharp contrast to an impressive performance in the last quarter of 2008-09. Oil marketers have been selling auto fuels below cost for most part of the quarter, while refiners too are facing pressure on margins with fuel consumption falling globally. The 16% y-o-y depreciation in the value of rupee may not have made much of an advantage for domestic companies as the average crude prices during the quarter at $60 per barrel was half of the year-ago figure.

Oil marketing companies: State-run oil marketing companies, including Indian Oil, Bharat Petroleum and Hindustan Petroleum, had suffered heavily in the first quarter of 2008-09 by selling petro-products below their cost when the oil prices soared to new highs. The June 2009 quarter would be somewhat better due to substantially-lower crude prices. However, in the absence of special oil bonds from the government and a fall in the refining margins globally, the performance of these three oil majors will be subdued, but better compared to last year.

Standalone refiners: With the global demand for petro-products weakening, the refining margins have come under pressure. According to the International Energy Agency, the average benchmark Singapore gross refining margins had dipped into the negative territory in the quarter compared to $5.4 per barrel in the yearago period. Although the actual GRMs will be better than the benchmarks, this indicates weakness in the profitability of standalone refiners such as Essar Oil, Mangalore Refinery & Petrochemicals and Chennai Petroleum. Reliance Industries, which derives two-third of its revenues from petroleum refining, will, however, be able to prop up its profits due to a jump in its income from production of oil & gas. The company is expected to maintain its June 2009 quarter profits at the year-ago levels.

Petroleum producers: ONGC’s 5% lower production in the June 2009 quarter and substantially-lower crude oil prices are likely to take the country’s largest oil and gas producer’s profits down. The state-run company’s subsidy burden is estimated at around Rs 2,600 crore during the quarter, down from Rs 9,811 crore in the yearago quarter. The troubles for Cairn India’s oil production in Rajasthan are not yet over, with the company failing to commence production in the June 2009 quarter despite being ready. Natural gas companies: The natural gas transmission companies such as Gail, Gujarat Gas, Gujarat State Petronet (GSPL) and Indraprastha Gas are all expected to continue with their stable performances. They are expected to show a rise in volumes, thanks to the additional gas from RIL, starting April 2009. Petronet LNG has commissioned a project to double its LNG import capacity to 10 million tonne per annum towards the end of the quarter.

Better tomorrow: The second quarter of FY10 is expected to be better for the industry in comparison to the June quarter. The hike in petrol and diesel prices starting July will cut down the marketing losses of oil marketers and will perhaps help them report profits for the September quarter. If under-recoveries come down, the subsidy burden on ONGC too would ease a little. In the private sector, RIL-RPL merger and commissioning of Cairn’s oil production from Rajasthan will boost their earnings.

ramkrishna.kashelkar@timesgroup.com

Petronet set to take control of Dahej unit - 9th July 2009

9th July 2009

Petronet set to take control of Dahej unit

Ramkrishna Kashelkar ETIG

PETRONET LNG expects to take possession of its expanded LNG import terminal in Dahej from contractors next week, saying that the technical problems that arose during the commissioning have been solved.
The company had expected that the expanded terminal would be able to operate at its full capacity by May 2009, but technical problems forced it to reschedule several cargoes.
“Despite those issues, the EPC contractors are within their contractual time limit, which is some time next week,” said Petronet finance director Amitabh Sengupta.
Japan’s IHI Corporation was awarded a contract in 2006 to double capacity at the Dahej terminal to 10 million tonne. With the additional capacity becoming available, the company has scaled up volumes.
“We are already operating at a level of 30 million cubic meters a day,” explained Mr Sengupta. For the year ended March 2009, Petronet LNG regassified 6.4 million tonne of LNG, equivalent to around 25.6 million standard cubic metres per day (MMSCMD).
Petronet LNG imports 5 million tonne per annum of LNG from Qatar’s RasGas under a 25-year contract, which started in 2004. This will be scaled up to 7.5 MTPA from the fourth quarter of 2009. Taking spot cargoes into account, the company’s supply of natural gas is expected to touch 38 MMSCMD towards the end of FY10. However, there are still some problems in scaling up the gas supply.
“The demand for natural gas remains high in India. However, the constraints on pipeline capacity may limit how much we can supply,” said Mr Sengupta.
Petronet LNG is also setting up a 2.5 MTPA LNG import terminal at Kochi by end 2011.

Stable and Able - 29th June 2009

Stable and Able

A cash-rich business with strong growth record makes Balmer Lawrie an interesting long-term investment idea

RAMKRISHNA KASHELKAR ET I NTELLIGENCE GROUP

Beta 0.89
Institutional holding 18.65%
Dividend Yield 4.5%
P/E 6.7
M-Cap Rs 728.5 cr
CMP Rs 447.2

THE Rs 730-crore Balmer Lawrie (BLL), a staterun unit with mini-ratna status, is a mid-cap with long-term promise. Headquartered in Kolkata, BLL is a debt-free company with rising dividends every year. It has a healthy record of sales and profits growth, which makes it an ideal investment candidate for long-term investors.

Business:
BLL operates in eight distinct strategic business units including industrial packaging, greases & lubricants, logistics services, engineering & technology, logistics infrastructure, travels & tours, leather chemicals and tea. The company is India’s largest producer of metal drums used in packaging chemicals and lubricants. Travel & tours services bring in the major share of revenues, while the logistics services account for the highest profits. The company has a wholly-owned subsidiary in the UK carrying out logistics business. Balmer Lawrie Investments (BLIL), which is 59.67% owned by the government of India, holds a 65.7% stake in the company. It was created in 2001 with a view to divest the government’s stake in Balmer Lawrie. The new UPA government, which is considering selling stakes in profitmaking PSUs, may look at BLL as a divestment candidate as it is a non-core, but profitable, public sector firm.

Growth Drivers:
Balmer Lawrie is a debt-free, steadily growing company with strong presence in all the industries in which it operates. The company has plans to grow inorganically by acquisitions in the areas of travels & tours and logistics and has a budget of Rs 100 crore for this. During the past five years, the company has grown at a cumulative annual growth rate of 12.6% at topline to Rs 2,007 crore for the year ended March 2009, with the PAT growing at a CAGR of 28.8%. BLL has a strong track record of paying dividends, and during the period its dividend payout has increased at a CAGR of 41.7%

Financials:
The global financial slowdown hasn’t left Balmer Lawrie untouched. Its operating performance stagnated in FY09 and the net profit was propped up by a spurt in nonoperative income. Revenues went up 13.7% in FY09 at Rs 2,007 crore and profits grew by 9.3% to bring in Rs 109 crore. The services sector did well during the year with travels and tours posting 19% growth and logistics services growing at 21%. Both these businesses posted healthy improvement in profits as against a fall in profit for manufacturing businesses such as industrial packaging and lubricants. With established businesses and very low annual capex, the company has maintained its return on employed capital to beyond 40% for last four years.

Valuations:
The company’s current market capitalization of Rs 728.5 crore is just 6.7 times its annual profit of the year ended March 2009, out of which Rs 150 crore is represented by cash equivalent. The dividend yield works out to 4.5%. We expect the company to post an EPS of Rs 77 in FY10, which discounts the current market price by 5.7 times.
ramkrishna.kashelkar@timesgroup.com

Lead Story - 29th June 2009

29th June 2009

Green SHOOTS In a bid to improve farm yield, the investment in agriculture has been on a steady rise globally reviving the fortunes of farm-input companies. ETIG’s Ramkrishna Kashelkar and Kiran Kabtta Somvanshi advise the long-term investors to add a few such stocks to their portfolio

“AGRICULTURE is the best, enterprise is acceptable, but being on a fixed wage is a strict no-no,” thus goes an old Indian proverb. odern India has turned that adage on its head, and in an economy that’s set to overtake China as the world’s fastest growing, a high fixed wage is acceptable, enterprise is preferred, and agriculture, well, seems eminently avoidable. However, a grain crisis that erupted in the last few years has reinforced how central food security is to an economy, developed or emerging. The reality has dawned on policy makers that high food prices will cripple every other sectors of the economy, as consumers, struggling to put food on the table, tighten their purse strings on every other non-essential product. The world is today consuming more than what it makes, and massive farm-to-fuel programmes are limiting the available farmland for foodgrains. This practice is now under review in many countries ranging from the corn belt of the US to the sugar cane farms of Brazil. Back home, the government’s investment in agriculture has grown steadily over the years and a boom in agri-commodity prices in the last couple of years means that the farmers are in a better position today to make long-term investments. For a long-term investor this is a good sign to invest in companies that supply key inputs to the agriculture industry. In view of this, ET Intelligence Group has cherry picked firms that could benefit from the rising demand for farm inputs and agricultural infrastructure. While the valuation of these stocks provides scope for appreciation, they could prove defensive bets in times of turmoil due to strong demand from agriculture segment. Food, after all, is a recession-proof business.

GROWING GOVERNMENT INVESTMENT

The direct government expenditure in agriculture has seen a sharp rise over last five years enabling better farm credit and creation of support infrastructure like irrigation (See chart). As a result, over last few years India has seen a spurt in the capital formation in the agriculture sector including initiatives such as irrigation projects, rural roads and communication infrastructure, sales and marketing infrastructure, production of fertilizers and pesticides, agricultural education, research and development of agricultural technology. Schemes like National Rural Employment Guarantee Scheme (NREGS) are also instrumental in improving the infrastructure in the rural areas.

THE GLOBAL SCENARIO IS CHANGING

Under the Renewable Energy Directive (RED) passed by the EU Parliament in January 2009, bio-fuel blending of 5.75% is envisaged by 2010 to be scaled up to 10% by 2020. In the US the ethanol consumption is set to quadruple to 36 billion gallons by 2022. In India also, the government has mandated a 5% ethanol blending to be raised to 10% next year. All this is necessitating the world to invest more in improving farm yields. This needs optimum usage of pesticides, farm nutrients including fertilizers, creation of infrastructure such as irrigation, warehousing and transportation and usage of automated processes from tilling to harvesting. Over the last few years, consumption of food grains has risen faster than the growth in supply. Although the higher foodgrain production in 2009 has assuaged the fears about immediate food scarcity, long-term worries remain. Most of the agrocommodities witnessed a sustained rise in prices in the last couple of years, which are currently at nearly double their 2001 prices. These factors reinforce a sustained rise in the demand for the farm inputs in the years to come. In fact, after a sluggish spell of five years, for the first time in FY09 the agrochemicals industry worldwide witnessed a robust double-digit growth. Similarly, India’s fertilizer industry, which was stagnating till FY04, has picked up growth in the last five years. India’s fertilizer consumption, which rose at a CAGR of just 0.6% from FY98 till FY04, jumped to a CAGR of 5.6% subsequently. For FY08, the country consumed over 20.9 million tonne of three major farm nutrients viz. nitrogen, phosphorous and potassium. Five years back, the corresponding figure was 17 million tonnes. The Potential Winners THESE visible trends are expected to benefit the following companies. Most of those in these industries viz. agrochemicals and fertilizers are trading at price-to-book-value multiple of around 2 and price-to-earnings multiple in a single digit figure. United Phosphorous is India’s largest pesticides manufacturer with over half its revenues coming from overseas markets. Over the last few years, the company has expanded its geographical footprint through a series of acquisitions, thereby safeguarding itself from the monsoon-led seasonal fluctuations in Indian market. Rallis India, which is part of the Tata Group, is another strong contender from the pesticide sector. It is one of the leading players in the domestic market and has seen turned around in the last 5 years and is now on a strong growth footing. The company is making targeted efforts to grow its exports, expand capacities and introduce new products periodically to sustain future growth. Tata Chemicals is one of India’s leading manufacturers of urea and di-ammonium phosphate (DAP), with nearly half of its revenues coming from fertilisers. The company has recently expanded its urea capacity by 25% through debottlenecking, which is fuelled by natural gas. Chambal Fertilisers is India’s largest urea producer in the private sector with a capacity of 1.73 million tonnes per annum. The company, which saw its profits wilt between FY05 and FY07, has recovered subsequently. Coromandel Fertilisers, which is part of the Murugappa group, is India’s leading manufacturer of phosphatic fertilisers. RCF, the government-owned fertiliser company, was stagnating between FY99 and FY04, but has picked up steam over last few years. The supply of natural gas is expected to keep it firmly on the growth path in the years to come. Although all the fertiliser companies in India today market micronutrients and water soluble fertilisers to the domestic farmers, Aries Agro is the only listed company fully focussed on this niche business. The demand for these essential soil-enriching products is expected to rise at a double-digit rate in India in coming years. Companies in the production of seeds, one of the key agri inputs, also have good prospects. Advanta India, which shares its parentage with United Phosphorous is India’s leading seeds producer, with global operations in seeds and leadership position in crops like sunflower, sorghum and sweet corn. This company, too, has been on an acquisition spree, acquiring Hyderabad based Unicorn Seeds and US based Garrison and Townsend in 2008 to expand product portfolio and geographical reach. One of the largest areas of public expenditure in agriculture is on irrigation projects. Companies like Patel Engineering and IVRCL Infrastructures and Projects have bagged some of the largest irrigation projects in the country. Any incremental spending in this area is likely to be positive for such companies. Companies like Jain Irrigation, the manufacturer of pipes, irrigation systems and such other farm equipment; Kirloskar Brothers, the manufacturers of pumps and pumping systems and Mahindra & Mahindra, one of the world’s largest tractor manufacturer are the obvious contenders to benefit once a boom sets in in the farm sector. DCM Shriram Consolidated with business interests in sugar, fertilizers & chemicals, seeds and rural retailing (through Hariyali kisan retail stores) is also a good bet due to its varied businesses being closely associated with the farm sector.

CONCLUSION

A widening demand-supply gap and consequent high prices are helping the agriculture industry the world over to hike its ability to investment in the future. In India, the government-lead efforts have provided the necessary impetus to the domestic agriculture industry. These trends are likely to strengthen in the years to come as the food demand continues to grow in line with the global economic growth. The struggle to extract more out of the same piece of land year after year is set to generate more demand for various types of farm inputs, which augurs well for the producing companies. Long-term investors must include these stocks in their portfolios.

Ramkrishna Kashelkar & Kiran Kabtta Somvanshi With inputs from Pallavi Mulay

Aiming higher - 22nd June, 2009

Aiming higher

Although freed from the subsidy-sharing burden, Gail’s last quarter profits took a hit from a sudden spurt in exploration costs. India’s largest natural gas transporter reported a 13% reduction in its fourth quarter profit to Rs 630 crore after a 24% improvement in net sales to Rs 6,104 crore. The company wrote off Rs 126 crore during the quarter towards expenditure on dry wells in its exploration efforts. Although the drilling activity began at eight of its E&P (exploration and production) blocks during the year, only one discovery was made. For the whole year FY09, the company reported an 8% increase in its PAT to Rs 2,804 crore, on the back of a 32% increase in net sales at Rs 23,776 crore. The healthy performance was despite a 36% higher LPG subsidy of Rs 1,781 crore. The company has proposed a final dividend of Rs 3 per share for FY09 in addition to the interim dividend of Rs 4 per share already paid. In FY09, the company sold 14% more natural gas at 79.1 mmscmd (million metric standard cubic metres per day). The higher volumes as well as increased price helped it post a 45% jump in its revenues from the segment to Rs 18,308 crore. The segment’s profits jumped 70% to Rs 348 crore. Gail plans to improve its natural gas sales volumes by 5% to 83.2 mmscmd in FY10. The natural gas transmission business, which is the largest contributor to the company’s profits, grew 10% to Rs 2,482 crore in FY09 as the volumes transmitted rose 1.5% to 83.3 mmscmd. The profits from the segment were 8% higher at Rs 1,598 crore. The company plans a 14% jump in the natural gas volumes transported in FY10 to 94.8 mmscmd. Gail plans to invest Rs. 5,558 crore during FY10 with over 70% to be invested in pipeline projects. The company’s E&P projects would need around Rs 650 crore, Rs 285 crore will be invested in petrochemicals, Rs 130 crore in business development, Rs 250 crore in city gas projects, Rs 200 crore in Ratnagiri Power Company and the rest in telecom. Although the prospects appear bright for the company, the regulations issued by the Petroleum and Natural Gas Regulatory Board (PNGRB) could become a cause for concern. As per these regulations, the natural gas pipeline tariff being charged by the company for its pipeline networks in operation is subject to revision with retrospective effect. In case of a substantial revision, the company’s future profits could suffer.

Lead Story - 22nd June 2009

22nd June 2009

The spurt in crude oil prices may lead to a rise in costs for India Inc. But it is not always such a bad thing, says ETIG’s Ramkrishna Kashelkar

THE latest inflation numbers might have fallen below the ground zero, but that does not change reality. The prices of commodities, food articles and energy are on a steady rise. Obviously, you couldn’t expect to see a different picture after experiencing the roller coaster ride in crude oil prices. Within just four months, the crude oil prices have more than doubled from their lows of February 2009 – faster than even last year when the crude prices touched historic highs. While the crash in crude oil prices marked a plunge in consumer confidence and contraction of economic activity the world over, the reversal does indeed signal a change in mood. However, when a commodity like crude oil changes gears so fast, the impact goes far beyond just changing moods. Crude oil is the world’s largest traded commodity and almost everything used in modern day life from pin to piano can be traced back to it, some way or the other. In 2008, the crude oil averaged $100 per barrel, while the world consumed 85.8 million barrels every day. At this rate, the world’s total expenditure on crude oil was more than thrice India’s GDP in 2008. It is no wonder that the industry using crude oil as a direct input is always the one to take the first hit when the oil prices fluctuate so fast. The petroleum refining industry, which was making merry in the June 2008 quarter when oil prices were on a rise, incurred heavy losses in the September and December 2008 quarters as the prices crashed. The impact, however, goes even deeper to the further downstream industries such as petrochemicals and polymers. THE CRUDE IMPACT The rising crude oil prices affect companies in two ways. It increases thee fuel cost for some, while for others it simply raises the feedstock costs. Although the availability of natural gas is fast increasing in India, a number of companies use liquid fuels derived from crude oil for their energy needs, either due to lack of availability of natural gas or lack of connectivity. RCF’s liquid fuel consumption in FY2008 was Rs 1712 crore or nearly 4.3 times its operating profit for the year. The company has long been suffering from insufficient natural gas to run its plants at optimum level. It had consumed over half-a-million tonne of naphtha in FY08 alone. Although the company’s fuel consumption figures for FY09 are not available yet, it will save a chunk of that cost in FY2010 thanks to 3 MMSCMD of gas it is now getting from RIL. Several companies – particularly in southern India – are yet to find pipeline connectivity to avail natural gas in the near future. The spurt in crude oil prices will continue to haunt companies such as Tamilnadu Petroproducts, SPIC, Mangalore Chemicals and FACT. LOGISTICS For the logistics industry, the liquid fuels derived from petroleum crude oil form the basic raw material and they have very little scope of replacing it with natural gas. The players in this industry will be at the receiving end of a rise in petroleum prices. The fuel cost of Jet Airways jumped over two-and-a-half times in the first half of FY2009 to nearly Rs 3200 crore or half of its revenues for the period. With the crude oil prices falling subsequently, the company cut its fuel costs by around 25% in the second half. Still, for the whole year, the company’s fuel bill was a staggering Rs 5850 crore or 44% higher against last year. The shipping and courier industries also witnessed a similar trend in FY09. Other expenditure, where their fuel costs are accounted for, bulged in the first half and eased in the second. The slowdown in traffic, due to the global economic slowdown, added to the woes of this industry. PETROLEUM AS A FEEDSTOCK Apart from being a major source of fuel, crude oil also accounts for chemicals used in various colours, fragrances, plastics and yarns, and as additives to boost the characteristics of other materials. Since crude oil is the common factor, a rise in crude prices lends a natural push to the prices of the dependent industries. However, it would be wrong to assume that a fall in crude oil prices would help these industries — petrochemicals, manmade fibres, rubber and tyre, plastic products etc — by reducing their raw material costs. In fact, historical analysis shows that their operating margins improve when the crude oil prices move up. (See the adjoining Chart). When the crude oil prices were hitting their bottom in the December 2008 quarter, these players reported their worst ever performance for over 20 preceding quarters. Most of them wrote off hefty inventory losses. Turnover suffered as customers postponed purchases in view of falling prices. The movement in the prices of these downstream petrochemicals and polymers also depend on the demandsupply dynamics. For example, basic petrochemicals such as ethylene and propylene gained around 25% since February this year despite the crude oil price doubling. The polymers derived out of these chemicals such as polyethylene and polypropylene have gained around 40% during the same period. PLASTIC PROCESSORS The plastic processing industry is at a peculiar juncture. As a number of new polymer production facilities are added in West Asia and China, the availability of polymers is set to go beyond its demand. Most upcoming projects in the West Asia are based on natural gas as feedstock, which is available abundantly and cheap there. HIGHER COST OR BETTER MARGINS This could put the polymer prices under pressure in the years to come. At the same time, these low prices could induce replacement of metal products by plastic products. Thus, the plastic processing industry is likely to benefit both ways, by a reduction in raw material costs and a steady growth in demand over the next couple of years. MARCH 2009 PERFORMANCE The stability in crude oil prices helped Indian industries to recover in the March 2009 quarter from the debacle of December 2008 quarter. Our sample of 79 companies, representing petrochemicals, plastic products, rubber and tyre and synthetic fibres industries, showed a substantial improvement and this pushed the operating margins back to levels seen in good times. The petrochemical companies have displayed the best turnaround, while synthetic textiles industry experienced only a marginal improvement. OUTLOOK The reversal in crude oil prices has renewed the confidence among investors and is also likely to contribute to an improvement in the quarterly performance of India Inc. For one, the industry will not suffer any losses on inventories and the appreciation in rupee will prevent foreign exchange losses. The logistics industry should continue seeing pressure on margins before the traffic picks up. However, manufacturing companies from petrochemicals to plastics are likely to witness an improvement in performance when they announce their June 2009 quarter numbers. ramkrishna.kashelkar@timesgroup.com

Ruling won’t show on RNRL’s books yet - 16th June 2009

16th June 2009

Ruling won’t show on RNRL’s books yet

Benefits Seen Accruing Only In Four Years As Plant Will Take Time To Take Shape

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

WINNING the court case against Reliance Industries (RIL) has been a great positive for Reliance Natural Resources (RNRL) on the bourses. However, it is not yet clear as to when it will translate into revenues and profits for the company. Firstly, there is a high probability that the matter will be dragged to the Supreme Court. Further, RNRL — or its group companies for that matter — do not yet have a gas-based power plant in operation.
This means, even if it can get the gas at a discounted price, it can avail of the benefits only in the long run. Given the long gestation period of the power plant from conception to commissioning, this could well extend to four years.
The favourable verdict lends better visibility to Reliance Infra’s gas-based ultra mega power plant (UMPP) at Dadri, which is under construction. The plant, which was originally planned with a 3,750-mw capacity, was later scaled up to 7,450 mw. The first phase of the gas-based power project comprising 1,400 mw is likely to be operational by mid-2010.
The Dadri project, which was planned before the split of the Ambani brothers, has received most approvals, including an environmental clearance and water linkages. ADAG is also in possession of more than 2,000 acres at the project site. However, the lack of clarity on fuel supply had kept it from achieving a financial closure.
The 28 million metric cubic meters of natural gas per day (MMSCMD) from RIL will be sufficient to produce around 6,250 mw of power.
In January 2009, the empowered group of ministers (EGoM) had assured supply of natural gas for the Dadri project once it was ready to begin operations. “This is without prejudice to the court case and subject to availability of gas,” the government counsel had told the Bombay High Court during one of the hearings of RIL-RNRL case.
“This is a zero-sum game. The gains for ADAG group will be equal to RIL’s losses. On a full-year basis, RIL is set to lose around Rs 3,500 crore supplying 28 MMSCMD of gas at $2.34,” commented SP Tulsian, an independent equity advisor. “However, the clarity is lacking on when RIL is supposed to start supplying gas to RNRL,” he added. Thus, although the market is sharing the jubilant mood in the ADAG Group today, it is unclear when the ground reality will get any better

WAITING FOR A FRESH BREEZE - 15th June 2009

15th June 2009

WAITING FOR A FRESH BREEZE

While oil marketing companies are back to selling fuel at a loss due to high crude prices, private oil companies appear to be better bets compared to their statecontrolled counterparts

R AM KR I SH NA K ASH ELK AR ET I NTELLIGENCE GROU P

WITH the recession pulling down oil demand, the petroleum refining industry globally has entered a cyclical downturn and is expected to remain depressed over next couple of years. Also, the oil marketing companies in India are once again selling fuel at a loss as crude prices have crossed $70 mark.
It is only the petroleum producers, who are making money. There again, Cairn’s oil production from Rajasthan fields is held up in uncertainty over pricing and taxation, while Reliance Industries’ gas continues to remain embroiled in court cases. The fate of the industry, which is investing heavily for its future growth, clearly depends on several policy decisions.
OIL MARKETING COMPANIES
State-controlled oil marketing companies Indian Oil, BPCL and HPCL, which were in a soup with over Rs 11,000 crore of accumulated losses in the first nine months of FY09, turned around in the fourth quarter.
Weak oil prices helped them not only wipe out the accumulated losses but also end the year in profit. A talk of the government allowing these firms some freedom in determining the retail prices of petroleum products has boosted their stock prices too.
But the companies are stressed. Lack of liquidity forced the three firms to borrow heavily last year and their annual interest cost jumped almost three times to more than Rs 8,700 crore.
One reason for this was delayed arrival of the special oil bonds from the government. In fact, the government is still to issue Rs 10,000 crore of bonds, out of the Rs 71,300 crore promised for FY09.
Despite the pressure on cash flows, the companies increased their dividend payouts over the last year by an average of 47%, further straining their cash position.
STANDALONE REFINERS
The standalone refiners witnessed huge jump in profits in the first quarter of FY09 due to a spurt in petroleum prices, only to see steep losses in the second and third quarters as the prices plummeted. The price stability in the fourth quarter returned the players to profits.
However, the accumulated losses of the previous quarters made Chennai Petroleum and Essar Oil close the year in red. India’s largest corporate Reliance Industries and ONGC’s subsidiary Mangalore Refinery (MRPL) reported profits for the year, which were lower on y-o-y
The boom phase for the refining industry, from FY04 to FY08, came to an end as industry entered a cyclical downturn. The refining margins in FY09 were lower for all the players.
With a number of new projects being
commissioned around the world and the demand remaining depressed due to the economic slowdown, the refinery margins are expected to be under pressure till a global recovery.
According to the latest estimates by International Energy Agency, the refinery utilisation in the member countries of the Organization for Economic Cooperation and Development (OECD) stood around 80% in March 2009 compared to 84% a year earlier.
India too, meanwhile, is adding to its refining capacity. Reliance commissioned its 580,000 barrels-per-day refinery in March. Other prominent projects include HPCL’s 180,000 bpd Bhatinda Refinery by 2011, BPCL’s 120,000 bpd refinery in Bina by 2010, Essar Oil’s plan to add 110,000 bpd capacity by end 2010, Indian Oil’s 300,000 bpd Paradip refinery by 2012 and ongoing expansions at other Indian Oil refineries and MRPL.
PETROLEUM UPSTREAM
ONGC, India’s largest petroleum producing company, is yet to publish its fourth quarter results. The discounts it had to extend on sale of crude oil to oil marketing companies have forced a drop in its profitability in the first nine months of the FY09.
The recovery in the crude oil prices since
April this year bodes well for the company, which has lined up big investments for the next five years in developing new fields and maintaining production from its ageing fields.
At the same time, the proposed petroleum sector reforms may make the subsidy sharing process transparent and may also raise the price at which ONGC sells natural gas. Both these developments would be positive for the petroleum behemoth.
Cairn India’s development work in its Rajasthan fields progressed well during the FY09 with the company readying the first train to begin production at 30,000 barrels per day (bpd). Another 50,000 bpd capacity will be added by end of 2009 to be augmented by a further 50,000 bpd by June 2010. With the construction of the fourth train in 2011, the company plans to achieve the plateau rate of 175,000 bpd. However, the company has so far not commissioned the production despite the facilities being in place. Although the customers for its crude have been identified, there are differences over pricing. Similarly, the payment of royalty and cess remains a point of contention between Cairn and ONGC, which owns 30% in the project. At the same time, since the pipeline to evacuate the crude oil is not in place, Cairn will have to spend $7-10 per barrel extra on trucking it to the Gujarat coast. In comparison, the other major exploration and production (E&P) project - Reliance’s D6 block in the KG basin - has done much better by starting production from April 2009, despite being embroiled in legal hassles. With the evacuation infrastructure in place, the natural gas from the east coast is now being shipped to various fertiliser and power producers. The production, which started at 15 million metric standard cubic meters per day (mmscmd), has been scaled up to around 26 mmscmd and will reach 40 mmscmd by end of June 2009, to be further raised to 80 mmscmd by end of the year.
CONCLUSION
The current valuations of most Indian petroleum companies appear expensive considering that the fate of the government-owned players remains strongly linked to policy changes. Amongst the lot, ONGC’s chances of obtaining a higher price for its gas appear bright. The long-term investors may, however, consider private companies in the sector, preferably on dips. The sale of natural gas and doubling of refining capacity are expected to improve Reliance’s profits substantially. Cairn and Essar Oil too will see their profits improving once their capitalintensive projects start paying off.

ramkrishna.kashelkar@timesgroup.com

Promise of dividend just not good enough for Gwalior Chem investors - 13th June 2009

13th June 2009

Promise of dividend just not good enough for Gwalior Chem investors

Ramkrishna Kashelkar ET INTELLIGENCE

INVESTORS are indeed fickle. When you show them profits they ask: “Where is the cash?” And when you offer them cash, they ask: “But where are the profits?” Cash may be king in their hands, but they refuse to value it when it lies with the company.
Gwalior Chemicals (GCL) is a case in point. When the company decided to sell off its entire business along with its debt to German specialty chemicals maker Lanxess at a steep premium, its shares were expected to hit the roof. But what happened was exactly the opposite. GCL’s shares lost over 17% in four trading sessions to close at Rs 88.8 on Friday from Monday’s close of Rs 107.3 when the deal was disclosed. The deal values the company’s equity at Rs 380 crore against the current market capitalisation of Rs 220 crore.
GCL’s promise to distribute Rs 100 crore among its shareholders on completion of the deal also failed to support the stock. A special dividend is expected to bring in at least Rs 35 per share to investors, after accounting for the dividend distribution tax.
Investors do not appear to be too enthused by the possibility of dividendstripping to manage their tax liabilities. With no business left and cash as its only asset, GCL’s stock price is set to fall once the dividend is paid out. If an investor buys the scrip three months prior to the record date of the special dividend and continues to hold it for at least three months after receiving the dividend, the investor will be entitled to tax-free dividends, on the one hand, and a short-term capital loss, on the other hand, which can be set off against any other capital profit.
However, doubts dog investor sentiment. “Buying GCL shares at today’s price can be justified only if they could be sold at Rs 55, after getting a dividend of Rs 35 per share. However, today even that is unclear,” explained a stockbroker who tracks the company.
The company is set to retain its Ankleshwar facility and may go for production of some other specialty chemicals. It also has plans to enter the power generation business. Company sources maintain they have identified some specialty chemicals, whose production could begin within weeks of the finalisation of the deal.

Not Just A Pipe Dream - 8th June, 2009

8th June, 2009

Not Just A Pipe Dream

Expanded capacities and product acceptance provide stong visibility to Astral Polytechnik

RAMKRISHNA KASHELKAR ET INTELLIGENCE GROUP

IN VIEW of the growing acceptance for cheaper and better piping products, Astral Poly Technik’s expanded capacities are likely to boost its revenues and profits in coming years. Long-term investors should consider investing in this stock.

BUSINESS
Astral Poly Technik (APL) is an Ahmedabad-based company manufacturing CPVC (chlorinated polyvinyl chloride) pipes and fitting since 1999. APL is the first licensee of Lubrizol of the US (formerly known as BF Goodrich, a fortune 500 company) and has an equity joint venture with Specialty Process LLC of the US to manufacture and market the most advanced CPVC plumbing system for the first time in India.
The company’s products compete directly with galvanized iron (GI) pipes, but are cheaper and more durable. They not only gained rapid acceptance in new construction projects, but in the replacement market.
Starting from merely hot and cold water system, the company has expanded its product portfolio to include industrial piping, lead-free PVC plumbing, ABS pressure pipes, CPVC aluminium bendable pipes, sewage, waste and rain water management systems and underground drainage system, and is planning to launch CPVC-based fire sprinkler system shortly.
APL imports CPVC from Lubrizol, which is the leading manufacturer of this specialized polymer and controls over 80% of the global CPVC production. It has set up a plant in Himachal Pradesh to produce fittings and this facility enjoys full income tax exemption till the end of FY2010.

GROWTH DRIVERS
APL has continuously expanded its production capacity since inception. In the past five years alone, its capacity has gone up at a cumulative annual growth rate (CAGR) of 70.5% to 26000 TPA from 1800 TPA by end FY05. Thanks to strong demand in the past, the company could fully utilize its additional capacity in the subsequent year itself. The latest round of expansion is likely to allow the company to grow in the next two years without any additional capex.
The company is also expanding its distribution network in India, which currently stands at around 200 distributors and nearly 3000 dealers. It is setting up a joint venture in Kenya to enter the African market and has plans to set up another plant in southern India.

FINANCIALS
Over the last five years, the company’s net profits have grown at a CAGR of 45% as against a growth of 39% in its net sales. Despite the expansion spree, the company has improved its debtequity ratio over last five years from 1.48 in FY 2005 to 0.67 in FY 2009.
During FY 2009, APL achieved a 42% topline growth to Rs 193 crore. But its net profit was 17% lower at Rs 14.2 crore. The fall in rupee increased the company’s import costs and repayment liability on foreign currency buyer’s credit. Both put together, the company lost nearly Rs 13 crore during the year. The recent rupee strength is set to boost the company’s future performance.

VALUATIONS
At the current market price of Rs 120, the scrip of APL is trading at 9.5 times its earnings for past 12 months. Going forward, we expect the company to record an EPS of Rs 22.7 for FY2010, which discounts the current price at just 5.3 times.
ramkrishna.kashelkar@timesgroup.com

Oil’s well - 1st June, 2009

Oil’s well

INDIA’S largest public sector independent petroleum refinery Mangalore Refineries and Petrochemicals (MRPL) more than doubled its net profit to Rs 608 crore during the fourth quarter ended March ‘09 from year-ago levels. However, the poor show in the preceding two quarters pulled down net profit for the whole year by 6%.
The company had posted poor refining margins in the preceding two quarters due to the crash in petroleum product prices. In the fourth quarter, however, buoyancy in crude oil prices aided MRPL’s growth. Its gross refining margins (GRM) - the differential between the cost of raw materials and the price of refined products sold - stood at $7.54 per barrel, making it the company’s best March ending quarter in at least five preceding years. During the March ‘08 quarter, the company’s GRM stood at $5.6 per barrel.
MRPL also improved its capacity utilisation to nearly 140% of its rated capacity during the quarter with a crude throughput of 3.42 million tonnes, 8.6% higher than the corresponding quarter of the previous year.
At the end of the March ‘09 quarter, the company’s net debt - borrowed funds net of cash equivalents - has become nearly zero due to strong operating cash flows and reduction in debt. The company’s interest cost during the quarter, at Rs 32.8 crore, was 8% lower y-o-y.
The weaker rupee caused a net forex loss of Rs 188.5 crore for the March quarter. For FY09, the exchange loss was at Rs 587.9 crore.
The company had created a provision of Rs 62.35 crore towards mark-to-market losses on outstanding forward forex contracts in the December ‘08 quarter. The contracts were taken to hedge the risk of changes in foreign currency exchange rates on future export sales. However in the March ‘09 quarter, these mark-to-market losses stood at only Rs 22.6 crore allowing the company to write back the excess provisioning of Rs 39.7 crore.
The company’s board of directors proposed Rs 1.2 per share as dividend during FY09, the same as last year. The scrip jumped over 14% after the results, to Rs 75. At the current market price the stock is now trading at 11 times its earnings for FY09 with dividend yield of 1.6%.

Growth vistas - 1st June, 2009

1st June, 2009

Growth vistas

Commissioning of new plants and entry into new markets provide a trigger for growth
RAMKRISHNA K ASHELK AR ET INTELLIGENCE GROUP

TIME Technoplast is Mumbai based manufacturer of innovative plastic products. It is India’s leading manufacturer of drums and containers used in transportation of chemicals with nearly 4 million units per annum and 75% market share in India. The company derives nearly 58% of its annual revenues from industrial packaging, with lifestyle products contributing 9%, and the rest coming from infrastructure products.

GROWTH DRIVERS
The company recently commissioned its greenfield battery unit at Panoli and high pressure HDPE pipe and pre-fabricated structures at Silvassa. It is setting up another plant to manufacture drums and containers near Kolkata to commission by September 2009 and planning to enter China with a greenfield unit. The government has recently made the usage of auto-disable syringes mandatory in India to improve public health. This is set to help Time Technoplast, which is a leading producer of such syringes from its plant in Baddi.
It has started supplying plastic fuel tanks for export variants of Tata’s commercial vehicle ‘Ace’ from its Pantnagar plant. Thanks to their low weight, which can improve an automobile’s mileage, the plastic fuel tanks have a substantial growth prospects in India. The company’s new capacities are coming up tax free zones and this is likely to reduce its effective rate of tax to around 20% in FY10 from 28.7% in FY09. The company is also working on other innovative products such as green batteries, fuel cells, polymer composite LPG and CNG cylinders, sound barriers as part of its various product lines. All these products have great growth potential in Indian as well as exports markets. Most of these products will be rolled out over next few quarters. At a macro level, with the natural gas based polymer capacities come up in the Middle East, it is expected that the global polymer prices will remain depressed in coming 2-3 years. This bodes extremely well for a plastic product manufacturer like Time Technoplast.

FINANCIALS
The company has always maintained its operating profit margin around 18% - 20% over last five years, which signifies its ability to command premium for its products. During the same period the company’s net profit grew at a cumulative annual growth rate (CAGR) of 109% as against 44% CAGR in net sales. Its performance for the December 2008 quarter was weakened due to the crash in commodity prices necessitating a write off in inventory value. At the same time, higher interest rates and longer working capital cycle pushed up the interest cost. As a result, the company’s consolidated profit fell 32% to Rs 14.5 crore

VALUATIONS
At current price of Rs 38.5, the scrip is trading at a P/E of 11.2 times based on trailing twelve month profits. We expect the company to end FY09 with earnings of Rs 3.9 per share, which discounts the current market price 9.8 times. During FY 2010 the company will have full benefit of its various new capacities, which are likely to boost its EPS to Rs 5.3. At its current market price, the stock is trading at just 7.3 time the forward EPS for FY10.

CONCERN
Several of the company’s products such as the plastic fuel tanks, fibre coated CNG / LPG cylinders, duro-turf, pre-fabricated structures, roadside sound barriers are new to Indian market and need government approvals as well as customer acceptance, both of which are time-consuming.

Powered By Gas - 18th May 2009

18th May 2009

Powered By Gas

By offering key services for petroleum retailing, Confidence Petroleum is set to emerge as an important player in LPG and CNG businesses across the country

RAMKRISHNA KASHELKAR ET INTELLIGENCE GROUP

Beta 0.39
Institutional Holding 0.83%
Current Dividend Yield 0%
Current P/E 10.1
Current Market Price Rs 9.1
Current Market Cap Rs 234 cr

CONFIDENCE Petroleum has emerged a key vendor for marketing operations of oil and gas players. Focussing on its key clientele the company is expanding its bouquet of offerings and is adding capacities. Considering the interesting opportunities lying ahead for this little known company, it appears attractive for the long-term investors.

BUSINESS:

Confidence Petroleum (CPL) is establishing itself as an allservice provider for the marketing and distribution needs of Indian oil marketing companies. The company has scaled up its traditional businesses of LPG cylinders and LPG bottling and is investing heavily in auto LPG and natural gas distribution related businesses. CPL has emerged India’s largest bottler of liquefied petroleum gas (LPG) operating out of 51 locations. These dispersed facilities offer greater flexibility and cost advantage to petroleum retailers in supplying LPG to domestic users spread across the country. The company is also the largest LPG cylinder manufacturer with 6 facilities having an installed capacity of around 42 lakh cylinders per annum. Its 7.5 lakh unit per annum plant near Kandla in Gujarate is a 100% export oriented unit (EOU). The company has set up 50 auto LPG dispensing stations (ALDS) across various cities under the brand of GoGas. The company has also entered the natural gas related businesses and recently commissioned a 3-lakh unit per annum cylinder manufacturing facility for compressed natural gas (CNG). It has also launched auto meter reading solutions for piped natural gas (PNG) sold to households by the city gas distributors (CGD). Towards the end of year 2008, the company acquired two ethanol manufacturing units with a combined capacity of 1.5 lakh liters per day and one crude oil refining unit with 2 lakh liters per day capacity in Maharashtra. The company acquired these distressed assets for a low investment of around Rs 7.5 crore, which allows them the flexibility of operating only when profitable.

GROWTH DRIVERS:
The company has recently commissioned CNG cylinder manufacturing plant in Vizag for exports market. It is currently setting up LPG and CNG cylinder manufacturing complex in Uttarakhand, which will commission operations by end of 2009. This new plant will enjoy 15-year exemption from sales and excise duties. The company is carrying an order book of over 30 lakh LPG cylinders. It has significant growth plans in ALDS to scale up to 250 stations in next couple of years and has also won a turn-key contract for Indian Oil to set up 9 similar stations. The company has tied up with Israel’s Energetech to introduce an innovative technology for automotive natural gas called ‘Adsorbed Natural Gas’ (ANG). This would enable it to store large quantity of natural gas under less pressure, enabling light-weight cylinders, which could be installed even on two-wheelers. This being a new concept in India needs government approval and the company has received permission from the Chief Controller of Explosives to conduct tests. This technology, when commercialised, would enable it to transport natural gas from the marginal fields. The company also has plans to augment its offering to the petroleum companies by adding fuel-dispensing units for petroleum retailing and also move into setting up auto CNG stations.

FINANCIALS:
The current management has taken over the listed company with two LPG bottling plants, which was a sick unit, few years back and has turned it around. Hence, we do not have long financial history for the company. Last year the company raised over Rs 100 crore through a GDR issue and share warrants. The company’s debt-to-equity ratio has been steadily coming down to 0.1 for the year ended March 2008. Post completion of its Uttarakhand plant, CPL would be carrying around Rs 30 crore of debt. The company has approved a share buy-back of upto 5% of its equity from open market at a price less than Rs 20 per share. The company is currently in the process of amalgamating three of its subsidiaries with itself.

VALUATIONS:
At the current market price of Rs 9.10, the scrip is trading 10 times its earnings for the 12-month ended December 2008. We expect the company to end FY09 with a net profit of Rs 30 crore, which discounts the current price 7.8 times. During FY 2010, the company is expected to derive meaningful benefit of its investments in Vizag and Uttarakhand plants as well as the acquisitions.

ramkrishna.kashelkar@timesgroup.com

STEPPING ON THE GAS - 27th April 2009

27th April 2009

STEPPING ON THE GAS

In view of healthy cashflows and growing investments, Petronet LNG looks attractive on a long term horizon

RAMKRISHNA KASHELKAR ET INTELLIGENCE GROU P

Beta: 0.84
Institutional Holding* 11.43%
Dividend Yield: 2.8%
P/E: 9.2
M-Cap: Rs 3975 cr
CMP: Rs 53

PETRONET LNG (PLNG) is India’s largest importer of liquefied natural gas (LNG) representing nearly 25% of India’s total natural gas consumption in FY09. The company is promoted by ONGC, Gail India, Bharat Petroleum and Indian Oil, which together hold 50% of its equity capital with strategic stakes held by Gaz de France (10%) and Asian Development Bank (5.2%).
PLNG set up its first LNG import terminal at Dahej in Gujarat with 5 million tonne per annum (MTPA) capacity in 2004. The company has entered into a 25-year contract with RasGas of Qatar for import of 5 MTPA of LNG, which will be scaled up to 7.5 MTPA from September 2009. The company has entered into back-to-back sell agreements with the promoter group companies, which market the regassified LNG (RLNG) to domestic customers. This arrangement not only insulates PLNG from any marketing risks, but also cuts down any requirement of working capital. The company earns a small fixed charge on regassification of LNG, which is revised annually.

Growth Drivers:
The company is set to benefit both from incremental volumes as well as increase in its conversion charges. The company has doubled the capacity of its Dahej LNG terminal to 10 MTPA and is currently in the process of commissioning the additional capacity in a phased manner. Similarly, its regassification charges were raised by 5% starting January 1, ‘09 to Rs 30 per MMBTU. The company has also tied up another six months of LNG supplies with BP for the Dabhol Power project. At the same time, import of spot cargos too is expected to rise with LNG prices coming down heavily.
Despite additional gas starting to flow out of RIL’s eastern offshore oil fields, India still remains undersupplied in terms of natural gas availability. This gives ample scope for PLNG to utilise its expanded capacities, provided LNG is imported at a competitive price. Globally the supply of LNG is set to increase over next few years with a number of projects currently under construction, which increases the possibility of the company striking a long-term supply deal in near future. The company has also taken up 26% stake in a dry-bulk cargo port at Dahej, the first phase of which is likely to complete by end 2009. PLNG is also contemplating setting up power plants near its regassification projects in Dahej, as well as Kochi, once it is ready.

Financials:
With the conversion charges fixed, the company’s revenues and profits depend directly on the volume of LNG handled. Over last four years the company has continuously increased the volumes, resulting in nearly 130% utilisation of its nameplate capacity of 5 MTPA. However, the first nine months of FY09 witnessed stagnation in volumes due to difficult economic conditions. The company has brought down its debt-to-equity ratio consistently from FY05 to FY08, while improving the interest coverage ratio. Its sales have grown at a cumulative annual growth rate of over 40% over last five years, while the loss of Rs 28 crore in FY04 turned into a profit of Rs 475 crore in FY08. Being a capital intensive company, PLNG has been providing over Rs 200 crore annually towards interest and depreciation. With the commissioning of additional capacities, these numbers will double in coming quarters.

Valuations:
At the current price of Rs 53, the scrip is trading at 9.2 times its earnings for the 12-month period ended December 2008. We expect the company’s profits to grow at 20% in FY2010, which translates in a forward P/E of 7.2. The company’s last year’s dividend of Rs 1.5 per share is expected to continue, which gives a 2.8% dividend yield.

Risk Factors:
Sourcing a long-term LNG supply, which will guarantee optimum capacity utilisation, remains the key concern for the company’s future growth prospects. PLNG also runs execution risks towards its new projects.
EXPANDING TO GROW Petronet LNG has doubled capacity at its Dahej terminal to 10 MTPA, which will be fully operational by end-May The company annually generates over $100 million of cashflows The company has secured 1.5 million tonne of LNG supplies for Dabhol Power project From September 2009, PLNG’s imports from RasGas will jump 50% to 7.5 million tonne per annum Interest and depreciation are the largest costs for the company, which will double in FY 2010 Spot LNG rates have crashed substantially to $5 per MMBTU – nearly 70% below last year’s peak due to global recession and fall in demand for LNG Thanks to the back-toback purchase and sale arrangements PLNG needs no working capital Signing a long-term LNG supply deal at attractive price will be a key trigger for Petronet LNG’s growth

Refiners in good shape as oil rules steady - 22nd April, 2009

22nd April, 2009

Refiners in good shape as oil rules steady

But For Upstream Cos, Low Oil Prices & Stagnant Output May Bring Down Profits & Sales

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

OIL marketing firms and standalone refiners are tipped to do well in the March 2009 quarter, which saw oil prices stabilising around $50 per barrel after plunging to below $35-levels in December. However, the quarter may turn out to be a disappointing one for upstream companies such as government-run ONGC, which may see low oil prices and stagnating output affecting their sales and profit numbers.
Oil marketing companies will post the biggest gains over the year-ago period, as their marketing operations were profitable for a major part of the quarter. Low crude prices prevailed in the quarter will see standalone and private sector refiners posting good numbers. The benchmark WTI crude oil prices averaged at $42 per barrel for the quarter, which was 57% lower compared with the prices prevailed in the year-ago period.
Fuel marketing firms such as Indian Oil, BPCL and HPCL will see a jump in profitability in the March quarter, as their refining operations will remain profitable unlike the two previous quarters when inventory losses played spoilsport. Also, they were selling auto fuels at positive margins during most part of the quarter, thanks to the crash in crude oil prices.
India’s largest producer of crude oil and natural gas, Oil & Natural Gas Corporation (ONGC), will have a disappointing quarter. Stagnating oil production from many of its ageing fields will also affect ONGC, which is likely to report a 7% decline in domestic production in the quarter. However, these negative factors will get partially offset by a major depreciation in rupee value, which at Rs 49.8 against the dollar was nearly 25% weaker since the year-ago period.

Oil refiners such as MRPL, Chennai Petroleum, Reliance Industries and Essar Oil are likely to see pressure on margins in dollar terms. However, unlike the preceding quarter, they won’t have inventory losses this quarter. They too will benefit from the rupee depreciation as the same dollar per barrel gross refining margin would translate in more rupee profits. However, India’s largest company Reliance Industries is set to report a fall in sales as well as profits for the quarter due to the maintenance shutdown at its refinery in January-February period.
In natural gas segment, the results for the March quarter are likely to be mixed. The supply of natural gas in the country remained more or less stagnant during the quarter. Gail is likely to maintain its growth momentum, thanks to additional gas from Panna, Mukta, Tapti (PMT) fields.

A rise in naphtha prices will see a number of gas consumers, who had shifted to naphtha in the December 2008 quarter, shift back to natural gas in the March quarter. As a result, smaller players such as Gujarat State Petronet (GSPL) and Gujarat Gas will see an improvement in gas volumes.
ramkrishna.kashelkar@timesgroup.com

Pantaloon: Acquiring a new look - 20th April, 2009

20th April, 2009

Rallis India: Well positioned
Robust performance continued at Rallis India, the agrochemicals company belonging to the Tata stable. The company reported net profit of Rs 72 crore for the year ended March 2009. But this appears to be lower on a y-o-y basis, despite strong operating growth, due to the onetime gain of Rs 87 crore in the earlier year following a land sale. For the year ended March 2009, the company reported 23% growth in net sales to Rs 856 crore and a substantial improvement in operating profit margins, leading to a 67% jump in the operating profits. Thanks to a muted growth in interest and depreciation costs, the pre-tax profits were 83% higher against the previous year. Rallis India’s strong operating performance was enabled by a jump in its international business, which now contributes nearly one-third of its revenues. The company secured long-term contracts from key customers with revenue potential of Rs 1000 crore over the next five years. In the domestic market, it was able to combat the spurt in costs through a series of price hikes totalling nearly 15% in FY09. Nearly 29% of the company’s revenues came from innovative products launched in the past four years.
For the quarter ended March 2009, the company reported 25% higher net profit at Rs 10 crore on 26% growth in net sales at Rs 187 crore. It was also able to improve its operating margins in the fourth quarter, which is typically its slowest quarter in a fiscal. The company declared a dividend of Rs 16 per share for FY 2009, which translates into a dividend yield of 3.3% on Wednesday’s closing price of Rs 492. It had paid the same dividend last year as well, albeit due to the extraordinary gains.

Pantaloon: Acquiring a new look
Early last week, Pantaloon Retail India announced plans to restructure its businesses. The company would sell/transfer its retail and fashion divisions to wholly-owned subsidiaries. The holding company will have two subsidiaries. One subsidiary will house the value and lifestyle retail formats, while the other will look after designing, manufacturing and sourcing products. The announcement was in line with market expectations. The stock lost 5% on a weekly basis after gaining nearly 60% in the past one month. Pantaloon also announced plans to raise money through the sale of shares or convertible warrants for funding its expansion and diversification plans. The additional equity infusion would help to lower its high debt equity ratio of 1.55. As on June 2008, the company’s interest coverage ratio was a low 1.9x as compared to Shopper Stop’s 5x. Its operating margin was just enough to cover two years of interest payment against 5 years for the latter. Pantaloon would issue 11 million equity shares at a price of Rs 183/- each to the promoters and their associates; 4.1 million equity shares at a price of Rs 183/- per share to Dharmyug Investments; and 5 million warrants at a price of Rs 183/- each to the promoters and associates, with an option to the warrant holders to acquire same number of equity shares within 18 months. There would be 11% equity dilution, leading to a 17% decline in the earning per share (EPS) from Rs 7.7 to Rs 6.4. It will hold an extraordinary general meeting on May 12 to obtain the approval of shareholders for the preferential issue of equity shares and warrants to promoters and investors.

(Contributed by Ramkrishna Kashelkar and Supriya Verma Mishra)

A Fertile Future - 20th April, 2009

20th April, 2009

A Fertile Future

With more natural gas becoming available, Rashtriya Chemicals & Fertilisers has short-term as well as long-term triggers for profit growth

R AM KR I SH NA K ASH ELK AR ET I NTELLIGENCE GROU P

RASHTRIYA Chemicals & Fertilisers (RCF) could emerge as a key beneficiary of the rising availability of natural gas in India. As additional capacities become available, dependence on subsidies will decrease. All this, along with positive policy changes, make RCF an attractive bet for a long-term investor.

Business:
Mumbai-based RCF is one of India’s largest producers of fertilisers and industrial chemicals. It has two operating locations, one at Trombay near Mumbai and the other at Thal in Raigarh district, and is India’s third-largest fertiliser producer. It makes urea and complex fertilisers and has a combined capacity of 25.1 lakh tonnes per annum (TPA). It also produces chemicals such as methanol, methylamines, nitric acid and ammonium bicarbonate. RCF also imports and sells urea, muriate of potash (MoP) and diammonium phosphate to support its product portfolio.

Growth Drivers:
RCF is set to receive an immediate boost from increased availability of natural gas — it is to get 3.05 million cubic metres per day (mcmd) of gas from Reliance Industries, which will enable it to restart its 3.3-lakh-TPA urea plant at Trombay by this month-end and cut down naphtha consumption at its Thal plant. By September, it will also restart its 3.2-lakh-TPA complex fertiliser plant at Trombay, which was closed due to an accident. RCF’s Rapidwall project to produce low-cost pre-fabricated walling systems from gypsum produced at Trombay will start operations by end-April and the company is also revamping its methanol plant to add more capacity and cut energy consumption. All these initiatives will raise output, raising turnover and boosting bottomline. Lower costs will bring down its subsidy bill. The lower dependence on government payments, typically made two to three months after actual production, will help cut RCF’s short-term borrowings and interest costs. In the long run too, RCF has various expansion projects planned to drive growth. It has set up a joint venture with Rajasthan State Mines & Minerals (RSMML) to set up a 3-lakh-TPA di-ammonium phosphate (DAP) fertiliser plant in Rajasthan at a total estimated cost of Rs 900 crore. This project involves a 2:1 debtequity ratio. The company is also de-bottlenecking its Thal plant to scale up urea manufacturing capacity to 20 lakh TPA by mid-2010 from 17 lakh TPA now. At Thal, it is also considering a 1.2-million-TPA brownfield urea expansion. RCF has also entered into a joint venture with Gail for a coal-bed-methane project and with National Fertilisers and KRIBHCO for revival of a defunct fertiliser plant.

Financials:
RCF’s net sales have risen at a cumulative annualised growth rate (CAGR) of 20.5% between 2004 and 2008. In the same period, its annual profit stagnated at around Rs 150 crore. However, the company seems to be back on the growth path and posted a 61% rise in net profit at Rs 172 crore for the ninemonth period ended December ‘08. For FY08, the company’s debt-to-equity ratio jumped to 0.75, as it had to borrow nearly Rs 900 crore more towards working capital because of rising dependence on government subsidy payouts. For the year to end-March ‘09, the company may report an increase in the debt-to-equity ratio as it has been unable to sell nearly Rs 700 crore of bonds. However, the situation is likely to improve in the current year. The company has booked a forex loss of Rs 122 crore for the ninemonth period ended December 31, ‘08 due to currency fluctuations. Since the company doesn’t carry any foreign currency debts, this mainly represents the import obligations.

Valuation:
RCF’s stock is now trading at 10.9 times earnings for the last 12 months. We expect the company to post a net profit of Rs 327 crore in FY10, which translates to a forward P/E of 7.5 at the current market price. Other major urea manufacturers such as National Fertilisers and Chambal Fertilisers are trading at P/E of 13.2 and 11.1 respectively. Risk Factors:The company may have to write off mark-to-market loss on the bonds, which it is unable to sell due to their illiquid nature.

ramkrishna.kashelkar@timesgroup.com

Moulding A Plastic Future - April 13, 2009

April 13, 2009

Moulding A Plastic Future

Innovative product offering, healthy financials and zest for inorganic growth make Sintex Industries attractive for long-term investors

RAMKRISHNA KASHELKAR ET I NTELLIGENCE GROU P

Beta: 0.94
Institutional Holding* 58.3%
Dividend Yield: 0.9%
P/E: 5.2
M-Cap: Rs 1,574.5 cr
CMP: Rs 115.35
*As of Dec’08

SINTEX Industries (SIL), which is having a healthy business in India, has taken up the acquisition route to expand geographically. The company has already acquired seven companies in two years and is looking out for more. innovative product offering, healthy financials and zest for inorganic growth make the company attractive for long-term investors. Business: Sintex Industries has two main divisions - textiles and plastics. Under the textiles division, the company sells high-end structured fabric to the international and domestic ready-made garment manufacturers. In the plastics division, the company manufactures pre-fabricated building materials, monolithic structures, custommoulded products and composites. These are high-end plastic products that are used in industries such as automobiles, electricals, construction and telecom.

SIL’s pre-fabricated building materials and monolithic construction material are in great demand in low-cost housing projects, rural schools and healthcare shelters. The company and its subsidiaries put together have 35 plants spread across India, the US and Europe.
Nearly 45% of the company’s consolidated turnover comes from building materials such as pre-fabs and monolithics, 40% comes from custom-moulded and plastic composite products, while the remaining 15% is accounted for by textiles. Textiles and construction materials are businesses conducted by Sintex on a standalone basis, while the subsidiaries manufacture moulded products.

Growth Drivers:
The company raised $225 million in early 2008 through FCCBs and Rs 750 crore by way of qualified institutional placement and issue of warrants to promoters to fund its growth plans. However, due to the subsequent turmoil in the financial markets, acquisition plans could not fructify. The company is carrying around Rs 1,600 crore of cash. Out of this, it will spend around Rs 300crore on organic growth in FY2010 and the remaining on acquisitions.

SIL also spent around Rs 300 crore during FY09 on expanding capacities. For the building materials, the company has gone from a single plant two years back to five plants today. It is planning to add further capacities at these plants. When the company launched its building materials business a couple of years back, it bagged orders worth over Rs 1,700 crore. The current capacities are now capable of executing around Rs 800 crore of orders per annum, which will enable the company to book further orders in the second half of FY2010. At present, the unexecuted order book stands at around Rs 1,300 crore.

Financials:
In last five years, SIL’s PAT has risen at a cumulative annual growth rate of 57.3% and net sales grew at 38.8%. Its debtto-equity ratio jumped to 1.3 in FY08 due to the issue of FCCBs. For the last ten years, the company’s operating cash flows have always remained positive. The December 2008 quarter witnessed a fall in operating margins, mainly due to inventory losses. The company reported a 21% growth in profit on the back of 30% higher sales.

Valuations:

At the current market price, the scrip is trading at 5.2 times trailing 12-month earnings. We expect the company to report a net profit of Rs 352 crore for FY 2010, which translates to a forward price-toearnings multiple of 4.5 on current equity. If we assume full conversion of outstanding FCCBs (conversion price: Rs 584) and equity warrants with the promoters (conversion price: Rs 452), the P/E would work out to 6.2 on a fully diluted basis.

Concerns:
The inorganic growth strategy of the company has inherent risks with regard to integration. SIL’s latest attempt at acquisition - Greiger Tech in Germany - has filed for bankruptcy and SIL may lose its initial investment of 7 million if it fails to emerge out of bankruptcy. The company’s overseas subsidiaries are facing pressure on sales and margins due to the economic slowdown. Lastly, the promoters’ holding in the company has dropped below 30% and a large chunk of it has been pledged out.

A Boost In Long Run - April 13, 2009

April 13, 2009

A Boost In Long Run

Although RIL’s KG basin gas is positive for the fertiliser industry, the benefits are long term and indirect

R AMKRISHNA KASHELKAR ET INTELLIGENCE GROU P

WITH natural gas starting to flow out of Reliance Industries’ (RIL) fields from this month, a new chapter has begun for India’s fertiliser industry. The perennial shortage of natural gas - a major worry for the urea manufacturers - has become a thing of the past. However, the benefits to the industry are rather long-term and indirect. The direct benefits will all accrue to the government, which will see a reduction in its subsidy payout.

Natural gas is a feedstock for manufacturing urea, which accounts for nearly 56% of the country’s total fertiliser consumption. The total demand from urea units connected to the natural gas grid is estimated at 43 million cubic metres per day (mcmd). However, the current supply falls short by around 14 mcmd, resulting in either under-utilisation of the capacity or use of costly naphtha instead. The recent gas supply agreements signed between RIL and fertiliser companies are set to bridge this gap.
Apart from this, there are several urea plants, which are currently running entirely on costly liquid fuels, such as naphtha or fuel oil, and are yet to be converted to natural gas. Once these plants get natural gas connectivity within the next three years, demand for natural gas from this industry alone would shoot up to 76 mcmd.
Over the last few years, dependence of fertiliser companies on government’s subsidy payments had increased due to rising input costs. For example, in the case of Rashtriya Chemicals & Fertilisers (RCF), the subsidy receipts grew at a cumulative annual growth rate (CAGR) of 35.1% in the last five years, whereas sales of urea grew at 14.1%. Thus, any delays in payments or issue of special bonds instead of cash by the government strained the cash flows of urea manufacturers.This meant higher indebtedness and interest costs. RCF’s total debt more than tripled to Rs 1,243 crore in FY08, while the interest cost jumped eight times to Rs 66 crore.
With the additional gas the cost structure of fertiliser companies will ease, helping them bring down their dependence on the government’s subsidy payouts. Similarly, the government may do away with the practice of paying subsidy by way of bonds - the illiquid nature of which hurts fertiliser companies.
The direct benefit to companies’ bottom lines would come in the form of better capacity utilisation. For example, RCF can now recommission its 3.3-lakh-tpa capacity at Trombay. Similarly, production volumes will go up for companies, such as Tata Chemicals and Chambal Fertilisers that have added capacities by way of debottlenecking. In the long run, the additional availability of natural gas is likely to induce fresh investments in the industry .
ramkrishna.kashelkar@timesgroup.com