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

Cos may land a windfall from FCCB buybacks - 7th April 2009

7th April 2009

Cos may land a windfall from FCCB buybacks

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

WHEN Moser Baer, the world’s second-largest manufacturer of compact discs, bought back foreign currency convertible bonds worth $51 million in the last three months, it had to pay just $12.4 million. Depressed market conditions and a liquidity crisis helped the company make a gain of around $38.6 million, which translates into an extraordinary gain of over Rs 190 crore at the current exchange rates. “We have bought back the FCCBs at a discount of around 75%,” said Yogesh Mathur, chief financial officer of the company.

Apart from bringing down the liabilities on the company’s books, the transaction may also help it bring down mark-to-market losses provided for against the FCCBs. These gains will help the company post better results in the fourth quarter of the fiscal ended March 31.

Ever since the Reserve Bank of India allowed Indian companies to buy back FCCBs in December 2008, a dozen companies have redeemed such bonds worth $340 million at deep discounts to the conversion price. As in the case of Moser Baer, these companies also will earn twin benefits from FCCB buyback. When they pay off a loan at a discount, they earn a substantial one-time gain. Also, they need not carry the mark-to-market losses for the redeemed FCCBs.

During the first nine months of the last fiscal, firms following Accounting Standard 11 had written off heavy mark-to-market losses towards outstanding FCCBs with the rupee depreciating significantly. For example, Jubilant Organosys wrote off over Rs 410 crore in the first nine months, while JSW Steel booked Rs 808 crore as MTM losses. According to industry sources, a part of such earlier provisions representing the bought back FCCBs could now be reversed.

Although these companies have published their FCCB buyback exploits, some of them, such as M&M and Firstsource Solutions, remain tight-lipped about the discount they received, which could give away the possible extraordinary gains they are likely to book. A press release by Financial Technologies, which redeemed FCCBs of $9.5 million face value, mentions the average discount was a little above 37%. This could earn the firm Rs 17.5 crore of gains the quarter. Ruchi Infrastructure had to pay a little more than 50 cents to a dollar according to their release, which translates into a gain of around Rs 37.5 crore. Wherever the firms had booked accrued interest on these zero coupon bonds, the book value of such bonds will be accordingly higher and hence, the extraordinary gains will also be higher.

So far, Jubilant Organosys has taken the maximum benefit of this opportunity, redeeming $60.9 million of FCCBs in the March quarter and now has $192 million of FCCBs outstanding. The average discount the firm received was 40% of the maturity price of the FCCBs, said R Sankaraiah, finance director, Jubilant. Firstsource Solutions ($49.7 million), JSW Steel ($47.8 million) and Uflex ($45 million) are the other companies.

Most firms went in for ECB for this purpose, wherever their forex earnings fell short. “We have arranged a seven-year ECB line for repaying $49.7 million of FCCBs due in 2012 at a deep discount. So, not only our liability has gone down, we also have a longer duration to repay it,” said Farid Kazani, CFO of Firstsource Solutions. K Chandrasekhar, senior VP, finance, M&M, also acknowledged raising ECB for redeeming $10.5 million of FCCBs.

GOLDEN HARVEST - 23rd March 2009

23rd March 2009 Lead Story

GOLDEN HARVEST

In a bear phase the dividends could and should be a compelling reason of buying. The current low stock prices mean market is full of these low hanging fruits offering juicy dividend yields

AS a Spanish proverb puts it, “Habits are at first cobwebs, then cables”. We have been so used to seeing the share prices go up month after month between 2003 and 2008 that investing for capital appreciation has become a habit. Even after a long year of turmoil, most investors are asking the question, “ye kitna upar jayega?” before buying shares. Investors are still not prepared to accept the reality that the bull-run is long behind us and the market is staring at a drought of good news to take it forward. This new reality requires the investors to revisit their investment rationale.
The days of momentum buying (buy high and sell higher without looking at the company’s finances) are over. Nor is it possible to double or triple your capital in ultra short time anymore. The froth is out and the investment world is back to its normal trajectory. Does this mean the end of the road for equities? Not really.

It just means that investors will now have to change their perception about equities. While equities were traditionally bought for capital returns, they could become excellent sources of steady income during bear phases. The lower stock price translates into higher dividend per share, thereby pushing up the dividend yield to attractive levels.

Right now, the market is full of low-hanging fruits where the posttax yields are almost double those in fixed income instruments. ET Intelligence Group makes your task easier by doing the necessary legwork. We must add that this does not amount to ‘buy’ recommendation for any of the stocks listed in the table. The investors are advised to do their homework before taking the plunge.

Rationale behind dividend approach
The new financial year is just a week away. The beginning of the new fiscal will usher in the annual dividend season. Beginning from the middle of April, companies that follow the April-March financial year (and bulk of them do that) will start announcing the annual goodies to the shareholders. It makes sense to focus on dividends which are also incidentally tax-free in the hands of the investor. In fact, a dividend yield of 6.5% is equivalent to 10% interest earned over a period of one year, which is a taxable income.

Another important aspect of dividends is that they are more stable than corporate profitability. Most companies raise their dividend payout ratios during times of low profitability instead of cutting the dividends in tune with a decline in profitability.

In fact, in the Western countries, a large section of people invest solely for dividends. And a cut in dividends is considered as a fundamental degradation of a company’s financials. For example, General Electric lost more than 30% of its value immediately after it announced a reduction in dividend and the shares of Citigroup dipped below $1 after it cancelled its annual dividends.

Will the dividends really come this year?
The number of dividend-paying companies in India and the total quantum of dividends would, no doubt, reduce this year compared to FY08. However, if we look back in history, a number of companies had a consistent dividend-paying record over the past 10-15 years regardless of the ups and downs in the business cycle. We also need to appreciate the fact that even the promoters of these companies depend on dividends as a source of their income.

We at ETIG sifted through heaps of data to identify companies that are most likely to maintain their dividend pay-outs. We only chose companies that never missed a dividend pay-out in the past 10 years, have healthy operating cash-flows, comfortable debt-to-equity ratio and haven’t performed too badly in the first 9 months of the year. We excluded companies in the automobile, auto ancillary and real estate space. Our list also excludes newly listed companies. Enjoying ample legroom
A case explained: Let’s take the case of Tata Steel. Its profitability has been hit by the crash in steel prices. Being a commodity business, the steel industry is cyclical and has undergone several ups and downs in the past. However, if we look at the history of the past 15 years, the company has never missed a single dividend. Even when its PAT fell by more than 60% y-o-y in 2002, it cut its annual dividend by just 20% to Rs 4 per share.

The worst of estimates predict a mere 25% decline in Tata Steel’s profits in FY09. Even if the company just maintains last year’s payout ratio, it would still pay Rs 12.5 per share as dividend. This is a 7.1% yield on the scrip’s prevailing market price.

Companies such as MM Forgings, Deepak Fertilisers, Graphite India, Tamilnadu Newsprint and Balmer Lawrie have actually seen a rise in profits in the first 9 months of FY09 over the past year. So they just need to maintain their dividend at the past year’s levels to make the cut. Most of the companies in our list paid out a very small portion of their last year’s profits as dividends. This provides them ample leg room to fiddle with pay-out ratio and thereby maintain dividend stability.

If we broaden our search to companies paying dividends since FY 2000 — to include companies listed in 1999 or 2000 — more interesting names would crop up. The readers can log on to www.etintelligence.com website for the detailed list.

At the end, we must mention that the payment of dividend is at discretion of the company management and shareholders should not treat it as their right. Nevertheless, in the current market scenario, dividend payout could and should be a compelling reason for buying shares, rather than being disappointed at the stagnant stock prices.
ramkrishna.kashelkar@timesgroup.com

CORPORTE ROUND-UP - Bullish Sentiment - 16th March 2009

16th March 2009

CORPORTE ROUND-UP

Positive Vibes
Amid the overall economic gloom, the month of February sprung a pleasant surprise. For the first time in many months, carmakers reported a positive growth in their domestic sales. This coupled with a revival in two-wheeler sales, prompted talk of an imminent economic recovery in Indian even if a mild one. According to monthly figures released by the Society of Indian Automobile Manufacturers (SIAM), domestic shipments of passenger cars grew by a strong 22% in the month of February 2009 over the corresponding month last year. Two-wheeler sales on the other hand were up by 16% yo-y during the month. So can this surge be described as the start of an economic and industrial recovery in India?
The answer is far from affirmative. This is because passenger cars and two-wheelers are consumer goods and their demand dynamics is not directly related to industrial activity in the economy. The current year witnessed many (household) income-boosting initiatives by the government, including generous pay hikes to government and public sector employees under the sixth pay-commission awards and farm loan waivers to farmers. Besides, almost the entire country is now covered under the rural employment guarantee scheme, which acts as a safety net for the poor and unemployed. The latest auto numbers may reflect the positive outcomes of these government measures. In contrast, the offtake of commercial vehicles and multi-utility vehicles (a bulk of which are used as taxis) and cargo three-wheelers continues to be in the doldrums. The demand for commercial vehicles, especially trucks, is directly dependent on the cargo availability in the economy, which in turn, depends on industrial production and the growth in India’s foreign trade. According to SIAM figures, while commercial vehicle sales were down by 32% y-o-y in February, the sales of medium and heavy goods carriers plunged by 56% during the month. M&HCVs are mostly used on inter-state routes linking various production centres with consuming centres. The continued slide in their offtake presents a sobering picture of the economic activity in India right now.

In The Pipeline
The award of a contract for laying 550 km of pipeline worth Rs 385 crore provides Kalpataru Power an opportunity to shore up its revenues and improve profits in a dwindling market. This is the second big order for the company this month, after securing a power transmission order worth Rs 373 crore from Power Grid. The client for this order is the high profile Hindustan Mittal Energy, a JV between HPCL and the L N Mittal group, and related to their upcoming refinery in Bhatinda. The order is to be executed in 18 months and does not include cost of material, which shall be supplied by the client. The orders is more than twice the trailing four quarters’ revenue for Kalpataru from this segment and would help shore it up, which has seen a decline over the last few quarters. The company has been a beneficiary of a number of domestic orders which have been awarded this month.
Kalpataru, which is mainly in the transmission and distribution (T&D) business with total revenue of Rs 1,748 crore in FY08, derives about 10% of its revenues from the pipeline and infrastructure segment, which is quite lucrative mainly because of low investment in fixed assets or working capital, as all the material is provided by the client. This is reflected in the operating profit margin level, which stood at about 17% for the pipeline and infrastructure segment against about 12% for its core T&D segment in FY08. However, for FY09 so far, margins have been nearly the same for both segments, owing to changed market conditions. The company has been in the pipeline and infrastructure segment for the last few years, and has already completed some medium-size orders. It has also moved from executing smaller size pipelines of 8” diameter to 30” diameter and now is executing this order with size upto 48” diameter. The bigger size does not really pose any constraint, except for mobilisation of heavier equipments on site, for handling and laying the pipes. Even though it has an order backlog worth about Rs 625 crore from this segment, this is by far the largest order being executed by it.

Bullish Sentiment
The International Energy Agency (IEA) further cut its global petroleum demand forecast for 2009 to 84.4 million barrels per day (mbpd) - 1.5% or 1.3 mbpd lower compared to 2008 - in its latest monthly report published on 13 March 2009. According to the energy policy advisor representing 28 countries, the world was consuming 86 million barrels of crude oil every day in 2007, which fell to 85.7 mbpd in 2008.
The major highlight of the report is the visible reduction in the global supply of crude oil down 1 mbpd from January 2009 to 83.9 mbpd in February 2009. The crude oil production of 12 members of the Organisation Of Petroleum Exporting Countries (OPEC) stood at 28 mbpd in February indicating nearly 80% compliance by the member countries with the agreed production quotas. Since September 2008, OPEC has cut the production of crude oil by 4.2 mbpd and now the current production level is 1.6 mbpd below what IEA estimates OPEC to produce on an average in 2009. OPEC itself in its latest monthly report has estimated a need to produce an average 29.1 mbpd of oil in 2009.The high compliance level of OPEC spreads bullish sentiments in the crude oil market, particularly when the OPEC is set to meet on Sunday, 15 March 2009 to take stock of the situation and discuss the production strategy. The speculation about another production cut propelled crude oil prices 11.7% in the last couple of trading sessions to $47.3 per barrel - a level last seen in the first week of January 2009. Considering OPEC’s present production level, it now has a spare capacity of around 4.5 mbpd, substantially higher than the average of 1.5 mbpd during 2004 to 2008. This cushion along with the weakening demand for petroleum products is likely to keep the crude oil prices soft in near future. If OPEC goes ahead with another round of production cuts on 15 March, we may see a short rally in crude oil prices.

(Contributed by Krishna Kant, Ashishkumar Agrawal and Ramkrishna Kashelkar)

On Slippery Ground - 2nd March 2009

2nd March 2009

On Slippery Ground

Slackening of global demand and rising inventories have brought down crude oil prices from all-time highs. Prices are less likely to bounce back from these levels, finds out Ramkrishna Kashelkar
THE crude oil prices, which shot up to $147 a barrel in mid-2008, have now fallen below $45 levels. The combination of slowing demand and high inventories means that the commodity has a limited upside available from the current levels. Crude oil is the world’s most actively traded commodity, and the light, sweet crude oil futures contracts traded on New York Mercantile Exchange (NYMEX) are the world’s largest-volume futures contracts traded on any single physical commodity. Crude oil is the single-largest source of energy for the entire world representing nearly 35% of the energy basket. In 2007 the world consumed 86 million barrels of crude oil every day (MBPD) - which is coming down.

THE SLOWING DEMAND:
The global economic slowdown has hit the demand for crude oil hard. The International Energy Agency has continuously revised downwards its monthly oil demand estimates for 2008 and 2009. In July 2008, when the agency for the first time published its official estimate on the global oil demand in 2009, it was 87.7 MBPD. This now stands slashed to just 84.7 MBPD and with further downside risk. This means that the global oil consumption in 2009 will be lower than 2008, which itself was lower than 2007. This is the first time in past 25 years that we will witness such demand contraction for two consecutive years.

OPEC CUTTING SUPPLIES:
The Organization of Petroleum Exporting Countries (OPEC), which produces a little over one-third of world’s oil demand, had cut production by 2 MBPD in Nov 2008 and by another 2.2 MBPD starting Jan 2009. However, this didn’t help the crude oil prices as OPEC’s spare capacity rose to 5 MBPD, removing altogether any supply disruption figures. RISING INVENTORIES:
US commercial oil stocks surged a significant 27 million barrels in January to stand at 1,746 million barrels, which are now within a striking distance of the all-time high inventory levels seen in Oct 2006. The inventories in other developed countries such as Japan and the European countries, however, have been steadily coming down in the same period. It is not just the demand falling faster than supply that has resulted in higher inventories. The crude oil market has entered into a contango - a situation where the near term contracts trade at lower value compared to the longer term contracts - which has encouraged traders and producers to store excess crude in floating storage to profit from higher forward prices. By the end of January 2009, an estimated 75 million barrels of oil was stored in 35 very large crude carriers (VLCCs). These developments have lead to a historically unique problem. The US oil inventories at the key WTI delivery point of Cushing, Oklahoma, have shot up substantially. As a result, the crude oil storage at Cushing, which is a land-locked place, has reached 34.9 million barrels, approaching maximum operational capacity of 36 million barrels. This resulted in a distortion in the price of benchmark WTI, which has diverted from broader market fundamentals. West Texas Intermediate crude, the oil that the New York Mercantile Exchange uses as the underlying commodity for its crude futures, is trading at its largest discount ever to Brent crude, the European benchmark and as well as the OPEC crude basket, despite being superior in quality. This discrepancy between WTI and the international oil market could slowly disappear only after the oil demand rebounds and Cushing inventories start falling.

THE WILD CARDS:
Apart from the fundamental demand-supply factors, several other factors also influence the global crude oil prices. The sporadic upsurge in the geo-political tensions in the Middle East region- more prominently the Israel-Palestine unrest and Iran’s nuclear energy programme - can suddenly create supply concerns and boost the crude oil prices. On the other hand, the compliance of OPEC members with the quotas agreed upon by them has always remained questionable. Although the production discipline is being observed currently, any slippage would have a big negative impact on the markets. The weekly data on US petroleum inventories also drives the markets. The inventories, which rose in January, have fallen in the past two weeks providing support to the crude oil prices. The next OPEC meeting on March 15, 2009 will also have a bearing on the market. As crude oil supplies - including the spare capacity - remain strongly above the demand, the speculative interest in the commodity has vanished. At present, there are hardly any factors to help the commodity move up consistently. The recent fall in US inventories is a positive development but is mainly regarded as a temporary blip. Hence crude oil is expected to remain between $40 and $45 per barrel in the near term.

ramkrishna.kashelkar@timesgroup.com

Oops… I did it again! - 2nd March 2009

2nd March 2009

Oops… I did it again!

ET Intelligence Group’s Ramkrishna Kashelkar finds out how investors can benefit from the much talked about merger between RIL and RPL

THE boards of Reliance Industries (RIL) and Reliance Petroleum (RPL) will be meeting on March 2 to consider amalgamation of both the companies. This will be yet another instance when RIL, the biggest private refiner in the country, would merge its refining subsidiary with itself.
There are several alternatives of carrying out the merger, the clarity on which will emerge only later. If it’s an allcash deal, and RIL comes out with an open offer for RPL, it will have to pay out over Rs 10,000 crore for the outstanding RPL shares.
Alternatively, RIL could issue its shares in the exchange for RPL shares. The swap ratio could work out to somewhere between 1:15 and 1:17, based on the valuation methodology. Comparing the current market capitalisations, one RIL share is worth 16.6 RPL shares, whereas comparing the latest available balance sheet, the book value of one RIL share is 14.8 times that of RPL share.
At an assumed swap ratio of 1:15, RIL will have to issue 8.89 crore equity shares against the outstanding 133.3 crore RPL shares. As a result, RIL’s equity will rise to Rs 1,662.65 crore, which amounts to a dilution of just 5.6%.
The new refinery is expected to bring in additional revenues of Rs 100,000 crore and net profit of Rs 8,500 crore, annually, which is over half of RIL’s net profit for the 12 months ended December 2008. Hence, there is no doubt that the merger will be EPS accretive for RIL shareholders.
What RPL shareholders should do now is a key question. If they choose to convert their shareholding to RIL immediately, they will get a swap ratio of around 1:17. However, it is likely that the company will fix the swap ratio based on the book value at 1:15 or so. Hence, RPL shareholders should wait for more clarity on the swap ratio. However, if the equation between RIL and RPL shares moves above 1:15 in the stock market, they would do better by switching.

ramkrishna.kashelkar@timesgroup.com

Greener Pastures Ahead - 23rd February 2009

23rd February 2009

Greener Pastures Ahead

Deepak Fertilisers is generating healthy cash flows.This together with attractive dividend yield and better business prospects makes for a good long term investment

RMKRISHNA KASHELKAR ET I NTELLIGENCE GROU P

DEEPAKFertilisers and Petrochemicals (DFPCL) is a Pune-based company with an annual turnover of Rs 1,400 crore and a market capitalisation of Rs 475 crore. The company derives over 72% of its revenues from chemicals and 25% from fertilisers. The company is generating healthy cash flows and is likely to emerge a key beneficiary of increased availability of natural gas in India over next few months. The company is placed attractively with little downside risk, healthy dividend yield and with promising growth prospects over next 12 months.

Business:
DFPCL manufactures various basic chemicals occupying high market share in most of them in India. It enjoys nearly 45% market share in nitric acid, 35% market share in ammonium nitrate, 16% in methanol and is the only producer of isopropyl alcohol (IPA) in India. However, availability of natural gas remains an ongoing concern due to which the company is forced to operate its methanol and nitrophosphate fertilisers units at lower than full-capacity.
Also the company has diversified into real estate. It has built a shopping mall Ishanya with 5.5 lakh sq feet leasable area. With around 50 stores, a little over half of total area is operational. Last year DFPCL entered into a joint venture with Yara International, a Norwegian manufacturer, to sell its specialty fertilisers in India.

GROWTH DRIVERS:
The company recently increased the capacity of its nitric acid plant by onethird to 400,000 tonne per annum (TPA). It has built up ammonia storage tanks of 15,000 tonne capacity at JNPT. Once these become operational from April 2009 the company will be able to import ammonia and save natural gas, which can be diverted to increase production of other products.
The company is now firmly connected to the national natural gas grid and has access to natural gas produced anywhere in the country. With RIL commencing natural gas production, DFPCL’s chances to secure a long-term supply of natural gas at reasonable price appear bright.
The company is setting up a 140,000 TPA nitric acid plant by end of 2009 and 300,000 TPA ammonium nitrate plant near its existing plant in Taloja at a cost of Rs 650 crore in first half of FY 11.

FINANCIALS:
The net sales of DFPCL have grown at a CAGR of 21.7% over last five years while the net profits grew at 9.5%. Its debt-to-equity ratio stood at 48.6% for the year ended March 2008 with the return on capital at 17.2%.
The company posted 8.5% fall in profits during the quarter ended December 2008. However, the poor performance was due to crash in commodity prices and also due to 2-month closure of its nitric acid plant for expansion. Hence, if we look at the 12-month period ending December 2008, the company has expanded its profits by 45% to Rs 140 crore with 51% jump in net sales to Rs 1,396 crore. In the past the company has distributed almost one-third of its annual profits by way of dividends with Rs 3.5 per share in FY08.

VALUATIONS:
For FY09, we expect the company to report net profit of Rs 145 crore, which translates in a P/E of 3.2 on current market price of Rs 52.8. If the company maintains its divided payout ratio around 30% of its net profit, the dividend per share will go above Rs 4 this year. At current market price this translates in a dividend yield of 7.5%. The low P/E and attractive dividend yield limit the downside in the scrip with definite growth prospects over next 12 months
ramkrishna.kashelkar@timesgroup.com

CORPORATE ROUND-UP - Holding On - 9th February 2009

CORPORATE ROUND-UP

Holding On
THE DECEMBER 2008 quarter results of Gujarat State Petronet (GSPL) were dampened by a 25% fall in natural gas volumes as consumers replaced high cost spot LNG with cheaper naphtha. Still the company posted a 10% rise in net profit to Rs 28 crore, while net sales increased 6% to Rs 117 crore. An increase in staff and maintenance costs put pressure on the operating margins during the quarter, which was eroded by 130 basis points to 86.4%. A 39% fall in other income and marginal increase in interest and depreciation charges pushed the pre-tax profits 5% below year ago levels. Thanks to a cut in tax provisions, the company posted 10% improvement in net profit. The company's shareholders have approved a contribution up to Rs 64 crore for charitable purposes in FY2009 in response to Gujarat government's request to all state owned companies to contribute onethird of their pre-tax profits. During the current quarter, the company successfully renegotiated most of its contracts under which the connectivity charges will now be borne by its customers. With naphtha prices moving up and Torrent Power's contract commencing, GSPL's gas volumes will improve substantially in the current quarter. Similarly, with the RIL's gas starting to flow from mid-February, GSPL will transport a greater volume of gas to Gujarat-based power and fertiliser plants. These factors will boost the company's topline as well as operating margins in coming quarters. However, in case of its contract with RIL to transport 11 million cubic metres per day (MCMD) of gas to its Jamnagar Refinery, the additional gas volumes are likely to begin only once RIL reaches production level of 60 MCMD at its KG basin gas field.

9th February 2009 (Lead Story)

9th February 2009 (Lead Story)

A bad quarter has just passed. ETIG’s Ramkrishna Kashelkar & Priya Kansara Pandya study the impact of the global meltdown on the results of 1,925 companies

When we predicted further deterioration in India Inc’s performance while analysing numbers for Sep ’08 quarter, even we had not anticipated the sort of massive and all pervasive fall that corporate India reported during the Dec’08 quarter. We were surprised to find that the aggregate net profits of 1,925 companies in our sample nearly halved in the third quarter compared to December 2007 quarter — an unprecedented crash in atleast last 20 quarters. And the journey going forward may only be marginally better than the quarter gone by.
The factors impacting the results were numerous and very few companies could escape these. The global economic environment turned negative with the key global financial institutions going bust. The credit markets choked up and interest rates soared. The economic turmoil resulted in a substantial reduction in consumption leading to decrease in production and trade. A string of layoffs across industries worsened the scenario and the largest economies in the world fell into a recession. US, which is the world’s single largest economy is reeling under the 16-year high unemployment level and its economy is expected to contract by a 1.5% in 2009.
Although India has not been at the epicentre of this crisis, it did not remain insulated from the tremors. The global credit squeeze resulted in fall in India’s exports adding pressure to the export oriented industries such as textiles and gems and jewellery. During the last two months of 2008, India’s merchandise exports fell by over 10% against the year ago period notwithstanding the weaker rupee against the dollar. Industries, that are directly dependent on availability of consumer credit such as automobiles and real estate, also took a hit. Crash in the commodity prices and a resultant slowdown in demand meant that the companies in the commodity business such as metals or chemicals had a tough time. Most of the services industries such
as hospitality, shipping & logistics, etc, turned out to be the indirect victims. As a result, India’s economic growth is likely to fall below 7% in FY 2009, much below the 5-year average of over 8.5%.
As an outcome of these difficult times, the foreign institutions pulled money out of the Indian stock market, leaving rupee sharply weakened during the quarter. This forced a large number of Indian companies book hefty foreign exchange losses in line with the new accounting standards. It worsened the matters further; as most of these corporates had booked forex gains on a strong rupee in the December 2007 quarter.

UNPRECEDENTED FALL
With a number of leading companies posting historic low profits, if not losses, we had a feeling that the quarter would turn out to be really bad. We studied the results of 1,925 listed companies, excluding banks and non-banking financial companies (NBFCs) — as their revenue recognition differs from the rest of the companies — and four oil majors, which could distort the overall picture due to their sheer size and magnitude of losses. We were not surprised to find that just a few industries posted year-on-year profit growth in the Dec ’08 quarter. A vast majority of the sectors we analysed posted a marked fall in profits against the comparable period of the previous year.
Although the net sales for the quarter were 13.3% higher against the year ago period, the operating profit fell 26.4%. As costs continued to increase at a higher rate compared to the increase in net sales, the profit margins weakened to mere 11.6%, which is lowest in last 20 quarters at least. Those Who Braved The Avalanche
The staff cost of India Inc, which averaged at 6.9% of its net sales in last 20 quarters, stood at 8.5% during the December quarter. In a similar manner, the interest burden rose to 3.1% of net sales against a 20-quarter average of 2.2%. Depreciation cost scaled up to 3.8% of net sales — something witnessed only prior to 2005. The resultant pretax profits were 48.2% below the December 2007 level and the PAT was 48.7% lower.

A FEW IN THE BLACK
It was really a tough task to identify sectors, which posted a growth in profits in the December 2008 quarter. Even the sectors regarded as ‘value preservers’ in times of slowdown — the fast moving consumer goods and pharmaceuticals — did badly. The pharma industry reported a massive 81.8% fall in net profits during the quarter, while FMCG reported 29.5% fall. The Infotech industry, which gains when rupee depreciates, also posted a minor 0.9% fall in the aggregate PAT level during the quarter.
Sugar sector was among those precious few that bucked the overall gloom in the economy. The aggregate profit of 24 sugar companies stood at Rs 47.7 crore in the December 2008 quarter. These had reported losses in the corresponding quarter of the previous year. The sector being seasonal in nature had posted substantially higher profits in the September 2008 quarter.
India’s telecom services sector has been doing well over last few years . With Tata Communications and Bharati Airtel posting healthy results, the industry reported a 43.2% spurt in profits, which was best in last five quarters.
The power generation sector also posted its best results in the preceding five quarters with a 12.1% growth in net profits. Higher profits reported by NTPC, Jaiprakash Hydro and Torrent Power lifted the sector. Apart from these, the other sectors that did well were agro-inputs sectors such as pesticides and fertilisers.

WILL THERE BE A REPEAT?
Among these sectors, the telecom industry is likely to maintain the higher subscriber growth. Although the average per user revenue is on a downswing, the impending launch of 3G services should support it.
Power and fertiliser industries, besides the natural gas transporters such as Gail, are likely to benefit from the higher availability of natural gas once RIL’s KG basin gas fields commences operations from end of the current month. The sugar industry is also likely to perform well over next couple of quarters from higher prices due to the estimated sugar shortfall in the country. The aggressive interest rate cuts and stimulus packages declared by the government are likely to lift the domestic sentiments. The consumption confidence in India seems to be returning. The automobiles companies have reported healthy January month sales. The cement despatches reported by India’s largest cement producer ACC in the month of January ’09 have also improved.

GOING FORWARD
The quarter gone by was indeed very painful. Corporate India’s results in entire year 2009 are expected to remain under pressure. Whereas, a slowdown hits the smaller companies harder, the larger companies are better equipped to weather such turmoil. Hence, it will be a good strategy to invest in companies, which are financially strong.
ramkrishna.kashelkar-@timesgroup.com

ONGC performance set to slip on sinking onshore output - 17th January 2009

17th January 2009

ONGC performance set to slip on sinking onshore output

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

THE production of crude oil and natural gas from ONGC’s ageing onshore oil fields is falling fast, which will have an adverse impact on its performance in the future. In the December 2008 quarter, ONGC’s production from its onshore assets is likely to report a 7% fall in crude oil and 1% in natural gas.
ONGC’s onshore production from its onshore fields in Assam, Gujarat, Andhra Pradesh and Tamil Nadu contributes nearly 30.5% of its total domestic production of 26 million tonnes per annum, or 0.52 million barrels per day. These onshore fields also represent over 26.4% of ONGC’s annual natural gas production of 22.3 billion cubic meters, or around 62 million cubic meters per day.
ONGC has more than 120 producing onshore oilfields, out of which 32 fields, comprising 15 major and 17 medium, contribute 85% of the total production. All these fields are more than 30 years old. “All our onshore fields are mature and are in the natural declining phase. We have been successful in restricting the fall at around 1.5% annually. Unless there are new discoveries, the production from our onshore fields will continue to fall at around 1.5-2% annually,” informed ONGC director (onshore) AK Hazarika.
Adding new fields to its portfolio is the only option available with ONGC to ensure its petroleum production grows in future. However, a number of its recent discoveries have been gas fields. This would mean pipeline connectivity for monetisation. ONGC is currently setting up a power plant in Tripura to utilise the available gas, which can’t be shipped outside the region due to lack of connectivity.
ONGC is planning to spend around Rs 2,000 crore on revamping these onshore fields during FY2010 in a bid to maintain their production level. “With crude oil prices at $40 per barrel levels, the economics of the capex plans will have to be re-evaluated. In next year’s budget, we are projecting around 1.5% fall in our onshore production from the current year,” added Mr Hazarika.
The onshore crude oil production of ONGC, which grew 6% YoY in May 2008, reported a 1% growth in June but fell 2% YoY in July, followed by a 3% fall in August, 4% in September and was 8% lower in November 2008 compared with the November 2007 production. The onshore production in the month of November 2008 at 614,000 tonne was the lowest in at least two years as revealed by the petroleum ministry figures. In case of natural gas, the onshore production has remained almost flat in 2008 compared to 2007.
ONGC’s crude oil production from Assam has been suffering from local issues preventing it from operating these fields continuously. The oil and gas production from Assam fields has remained consistently lower on a YoY basis in 2008. In November 2008, ONGC’s production of crude oil was 10% down and natural gas was 5% down compared with November 2007 figures.
The production from Gujarat is suffering from reduction in reservoir pressure, leading to increase in water content of the total production and also a lack of continuous power supply. Gujarat reported a 4% fall in natural gas and an 8% fall in crude oil produced during November 2008. Although the crude oil production in Tamil Nadu is on a sharp decline over past few months, ONGC has been able to increase the natural gas production from these fields substantially. Despite the problems on the onshore front, ONGC’s offshore oil production from the Mumbai High oilfield continues to remain on track and is not expected to report any fall on YoY basis, although the natural gas production is declining at around 2%. ramkrishna.kashelkar@timesgroup.com

Fall in crude, refinery margins may dent oil cos’ bottomline - 12th January 2009

12th January 2009

Fall in crude, refinery margins may dent oil cos’ bottomline

Ramkrishna Kashelkar/ETIG

INDIA’S petroleum majors are likely to post a fall in profits as well as revenues when they announce their results for the quarter-ended December 31, 2008, later in the month. The crash in crude oil and polymer prices, coupled with a decline in refining margins, is likely to result in heavy inventory losses. On the other hand, the current scenario could also serve as a springboard for some of them — particularly companies with oil marketing and gas transmission operations — to report a better performance in the year-ending quarter.
Oil prices fell by over 55% during the December quarter, much steeper than the 30% fall in the September 2008 quarter. Thus, going by the September quarter’s performance of domestic petroleum firms — PSU oil refiners posted unprecedented losses — the December quarter could be worse. The weak rupee will also have a negative impact for refiners, but bring a relief for oil producers.

Petroleum producers
Due to standstill production and lower realisations, ONGC's profitability is likely to stagnate in the quarter. Merrill Lynch, which expects flat earnings from the company, says in its Q3 preview report, “The weaker rupee and a fall in subsidy are likely to make up for the decline in ONGC’s oil and product price realisation.” Brokerage Prabhudas Leeladhar estimates ONGC’s profits to slip by 2.5% to Rs 4,257 crore. According to ETIG estimates, ONGC may post a 30% drop in net profit to Rs 3,026 crore with net realisation in the quarter at $45 a barrel. Although its net sales are expected to be lower on a year-on-year basis, the net profit of Cairn India is likely to receive a boost from higher income courtesy other investments.

Refiners
Benchmark Singapore refining margins fell 66% to an average of $1.29 a barrel during the quarter as against $3.74 in the same quarter last fiscal. Fall in margins, besides inventory losses, will thrust India's standalone refiners, such as MRPL and Chennai Petroleum, into the red. Private refiners Reliance Industries and Essar Oil, too, will face the heat but to a lesser extent. RIL, which had shown no fluctuations in its gross refining margins in the two preceding quarters despite fluctuating oil prices, is not expected to report any impact of the inventory loss in the December quarter as well. Brokerages have estimated RIL to post refining margins between $8.5 and $10 a barrel. Its petrochemicals business may take a hit due to fall in prices, margins and demand. ETIG's estimates put RIL's Q3 profit at Rs 2,739 crore, down 31% against the same quarter last year adjusted for profit on sale of RPL stake

Marketers
Oil marketing firms are expected to post losses in view of the lower refining margins, inventory losses and uncertainty over oil bonds. Merrill Lynch estimates the cumulative losses of Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum at Rs 8,660 crore. However, brokerages are positive on the future of the firms, which are making profits on sale of petrol and diesel. At the same time, falling crude is expected to bring down their debt. “Even at an oil price of $60 a barrel and downstream share in under-recoveries at 22% in FY10, OMCs’ earnings would be significantly positive at current product prices,” said a Motilal Oswal report.

Natural gas
The natural gas transmission companies are unlikely to post any spectacular numbers for the December quarter. India's largest gas-transmission company Gail is expected to take a hit on its petrochemical and liquid hydrocarbon business, while the transmission business is estimated to post a growth. Motilal Oswal expects a 45% fall in Gail’s Q3 profit, while Merrill Lynch pegs the fall at 14%. ETIG estimates a net profit of Rs 576 crore, which is 7% lower on a y-o-y basis. Gujarat State Petronet, Gujarat Gas and Indraprastha Gas, are expected to post flat results. RIL’s KG basin fields are likely to commence natural gas production in the March 2009 quarter, which will double the natural gas availability in India over the next two years.

ramkrishna.kashelkar@timesgroup.com

CORPORTE ROUND-UP - Falling numbers - 12th January 2009

CORPORTE ROUND-UP

Falling numbers
THE PRODUCTION from ONGC’s onshore oilfields is falling fast, which will have an adverse impact on the company’s performance during the December 2008 quarter. ONGC's onshore production from its onshore fields in Assam, Gujarat, Andhra Pradesh and Tamil Nadu contributes nearly 30.5% of its total domestic production of 26 million tonnes per annum or 0.52 million barrels per day. The onshore production of ONGC, which grew 6% y-o-y in May 2008, reported a 1% growth in June but fell 2% y-o-y in July, followed by a 3% fall in August, 4% in September and was 8% lower in November 2008 compared to the November 2007 production. The onshore production in the month of November 2008, at 614,000 tonnes, was the lowest in at least two years as revealed by the petroleum ministry figures. ONGC's production from Assam, which has been suffering from environmental issues, is likely to report an 8% fall to around 290,000 tonnes for the December 2008 quarter. The production from Gujarat, which is suffering due to a reduction in reservoir pressure, leading to an increase in water content of the total production, would report a 6% fall at 1.56 million tonnes. Production in Andhra Pradesh was lower in November 2008 as production could begin from only two wells out of eight. Despite the problems on the onshore front, ONGC's offshore production from the Mumbai High oilfield, continues to remain on track and is not expected to report any fall on y-o-y basis.

Growth in the Pipeline - 12th January 2009

12th January 2009

Growth in the Pipeline

Gujarat State Petronet is likely to emerge as a key beneficiary of rising availability of natural gas in the country. This makes it an attractive investment in the long term

RAMKRISHNA KASHELKAR ET INTELLIGENCE GROU P

GUJARAT STATE Petronet (GSPL) is India's only company that transmits natural gas for its clients without trading in it. The company's longterm contracts with Torrent Power and Reliance Industries (RIL) for transmission of natural gas are likely to become effective in the March 2009 quarter, which will boost its profits substantially.

BUSINESS:
GSPL's 1,130-km pipeline network is spread across the state of Gujarat and connects natural gas producers on the west coast of Gujarat to their clients in nearly 33 districts of Gujarat. Some of GSPL's prominent clients are Gujarat Power, Essar Steel, Essar Power, Arvind Mills, GNFC and GSFC. The company operates its pipeline network on an open access basis and is not involved in buying and selling gas.

GROWTH FACTORS:
Presently, GSPL transports about 17 million metric standard cubic metres of gas a day (MMSCMD), which will double once its contracts with RIL and Torrent Power become effective. GSPL has signed a 15-year agreement with RIL to transport 11 MMSCMD and another contract with Torrent Power to transport 4.5 MMSCMD for 20 years. Torrent Power's 1,147.5 MW Sugen power plant is scheduled to commence operations in the quarter ending March 2009. In the same quarter, RIL is also slated to start production of natural gas from the KG basin. The company is extending its pipeline network to 2,000 km by 2010 at a capex of Rs 1,900 crore. With the Petroleum and Natural Gas Regulation Board (PNGRB) now in place, the company will get competitive advantage while bidding for new projects in the adjacent areas. GSPL's return on capital is low at present. So, there is little risk that GSPL will have to reduce transport tariffs in future. GSPL also holds strategic stakes in gas distribution companies in three cities-two in Gujarat and one in Andhra Pradesh. Over the next two years, the availability of natural gas in India is expected to double. Apart from RIL's gas, Petronet LNG's project to double its regassification capacity to 10 million tonnes per annum is likely to be completed in January 2009.

FINANCIALS:
The natural gas transported by the company grew 17% from 14.6 MMSCMD in FY '07 to 17.1 MMSCMD in FY '08 but has stagnated since then. This is mainly due to the stagnation in the availability of natural gas and situation is likely to improve in the near future. The company has consistently increased its revenues per unit of gas transported. The company is currently carrying a debt of around Rs 1,200 crore at an average cost of 9.5%. The company has been consistently generating healthy cash flows from operating activities.
Being capital intensive, interest and depreciation are the most important costs for the company, which grew at a CAGR of 33.7% and 42.3%, respectively, in the last five years. During the same period its net sales grew at a CAGR of 31.4% and pre-tax profit grew at 70.3%.
GSPL currently assumes 12 years of working life, which increases the annual depreciation charged on its pipelines compared to 30 years working life assumed by India's largest gas transporter GAIL. This indicates the need to examine GSPL's cash profits rather than its book profits for its valuation. The company's cash profits have grown at a CAGR of 58.6% in last five years.

VALUATIONS:
The company is likely to post a 21% increase in its gas volumes in the second half of FY '09 to 20.6 MMSCMD. This will drive its H2 FY '09 revenues 36% up on y-o-y basis to Rs 309 crore. The net profit for the period is expected to go up 40% to Rs 91.8 crore. As a result, the company is expected to end FY '09 with an EPS of Rs 2.7 and cash EPS of Rs 5.8. The current price of Rs 34.8 translates this to a P/E of 12.7 based on book EPS and just 6, if we consider the cash EPS.

KEY RISKS:
The company is currently conducting a postal ballot seeking shareholders' view to contribute 30% of pre-tax profits for social development as requested by the chief minister of Gujarat. Presently, 50.2% of the company's equity capital is held by five companies, which are controlled by the Gujarat State government. The company's EPS will erode proportionately, if its shareholders accept the resolution.
ramkrishna.kashelkar@timesgroup.com

CORPORATE ROUND-UP - Unprecedented losses - 26th January 2009

Unprecedented losses

INDIA'S LARGEST public sector standalone petroleum refiner Mangalore Refinery and Petrochemicals (MRPL) posted negative gross refining margins (GRMs) and net losses in the December quarter — for the first time in the last five years. MRPL posted a net loss of Rs 285.1 crore on sales of Rs 7,537.1 crore, which was down 7% y-o-y despite a 6% improvement in sale volume to 2.9 million tonnes indicating an average 12% fall in gross realisations. The company's desulphuriser unit remained closed for three weeks during the quarter to change catalyst, resulting in production of high-sulphur diesel. This necessitated the company to export more and that too at a lower price. The exports fell 10% y-o-y despite a 22% improvement in volumes as the realisations crumbled 26% against the similar period of last year. MRPL reported an inventory loss of Rs 1,062 crore during the December quarter as against Rs 646 crore in the September 2008 quarter and reported a negative GRM at $2.77 per barrel. Crude oil prices crashed by another 55% in the quarter, in addition to the 35% fall in the September 2008 quarter. The weakness in the rupee also added to the company's woes, which recorded a Rs 78.85 crore of exchange fluctuation loss during the December quarter as against an exchange gain of Rs 12.84 crore in the corresponding quarter of the previous year. During the quarter, MRPL's refinery reported a 3% growth in its crude oil throughput to 3.11 MT, representing 128% capacity utilisation on its nameplate capacity.

RIL profit slips 10% on margin pressure - 23rd January 2009

23rd January 2009 Main Page Story

QUARTER SHOW

RIL profit slips 10% on margin pressure

Our Bureau/ETIG MUMBAI

INDIA’S biggest private company, Reliance Industries (RIL), unveiled its first ever drop in quarterly sales in around six years and its first profit decline in three years on Thursday, hit by a steep fall in petroleum product margins in what its chairman called “one of the most challenging” periods faced by the company.
The Mukesh Ambani-controlled RIL, which runs one of the world’s biggest oil refineries and is also among the world’s biggest petrochemicals producers, reported a 8.75% drop in net sales for the three months to end-December to Rs 31,563 crore – the first decline since the first quarter of 2002-03. Its net profit, excluding exceptional items, fell 9.8% to Rs 3,501 crore during the period compared with Rs 3,882 crore in the year-earlier period, ahead of expectations. ETIG had expected RIL to announce a net profit of Rs 2,739 crore.
Refining margins likely to remain flat till 2010-11
“This was one of the most challenging quarters for Reliance with volatility in prices and margins. Producers and consumers are coming to terms with slower global trade and economic outlook. Reliance performed commendably in this environment, with high operating rates. We also reached an important milestone in start up of the RPL refinery,” said RIL chairman and managing director Mukesh Ambani.
RIL’s keenly-watched gross refining margins (GRM) — the difference between the value of petroleum products and the price of crude oil — for its 660,000 barrel-a-day refinery in Gujarat came in at $10 per barrel, substantially lower than the corresponding period’s $15.04 per barrel, but some $6.4 per barrel higher than the region’s benchmark Singapore complex.
Worldwide refining margins for refineries fell during the December quarter, as the global economic slowdown brought down prices of petroleum products such as gasoline and naphtha. The slump in demand forced some of the world’s big oil companies, including Exxon Mobil, to shut units for seasonal maintenance.
The company, which has been maintaining GRMs better than the Singapore benchmark, said it managed to sustain its margins “primarily on the back of efficient sourcing of crude oil, ability to produce globally accepted products and flexibility in its crude bucket”.
“RIL’s performance exceeded our expectations. This is mainly driven by higherthan-expected revenues from the petrochemical segment and better GRMs. RIL has surprised the market on the upside, hence would have positive impact on the market,” said Amitabh Chakravarty, president for equities at Religare Capital Markets.
RIL shares ended 1.21% at Rs 1,132.95 on Thursday ahead of the results, which were announced after the market closed. The stock slipped 37% in the December quarter, underperforming a 25% drop in the BSE Sensex and a 33% loss in the sector index during the same period.
Analysts said RIL’s earnings drop was temporary and would be reversed in the fiscal fourth quarter, when it is due to start producing 30-40 million cubic metres of natural gas a day in the second half of February. The company’s earnings and sales will see benefits from its new refinery which was commissioned on December 25.
Refining margins are, however, likely to remain flat till 2010-11 due to overcapacity and slower demand growth amid a global economic downturn. RIL’s refinery is almost entirely export-focussed, leaving the company particularly exposed to a drop in global demand for petroleum products.
The net profit fall would be steeper at 57%, if exceptional gains of Rs 4,733 crore in December 2007 — booked by RIL for selling shares of its subsidiary Reliance Petroleum (RPL) — were taken into account. RIL had posted net profit of Rs 8,079 crore, including exceptional gains, in December 2007 quarter.
RIL’s operating profit margins stood at 17% in the quarter, little-changed from 16.9% in the year-ago period, but higher than the 14.6% achieved in the first six months of the year. Interest outgo was higher at Rs 663 crore compared with Rs 241 crore because of a weak rupee. A big chunk of the company’s debt is dollar-denominated.
RIL’s refining business contributed Rs 1,881 crore to its profit before tax of Rs 4,225 crore during the quarter, while the petrochemicals business contributed Rs 1,657 crore.
The company’s cash reserves jumped to more than Rs 28,500 crore, boosted by the conversion of 12 crore equity warrants, which brought in over Rs 15,000 crore to the company in October. RIL said 95% of the reserves was invested in fixed deposits, and the rise in the deposits helped it expand its other income during the quarter to Rs 663 crore from Rs 241 crore in the year-ago period.
For the nine months ended December, RIL’s net profit, excluding exceptional items, increased by 3.4% to Rs 11,733 crore, while its revenues rose 21% to Rs 121,698 crore. Despite a 3.4% rise in refinery throughput to 7.86 million tonnes during the quarter, revenues from this segment dipped 17%. Production of most of its petrochemicals and polymers fell 3%-6% during the quarter, but the fall in revenues was less than 1%. The refining and petrochemicals segments account for 97% of the company’s total turnover. RIL said it has spent Rs 110 crore during the quarter at its Patalganga plant to finance a voluntary retirement scheme for 430 employees.