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22nd June 2009The 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
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
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
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.
8th June, 2009Not 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 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%.
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.
