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IPCL:

Cyclical upturn to benefit

The petrochemicals cycle is on an upturn and is expected to reach its peak

by FY05. IPCL, being

one of the companies

dealing in petrochemicals, is likely to benefit from this cyclical upturn. Post

Reliance's acquisition, the company will also benefit from various other

factors. Lets take a look at its business.

The company has three plants. One plant is at Vadodara having a 1.3 MTPA

capacity of naphtha cracker, and other two at Nagothane (4 mtpa) and

Gandhar (3 mtpa). The plant at Vadodara is naphtha based while the other

two uses natural gas as its feedstock. The company has a range of

petrochemicals, fiber and fiber intermediates and chemicals in its portfolio of

products. On an overall basis, while polymers contribute to 70% of volumes,

chemicals contribute to about 16% and fiber and fiber intermediates account

for the remaining.

Due to global economic slowdown and an oversupply scenario observed in

FY02, prices of various petrochemical products fell and hence IPCL saw a

decline of about 57% in net profits in FY02. However the cyclical upturn

started in FY03 and IPCL took advantage of favorable conditions. While the

sales grew by 6% during FY03 as a result of increased prices and higher

volumes, operational efficiency also improved (490 basis points

improvement in operating margins) during the same period. This led to a

significant growth in bottomline by 90% during FY03.

As far as growth prospects of the company is concerned, absence of any

large polymer capacity additions globally and the rise in demand for

petrochemicals augurs well for IPCL. With IPCL expanding the naphtha

cracking facility by 30% at its Vadodara plant, we expect higher volume

growth in FY05. While the production, selling and administrative expenses of

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Reliance's petrochemicals division is only about 20% of its net sales, that for

IPCL is about 38%. Therefore, we expect that there is a lot of scope for

improvement in overhead costs for IPCL.

At Rs 113, IPCL is trading at a P/E of 13.7x its FY03 multiples. The prices of

petrochemicals have increased in the first three months of the current

financial year. With Reliance taking control of IPCL in FY03, the combined

entity account for 65%-70% of petrochemicals capacity in India. Therefore,

the recovery in prices will benefit the company in a large way. This coupled

with the increased synergies with Reliance are long-term positives for the

company. Though the expected deregulation in natural gas prices may

impact profitability, the cyclical upturn may rub off this negative effect.

K