Date:24/10/2004 URL: http://www.thehindubusinessline.com/bline/iw/2004/10/24/stories/2004102400411100.htm

Back Indian Petrochemicals Corporation: Hold

Raghuvir Srinivasan

IPCL's Gandhar petrochemical complex ... Earnings buoyed by rising product prices.

IT HAS been a roaring first half of 2004-05 for Indian Petrochemicals Corporation (IPCL) with post-tax earnings, at Rs 261 crore, almost trebling compared to the first half of last year. The first half profit is almost equal to the profit of Rs 273 crore posted for the whole of fiscal 2003-04.

Rising realisations

The performance reflects the trends in the petrochemicals industry where product prices have run up sharply in the last six months. Prices of major polymers such as high density polyethylene (HDPE), low density polyethylene (LDPE) and polypropylene (PP) have risen between 50 per cent and 60 per cent in the international markets in the first half of this fiscal.

The second quarter alone saw prices rising by 27 per cent compared to the same period last year. With their policy of pricing their products just below the landed cost, it has been a windfall for domestic producers such as IPCL and Reliance Industries. IPCL is a big player in the polyethylene market and is also the only producer of poly-butadiene rubber (PBR) used by the automotive tyres industry. PBR prices (Rs 100 per kg now) have been spiralling in the domestic market in sync with that of natural rubber and IPCL, with a 60,000 tonne capacity, seems to have made a killing in the market.

The company has also done well on the financial management side with interest costs falling by half during the quarter and also the first half, courtesy the early repayment of almost Rs 1,000 crore of loans last fiscal.

Clear visibility

Global petrochemical prices are still nowhere near the historic levels reached in the mid-90s and there seems to be a lot of steam left. There are no new major capacity additions planned worldwide for the next one year that means that prices will continue to remain strong. The only risk stems from a possible slowdown in global economic growth caused by rising oil prices.

The attempts of China, which accounts for 8-9 per cent of global petrochemical demand, to slow down its economy is beginning to have an effect on global commodity prices. In India, demand growth for polymers has traditionally been about twice the real GDP growth. With the latter being revised downwards to less than 6 per cent for this fiscal, demand growth for petrochemicals is likely to be around 12-15 per cent.

The recent amendment to the Jute Packaging Order, which makes it mandatory to use jute packaging for foodgrains and sugar, could affect the demand for PP, which is now being used. PP is one of the fastest growing polymers and IPCL has a minor presence in that market.

A worrisome trend seen in the last four months is that of inventory build up at the producer's end. Downstream users of plastics appear to be using up their inventory and not placing fresh orders on producers such as IPCL in the hope that prices would fall. IPCL's inventory has risen by about Rs 200 crore in the first half compared to the same period last year, clearly indicating that buyers are postponing their purchases.

Downstream inventory cannot last forever and buyers have to re-enter the market soon and it could happen in the current quarter itself. Global product prices are off their highs in the last month by between 3-5 per cent. This, along with the impact of duty reductions effected by the government last month, has kept domestic prices steady for a month now. It could prompt buyers to return to the market.

By present indications, the second half of the fiscal could prove to be as good as the first for IPCL though a lot depends on global economic growth.

The IPCL stock is off the highs of Rs 218-220 it touched a month ago. Shareholders can stay invested in the stock while fresh investment can be considered at declines from the current levels.