Indo Gulf Corporation Ltd (IGCL)-Cash is king (Buy Rs35)
(Indian Stock Market-Investment Ideas June 10, 1999 )
indogulf.co.in
Investment rationale
IGCL's FY99 results were in line with our expectations. Depreciation and interest costs have risen post commissioning of smelter operations. Fertilizer division registered a 9.3% growth in sales. The operations of the copper division have stabilized. This will generate a cash flows of over Rs 3bn annually.
IGCL is one of the lowest cost producers of urea. Its plant is strategically located in the Indo-Gangetic plains, the highest urea-consuming zone in the country. Urea is sold under brand name Shaktiman, which commands a high brand equity. IGCL also has a strong distribution network comprising more than 300 wholesalers and 2000 accredited retailers. Capacity utilization of urea plant is well above 100%. IGCL is proposing to increase its present urea capacity from 0.75 mtpa to 1 mtpa by de-bottlenecking.
Profitability of the copper smelter is linked to the treatment and refinement (TC/RC) margins. Being a custom built smelter, IGCL imports copper concentrates and converts them into copper cathode and value added rods. The difference between the price of copper cathode and copper concentrate is the TC/RC margins. TC/RC margins have historically been more stable than copper prices. Presently the TC/RC margins are ruling at 17 cents/lb and expected to remain at these levels only. Any upside from these levels will add to the bottom line.
Copper division will benefit from the demand supply mismatch and the high level of duty protection. At present the demand for copper exceeds supply by around 5000 tpa. Likely capacity addition from Sterlite as well as IGCL will at least take 2 years to be commissioned. Duty differential between copper cathode and copper concentrates presently at 33% will keep operating margins as high as 25%. Hence IGCL will be able to recover a substantial portion of its capital costs over the next 2-3 years. Any rupee depreciation adds to the bottom line.
IGCL is one of the largest private sector urea producers with a 2250 tpd gas based plant in Uttar Pradesh. It has a smelter capacity of 0.1 mtpa, which is expected to be expanded to 0.15 mtpa in the next 2 years.
Valuation.
At the current price IGCL trades at 2.9x FY2001 EPS and 2.2x FY2001 cash EPS. The stock also trades at a significant discount to book value. In the short term, IGCL's net profit is likely to be affected due to higher composition of fixed costs. We expect Cash EPS to witness a CAGR of 25% in the next two years. The management is also well experienced at handling commodity business. We, therefore expect the stock to outperform the market in the next 12 months.
Financial Highlights
Rs mn 03/96 03/97 03/98 03/99 03/00P 03/01P
Net sales 5638.1 4718.7 6352.2 13342.0 17138.0 19708.7
Other income 750.8 484.5 411.4 390.0 400.0 450.0
PBIDT 2520.8 1833.4 2098.5 3178.0 4455.9 5321.3
Adjusted OPM(%) 31.4 28.6 26.6 20.9 23.7 24.7
Finan.expenses (247.4) (194.2) (127.1) (644.0) (1173.2) (1373.2)
Depreciation (326.1) (400.8) (394.6) (699.0) (838.1) (900.0)
Provision/tax (495.0) (155.0) (165.0) (195.0) (333.3) (300.0)
Extraordinary/ 0.0 0.0 0.0 0.0 0.0 0.0
PYA
Profit aft tax 1452.3 1083.4 1411.8 1640.0 2111.2 2748.1
EPS(Rs) 7.8 5.8 6.9 8.0 9.0 11.7
Cash EPS 9.5 7.9 8.8 11.3 12.6 15.6
Equity capital 1871.5 1871.5 2061.0 2061 2340.0 2340.0
Prefer/shares 1000.0 1000.0 1000.0
Net worth 9047.8 9760.6 11751.1 13978.9 16622.1 19870.2
Total debt 2353.4 7384.2 12365.2 14165.2 15165.2 15165.2
Ttl fix. assets 6655.4 12813.8 17953.4 19953.4 21953.4 24911.3
Investments 1855.3 960.1 1124.1 124.1 1124.1 1124.1
Working capital 2890.5 3370.9 5038.8 7022.1 10081.2 9000.0
Mis. expenses 0.0 0.0 0.0 (11.5) (20.3) 0.0
Capital employed11401.2 17144.8 24116.3 28088.1 33138.4 35035.4
RONW % (post tax) 16.1 11.1 12.0 11.7 12.7 13.8
ROCE % (pre tax) 19.2 8.4 7.1 8.8 10.9 12.6
P/E ratio (x) 0.0 0.0 3.6 3.1 3.9 3.0
Cash EPS (Rs) 9.5 7.9 8.8 11.3 12.6 15.6
Book value (Rs) 0.0 0.0 57.0 67.8 71.0 84.9
Background
IGCL was incorporated in 1983 at Uttar Pradesh. It was promoted by the A V Birla group, PICUP (Pradeshiya Industrial and Investment Corporation of UP Ltd). and GCSI (Gulf Consolidated Company for Services and Industries) , a Bahrain company. The promoters hold 51% of the equity. A V Birla group's holding of 26% is through its group companies Grasim, Hindalco and Indian Rayon. PICUP holds 11% and GCSI's associates hold a further 11%. Shares were offered to public in early 1987. IGCL operates one of the largest urea plant in the private sector with a capacity of 750,000 tpa. The plant is located at Jagdishpur in UP. The highlight of the project was the record completion time of 4 years at a less than budgeted cost of Rs8.5bn. The per ton capital cost is among the lowest and is less than half that of Chambal Fertilisers and Nagarjuna Fertilisers. Production commenced in October 1988. The gas based plant also consists of a 445,500 tpa captive ammonia plant. Technical know-how has been provided by Haldor Topsoe of Denmark. Having achieved a critical mass in fertilisers, the Company diversified into copper by setting up a 0.1 mpta smelter at Dahej in Gujarat. This project was funded by a preferential allotment to promoters.
Nachiket Moghe
nachiket@indiainfoline.com
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