The Index

Part of the drop in operating margins has been lower volume production due to the shutdown of the plant for 45 days at Nagothane. This meant loss of 50,000 tonnes of ethylene, 10,000 tonnes of LDPE, 27,500 tonnes of LLDPE /HDPE, and 7,500 tonnes of Polyproplene. In value terms, this adds to about Rs 200-225 crore of sales.

The depreciation expenses at Rs 270 crore for 1998-99 were higher than that of the previous year mainly because of the start of a new cracker at Gandhar. In addition, the company expanded its polyethylene capacity and commissioned a new HDPE plant at Dahej. Higher depreciation from the new plants has resulted in lower tax liability for the company. IPCL continued to be a MAT-paying company in 1998-99.

From April onwards, polymers, which contributed 67 per cent of the revenue of the company, have been witnessing continuous price hikes. So far, the price has risen by 20-30 per cent, depending on the grade and type of the polymer.

Simultenously, raw-material prices have also sky-rocketed with a 50-60 per cent rise in naptha prices. ICICI Securities analyst Vivek Jain points out that since the base of the product price is higher than raw-material prices, even a smaller percentage rise in the product price may add to the company8217;s operating margins. At current sales levels, an extra rupee per kg of operating margin would add up to Rs 120 crore to the bottomline, as IPCL was able to recover the fixed and variable costs at the rock-bottom prices of last year.

The problem for the company continues to be higher sales tax incidence for its plants in Gandhar, while its peer Reliance Industries continues to enjoy sales tax exemption for its production at the Hajira plant. This brings down the operating margins for the company by approximately 4 per cent.

Additionally, the raw-material supply problem is yet to be solved with the company facing a bottleneck for importing propylene, ethylene, and naphtha at its jetty at Dahej.

In spite of these bottleknecks, the earnings for 1999-2000 would be 10-15 times the bottomline of 1998-99.

So far, the share price has been moving up primarily on account of divestment activities, but even after that is completed the share price would continue to look good if the current rally in product prices is sustained.

Electrosteel Castings

Electrosteel Castings has posted excellent results for 1998-99, with the net profit rising by 58.5 per cent to Rs 60.65 crore. Gross sales went up 27.8 per cent to Rs 424.58 crore, reflecting no signs of a recession in the water pipes business.

The sales and earnings growth is not a one-shot affair. One feature of the results has been the acceleration in sales growth. While net sales growth was 5.1 per cent in 1997-98, it increased to 28.09 per cent last year. The increase was due to higher production. The production of CI spun pipes went up from 94,630 tonnes to 115,691 tonnes during the year, while DI Ductile Iron spun pipe production increased from 57,110 tonnes to 74,252 tonnes. The company8217;s director and secretary SY Rajagopalan says that this year he expects production of CI pipes to be around 125,000 tonnes, the while DI pipe output should be around 85,000-90,000 tonnes. That indicates growth will continue this year. Rajagopalan also said that the company had orders in hand for around 10 months of production, far more than the usual 3-4 months.

The PBDIT growth has been 42.96 per cent, compared to 21.98 per cent in 1997-98. Higher turnover is the main reason, with cost control also contributing. There has been a slight decrease in raw-material costs, on account of lower coke prices. According to the management, anti-dumping duty imposed on Chinese coke is not going to affect prices, since they do not import Chinese coke. Rajagopalan expects coke prices to harden internationally only if the steel industry picks up. Margins improved drastically in Electrosteel Castings once it started manufacturing its own pig iron.

Cash flow improved substantially in 1998-99 due to lower levels of both receivables and inventory, in spite of considerably higher turnover. Borrowings were reduced. The company has invested the surplus in tax-free bonds and mutual funds, and the funds will slowly be used to fund the company8217;s DI pipe plant coming up in Maharashtra. Rajagopalan says that athough work on the site will begin soon, the extra investments will result in higher quot;other incomequot; this fiscal. From the crrent year, Electrosteel Castings has recognised revenue against turnkey contracts on the basis of running bills certified by the client, as against recognising the same on the basis of materials supplied. This has resulted in the profit for 1998-99 being lower by Rs 1.03 crore.

Doomsayers had consistently pointed to competition from PVC pipes and steel pipes as likely to affect the DI pipe business. Electrosteel Castings has proved them wrong. With an EPS of Rs 75.15, the scrip quotes at a low 4.6 times historical earnings at a price of Rs 350, indicating immense scope for appreciation.

Emcee With contributions from Manish Saxena