Global Trends, Local Profits

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Rising petrochemical prices, coupled with higher volumes meaans that the coming year for IPCL will be excellent.

With duty protection coming down continuously, the Indian petrochemicals industry is feeling the pressure of the global market. The fact that the sector is becoming highly sensitive to global price movements is proof enough. Commodity prices the world over move in cycles, and the petrochemical industry is no exception to this rule. After lying low for some time, global petrochemical prices have started moving up. And this is why Indian petrochemical companies stand to gain.

 

The main reason for the revival of prices, says Suresh Iyer, analyst with P R Subramanyam and Sons, are the annual plant shut down, high demand from China and the tight raw material supply. The gain from this price rise will obviously be maximum for companies that have integrated facilities, low cost of production and can reap the full benefit of volume growth.

One company which fits the bill is Indian Petrochemicals Corporation (IPCL), a government owned enterprise (governments stake is 59.9 per cent) under the administrative control of the department of chemicals and petrochemicals, ministry of chemicals and fertilisers.

IPCL, a dominant player in the petrochemical industry, currently has two integrated petrochemical complexes meaning that it has the facility right from a cracker to downstream petrochemical products. The first cracker is naphtha-based, located at Vadodara in Gujarat. It was set up in 1973.

The second one, located at Nagothane, Maharashtra, was commissioned in 1989 and is Indias only gas cracker. Though it was commissioned in 1989, following an explosion, it was able to reach optimal capacity utilisation only in 1995. The company also has a catalyst and absorbent unit at Thane.

Finally, a third integrated plant is coming up at Gandhar in Gujarat, which again, is gas-based.

The business

IPCL is predominantly a polymer/petrochemical manufacturer. Seventy seven per cent of its turnover in 1996 was from this division, out of which High density polyethylene (HDPE) / Low liner polyethylene (LLDPE) contributed 33 per cent. About 16 per cent of its turnover was from polyester intermediates.

Currently, IPCL is the only Indian company to have world-scale integrated ethylene cracker complex. IPCL accounts for 80 per cent of Indias ethylene capacity and 56 per cent of propylene capacity.

Among the five domestic ethylene producers, IPCL was, till recently, the largest producer with a capacity of 4.3 lakh tonnes per annum. With the commissioning of 7.5 lakh tpa Reliance Hazira cracker, however, IPCL has lost its position to Reliance, and now stands at number two.

The other three producers are NOCIL (75,000 tpa), Oswal Agro (25,000 tpa) and Bindal Agro (12,000 tpa).

IPCLs Vadodara plant has the capacity to manufacture 1.3 lakh tpa of ethylene and 1.07 lakh tonnes per annum of propylene and 23,600 tpa of benzene. This plant uses naphtha as the feed stock. Its downstream units include 80,000 tpa of LDPE, 55,000 tpa of poly vinyl chloride (PVC), 30,000 tpa of propylene, 20,000 tpa of polybutadinene rubber (PBR), 24,000 TPA of acrylic fiber, 30,000 tpa of DMT, 48,600 tpa of paraxylene, 20,000 tpa of MEG, 43,500 tpa of LAB. This plant has been operating at an average capacity utilisation of 88% for the past five years.

The Nagothane complex produces the balance capacity. (see table: IPCL capacity)

While IPCL continues to be the sole manufacturer of (PBR) in India, it is no longer the sole producer of polypropylene in India. And thats because of Reliance commissioning its polypropylene capacity 1.75 lakf tpa.

However, till Reliances second polypropylene unit starts production, IPCL will continue to be larger player: with its capacity at 1.9 lakh tpa against Reliances 1.75 lakh tpa.

Further, with a market share of 86 per cent, IPCL dominates LDPE production in India and is the second largest producer of HDPE (23 per cent of market share) and MEG (26 per cent). It is also the third largest LAB manufacturer (22 per cent) and PVC producer (11 per cent).

IPCL uses gas as the feed stock at its Nagothane ethylene cracker plant (capacity: 3 lakh tpa), while the smaller 1.3 lakh tonne per annum ethylene cracker at Vadodara has a swing plant which uses both propane gas and naptha as the feed stock but naphtha is used. Hence, for the company as a whole, gas is the second largest contributor to its raw material requirement: about 34 per cent of the total raw material needs.

Now this is where a small point of concern creeps in. Prices for gas are controlled. Since the prices have not been increased since January 1992, a price hike ranging between 15 per cent and 20 per cent cannot be ruled out.

However, our analysis shows that even if the gas prices are hiked, gas will remain a cost-effective feed stock. A bigger point to worry about, in fact, is that the supply of the same is constrained in the country.

But here too, IPCL has assured supplies for both its existing and expanded capacity, which will prove to be a major advantage over other players like RIL and Nocil.

The naphtha constitute 44% of companys total raw material cost. When the government increased the price of naphtha after a gap of four years in June 1996, IPCL shifted to imports as it was 15 per cent cheaper then the administered price.

Now the government is considering to increase the import duty on naphtha, this will put pressure on the margins of the company.

The Gandhar complex

One of the major attraction of the company is the increased volume and this will come from its proposed third complex, which is coming up at Gandhar complex in Gujarat. This complex will be completed in two phases at an estimated cost of Rs 3,500 crore.

The first phase (costing Rs 1,500 crore) includes a chloralkali plant using membrane cell technology which is energy efficient, a 1.7 lakh tpa VCM plant. All these will be consumed in-house to produce 1.5 lakh tpa PVC.

Also in the plan is a 65 MW captive cogeneration power plant and two pipelines connecting the Gandhar and Vadodara complexes. This will not only reduce transportation cost, but also the lead time. And obviously, this, in turn, will reduce the manufacturing cost of IPCL considerably. This complex was to go on stream by in the current year, but has been delayed and will be going on stream in 1997-98 only.

The second phase of Gandhar involves a cost of Rs 2,000 crore and upon completion will have the facility of gas-based 3 lakh tonnes per annum capacity ethylene cracker plant, 4.5 lakh tpa of propylene, 10,000 tpa of ethylene oxide, 1 lakh tpa of ethylene glycol and 1.6 lakh tpa of HDPE. This plant is expected to go on stream by mid of 1998.

Financial performance

The first-half performance of the company was bad. For the first half of 1996, the sales at Rs 1,343 crore was lower by 9 per cent and the net profit at Rs 254.5 crore fell by a whopping 16 per cent over its corresponding period of last year.

The reason for this poor performance was the fall in the prices of petrochemical products. The second half performance is expected to be much better than the first half, primarily because of the increase in prices now. This sapect in fact, should also lead to better

results for the company when compared with the same period last year.

For example, IPCL has increased the price of PP by Rs 1,500 per tonne, that of HDPE by Rs 2,000 per tonne and LDPE by Rs 1,000 per tonne.

But the coming year will see a high volume growth as the full benefit of expansion of Vadodara complex accrues. It is at Vadodara where the companys butadiene capacity has been expanded to 36,000 tpa and PBR to 50,000 tpa. It has also increased the installed capacity of polypropylene to 1.9 lakh tpa.

At its Nagothane plant, it is increasing the capacity of ethylene to 4 lakh tpa, which will increase the capacity of its downstream products like LDPE/HDPE etc by de-bottlenecking of plant. The expansion is expected to go on stream by mid-1997. Also the benefit of the first phase of Gandhar complex will be reflected in 1997-98 earnings.

The current price of IPCL is Rs 148, which leads to a discounting of 6.1 given the the 1996 earnings of Rs 24.20. With the projected earnings Rs 20, the figure is 7.4 times. One can ride on the boom for decent returns from the investment in this scrip.