Fuelling growth

SMARTSHARE

A chemistry professor with a warped sense of humour once explained the petrochemical cycle thus: once upon a time, the dinosaurs died in order that we could rob their graves to build a civilisation run on fossil fuel technology.

Somebody exhumes the corpses (the exploration and production industry). Then this black sludge is refined into fuels and intermediates such as petrol, diesel, kerosene, naptha, etc.

While some people turn the refined products into plastics, polymers, synthetic fibres, etc (the petrochemicals industry), others set up petrol pumps (retail) and supply fuel to power plants and the fertiliser industry (generic marketing).

The E&P segment prefers high crude prices. Refiners and petrochemical units want lower crude or failing that, strong user-demand that allows the passing on of high crude prices. The marketing guys want high margins and these are associated with lower crude and refined product prices.

So upstream and downstream players have different perspectives. There is a "sweet spot" in the cycle when perspectives coincide "" crude prices are high but industrial demand is also high.

This happened in Q4, 2004-05 if the results of IPCL and Reliance Industries (RIL) are any guide. Both companies have been in the news more because of fraternal problems and mysterious share sales and transfers rather than operational reasons.

In the long run, ownership problems will inevitably affect morale. But in Q4, the row hasn't affected margins or growth. IPCL reported a 134 per cent growth in PBT to Rs 374 crore in Q4, 2004-05.

IPCL's net turnover grew 65 per cent in Q4. Though raw material costs jumped, operating margins also rose and OP climbed 71.5 per cent to Rs 530 crore.

Looking closer, key IPCL products such as low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) have risen 25 per cent and 20 per cent respectively in price on a y-o-y basis in January-March 2005.

But Q4 polymer prices fell in comparison to September-December 2004 and this may have led to increased demand. IPCL continues capacity expansions at Gandhar and Baroda.

The jump in raw material costs is reflected in RIL's results "" because this translates into higher margins for RIL. RIL saw a 61.5 per cent jump in net profit at Rs 2,292 crore for Q4. Turnover rose by 29.5 per cent. PBT was up 51 per cent at Rs 2,679 crore.

During FY 2004-2005, RIL posted 47 per cent growth in NP (Rs 7,572 crore) while sales grew to Rs 73,164 crore, a 30 per cent increase. EPS stood at Rs 54.2 for 2004-05.

OP grew 28 per cent while cash profits rose 31 per cent. Exports (including deemed exports) at Rs 25,532 crore grew 71 per cent and approached 35 per cent of total turnover.

Reliance Infocomm has apparently stablised with a net profit of Rs 51 crore in 2004-2005 versus a loss of Rs 390 crore in 2003-04. "Infocomm's" turnover doubled to Rs 5,387 crore. RIL's growth reflects an average 24 per cent rise in product prices and a 6 per cent increase in unit sales volumes.

An integrated player present across the entire chain can obviously manage the cycle better. If the infighting stops before the cycle drifts out of the sweet spot, both companies could be good investments.