Tata Chemicals: Growth catalyst

Tata Chemicals has improved its balance sheet

Tata Chemicals' net sales are down by 10 per cent to Rs 792 crore compared with the second quarter in FY04, and the earnings before interest, taxes, depreciation and amortisation (EBITDA) too is down at Rs 140.4 crore by about 5 per cent, but net profit is up 5 per cent at Rs 87.19 crore.

Moreover, the EBITDA margin has risen to 19.3 per cent from 18.24 per cent in the corresponding quarter of FY04. The good news is that there has been a huge reduction in interest, from Rs 14.78 crore to Rs 5.9 crore, the result of a debt swap and the consequent lower cost of funds, now at 4.6 per cent. The debt on the books now stands at Rs 659 crore, 70 per cent of which is short-term buyer's credit.

The management says that sales were lower in the quarter because volumes of phosphatic fertilisers were down, owing to a shortage of raw materials such as phosphoric acid used to make DAP.

The truckers' strike and not so favourable market conditions were also partly responsible for the lower sales. Higher power, coke and coal prices, up by 11 per cent and raw materials (including ammonia), up 17 per cent have added to costs.

However, operating margins were better thanks to a better fuel mix and operating efficiencies. Moreover, the price increase of soda ash of Rs 450 per tonne, which the company had announced six months back helped improve sales.

The price of salt was raised by 50 paise a kilo in September, and Tata Chemicals now has a 40 per cent share in the market. The company has not been compensated by the government for the increase in fertiliser raw material prices in the last quarter, and, hopefully, this should be corrected in the near future.

IPCL-staying on course

Indian Petrochemicals Corporation Ltd (IPCL) has reported a spectacular growth of 109 per cent in its profit before tax and extraordinary items to reach Rs 237 crore in the last quarter. There had been indications of an inventory build-up of polymer products with domestic downstream users in second quarter FY04.

Hence, the lead taken by group company Reliance Industries to cut prices and the subsequent revival in demand from user industries, has shown signs of also helping players such as IPCL. As a result, its net turnover rose 35 per cent to Rs 1,819 crore in the last quarter.

No doubt operating profit of IPCL rose 22 per cent to Rs 369 crore in the last quarter but operating profit margins declined 215 basis points to 20.3 per cent. What are the factors responsible for this decline?

Key input costs such as naphtha have risen by approximately 20 per cent in the last quarter and that has been reflected with consumption of raw materials and purchases (included traded goods) rising 38.2 per cent to Rs 905 crore.

Nevertheless, the company was able to cut costs in other areas such as interest - which declined 50 per cent to Rs 33 crore in the last quarter.

IPCL's result indicate that group company RIL could also highlight similar cost increases in its petrochemicals division, when it declares its results next week. Of course surging refinery margins are expected to offset any profitability concerns for the petrochemicals division.

Gillette-working up a lather

Gillette India reported a strong 16 per cent growth in revenues in the September quarter, but a 146 per cent jump in ad spend led to a 15 per cent drop in operating profit. This led to a near 5 per cent drop in Gillette India's stock price on Monday.

But looking at quarterly variations in ad spend does not make sense for Gillette, as these depend on the nature of product launches. It's premium shaving system, 'Mach 3 Turbo' was launched late in the June quarter and much of its promotional and ad spend happened in the September quarter.

Besides, it also launched Duracell rechargeable batteries last quarter. Ad spend for the nine months till September stood at 12.1 per cent, almost the same level as in CY2003. In the nine months, earnings growth was respectable at 15.3 per cent.

Also, the revenue growth of 12.6 per cent is among the best in the FMCG industry. What's more, the oral care and the portable power businesses (together 22 per cent of revenues), saw profit margins improving from under 4 per cent last year to almost 29 per cent this year.

The company's ability to the company's leadership position in blades, razors and alkaline batteries, and its technological superiority. Another reason is the extremely low floating stock of just 11.24 per cent (Rs 212 crore).

With contributions from Shobhana Subramanian, Amriteshwar Mathur and Mobis Philipose