Low On Gas

BOC India, a key multinational player in the industrial gas industry, has been a mediocre performer in the past. How good is its rights offer?

Many multinational companies like Cadbury, Coats Viyella and Bata have raised money through rights issues in the recent past. BOC India, the industrial gas major, too joins them. BOC Group plc, UK, holds 51 per cent of the equity in BOC India. BOC India is raising Rs 130.9 crore to part finance the setting up of a new air separation plant and to retire some of its debt. The air separation unit will cost Rs 80.14 crore while the rest of the money will go in repaying debt.

BOC India has three strategic business units -- industrial gases, health care products and plants and contracts. It is the market leader in industrial gases in India. Industrial gases and air separation and gas plants contribute over 75 per cent to the turnover. In industrial gases, the company has three tonnage plants (large capacity plants) located at Jamshedpur in Bihar, Tarapur and Taloja, both in Maharashtra, and smaller plants throughout the country.

With this project, BOC proposes to set up a 1,290-tonnes per day oxygen capacity air separation plant at Jamshedpur mainly to meet the oxygen, nitrogen and argon requirements of Tisco. Besides, this plant will also cater to the demand of the merchant gases market in eastern India. The project is expected to start only in April 1998.

BOC India has entered into a strategic agreement with Tisco which will remain in force for 20 years. Under this agreement, BOC will install and operate the plant and Tisco will buy the gases produced by the plant on a continuous basis. BOC will be free to dispose off the surplus products in the market. This will also help the company supply low cost gases in the market due to economies of scale arising out of the large project. The supply of the entire plant and machinery will be made by BOC Process Plants -- a subsidiary of BOC, UK. Tisco shall arrange for the power, water and steam requirements for the project.

Besides BOC there are around a dozen other players in this industry like Bombay Oxygen, Industrial Oxygen, Gujarat Fluorochem, Bhagwati Gases and Hindustan Gases. The global gas majors - Praxair, Air Liquide and Air Gas are also poised to enter the Indian market in a big way .The Indian market size is only $165 million compared to the global market of $25 billion. Why then are the foreign companies vying to enter the Indian market? The answer lies in the fact that with the growth in the Indian economy, major user industries like steel, petrochemicals and chemicals are also expected to grow which would in turn fuel the demand for industial gases .Analysts estimate that the market is all set to double to $330 million by 2000. The steel industry alone accounts for more than 70 percent of the total off-take and the growth of the Indian steel industry is bound to be high as there is a lot of demand for steel in the country.

BOC's strength lies in its multinational parentage, strong reputation, efficient management and modernised production facilities. BOC was a slow grower with a compounded annual growth rate in sales of 13 per cent over the last five years. However, after the commencement of the Taloja plant, the company has been showing a higher growth rate of 17 percent in the last two years. Moreover the pruning of the work force has resulted in drastic reduction of employee costs from 15 per cent of turnover in 1992-93 to 10.5 per cent in 1995-96. Though the work force has been reduced from 5,500 in 1990 to 1,550 in 1996, the obvious fallout of this move is the high cost of voluntary retirement.

BOC's first half performance for the period ending March 1997 is far from satisfactory. Sales showed a meagre growth, rising from Rs 105.3 crore in March 1996 to Rs 110.3 crore. For the year ending September 1996, sales were 223.55 crore and the net profit stood at Rs 11.04 crore. Net profit for the first half of 1996-97 was Rs 4.22 crore against Rs 4.3 crore in the previous corresponding period. The profit figure would have been lower if the company had provided for tax (it did in the first half of 1996). The EPS at the six month ended March 1997, is Rs 1.55 which is not very encouraging. The operating margin of BOC is also not impressive. It decreased from 22.06 per cent in September 1995 to 18.64 per cent in September 1996.

BOC India has got an aggregate capacity of 155 million cubic metres of gas of which about 67 per cent is manufactured by the modern air separation process and the rest is through the classical route of high pressure technology. The advantage of the new technology is that it uses 40 per cent less power. The power supply is the most critical factor of production since uninterrupted power of the right frequency is required for the rotary equipment. Industrial sources say that power accounts for about 40 per cent of the production cost and among the domestic companies BOC has the lowest power cost.

The present rights issue is being offered at a premium of Rs 50 per share. Compared to the current stock price of Rs 90, the rights seems to be a good buy. But analysts say it is not. The price-earnings ratio for the industry is 6. But the present P/E ratio is 22, which is on the higher side. The performance in the recent past has been poor. So will the company be able to post earnings within the next two years so as to sustain its higher expectations of income? The answer to this question lies in the management's ability to extract better cash flows from the new and modernised units as well as to find new areas for growth.

This seems an uphill task as BOC has to meet the cost of expansion and work force reduction, cash in on the new opportunities and at the same time counter existing and new competition. Thus it is advisable for the investor to sell the existing shares in the market and subscribe to the rights issue.