BRPL: Synergy

The government, which holds 82% in IndianOil, will be the biggest gainer from BRPL's merger with IOC

The IOC board has decided to amalgamate Bongaigaon Refinery (BRPL) with itself in the ratio of 4:37. Prior to the announcement, at the end of the September 2006 quarter, IndianOil held 74.46 stake in BRPL.

The book value of IOC at the end of FY06 was Rs 250.8, while that of BRPL was Rs 44. The central government, which is the single largest shareholder in IOC with 82.03 per cent stake at the end of the September quarter, will be the largest gainer from this swap ratio.

The impact of the development on the two stocks was muted as the bigger news of petrol and diesel price cuts resulted in the BRPL stock dipping 5 per cent to Rs 50.9 and the IOC scrip 4 per cent to Rs 463.3 today.

While global crude oil prices slid from their highs earlier this year, the market did not expect a drop in petrol and diesel prices. As a result, share prices of oil marketing companies have tumbled 8-10 per cent over the past five trading sessions.

After the merger with BRPL, IndianOil's equity will be diluted by just 1.7 per cent.

A year earlier, IOC merged IBP with itself, in the ratio of 110 shares in IOC for every 100 shares held in IBP. In H1 FY07, IOC earned an operating profit of Rs 1,990.3 crore on a turnover of Rs 78,712 crore, while BRPL had an operating profit of Rs 208.2 crore on sales of Rs 3,221.3 crore.

IndianOil's refinery throughput was 38.5 million tonne in FY06, which will be enhanced by BRPL's throughput of 2.35 million tonne in the same year.

The IOC counter trades at 9 times estimated FY07 earnings (excluding the latest amalgamation) given the uncertainty in global crude oil prices and its resulting margins, as well as the impact of Wednesday's fuel price cuts.

Raymond: Better sales

Textile major Raymond's September quarter numbers have been satisfactory with an estimated 18 per cent rise in sales to Rs 358.62 crore, after adjusting the divestment of the denim division.

Most of the growth was the result of higher volumes, though the company did manage to improve realisations for the worsted fabric segment by about 5 per cent.

The better performance of worsted fabrics, where the EBIT (earnings before interest and tax) margins improved by 120 basis points drove the overall margin expansion of 170 basis points y-o-y.

Colorplus Fashions, a subsidiary, saw a lower profit before tax of nearly 50 per cent owing to higher expenses on new stores and higher salaries, while Raymond Apparel fared well on the back of expansion of the retail network.

With presence across the value chain "" from fabrics to garment retailing "" Raymond is well-positioned to cash in on the boom in consumer demand. It has 60 per cent share in the domestic worsted fabric market.

The company has taken initiatives to team up with global players such as UCO NV of Belgium for denim and also for shirting fabrics and carded woollen fabrics, which would help it move up the value chain and command better realisations. They will also give the company access to new markets overseas.

At the current price of Rs 432, the Raymond scrip trades at around 15 times FY07 estimated earnings and around 12 times FY08 earnings. Given that earnings could grow 20-21 per cent over the next couple of years, the stock is reasonably valued.

Fulford India: Parental guidance

Schering Plough, USA, which had 40 per cent stake in Fulford India, is now planning to increase its stake in its Indian arm. Fulford, on Wednesday, announced that it had allotted 7 lakh shares to Schering Plough subsidiary Dashtag through a private placement, and the latter's holding in Fulford had gone up from 40 per cent to 50.77 per cent.

As a result, Dashtag will also make an open offer for another 20 per cent stake to the public. With renewed interest from the parent, the Fulford India scrip has gained about 10 per cent to around Rs 575, the same price that Dashtag paid for the preferential issue and its open offer price.

Fulford's financials have deteriorated in the nine months ended September 2006 despite the company's strategy to increase top line this year.

Fulford's sales grew just 5.4 per cent y-o-y in the first nine months, while its operating profit fell 26.3 per cent. Higher raw material costs, mainly on account of higher outsourcing, were responsible for the 540 basis point y-o-y erosion in its operating profit margin to 12.57 per cent. The company has presence in oncology, virology, cardiovascular, dermatology and antibiotics segments.

Like some other MNC pharma companies such as Abott, Fulford too has refrained from launching many new drugs from its parent's portfolio owing to the prevailing patent laws. But with the parent's stake rising, investors can expect more new launches from it in the future.

Even after the current appreciation, the Fulford India stock trades at 14.3 times trailing 12-month EPS, which seems reasonable.

With contribution from Amriteshwar Mathur and Shobhana Subramanian