Fuelling growth

Bongaigaon joins bandwagon of refineries producing Euro-III fuels.

With Euro-III norms coming into force from 2010 throughout the country, Bongaigaon Refinery & Petrochemicals (BRPL) has announced its plans to set up a diesel treatment unit confirming to the new emission norms. Larger refineries in India are already manufacturing Euro-III fuels as it is mandatory in some parts of the country.

BRPL has not had a good year thus far in 2005-06, owing to higher oil prices and a reduction in refining margins, which have averaged $3.31 a barrel for the first three quarters of FY06 compared with $9.3 a barrel in previous period. Since it is a pure refinery, it does not suffer as much losses on subsidy as marketing companies do.

As a result, BRPL has remained profitable for the first three quarters, whereas marketing companies HPCL and BPCL have clocked huge losses in the same period.

Also, because of its location in Assam, the company enjoys excise exemption of 50 per cent, though Assam government has imposed a crude entry tax of 4 per cent. But BRPL is operating at over 100 per cent capacity, so there is no room to increase production further.

For the first three quarters of FY06, its operating profit fell by 63 per cent y-o-y to Rs 230.9 crore though net sales rose by 25 per cent. Net profit fell by 66 per cent to Rs 144.11 crore.

BRPL will invest Rs 1,420 crore to set up a diesel hydro-treatment in a 1:1 debt-equity ratio. The company will have to finance Rs 710 crore from internal accruals, which will not be easy considering that it had a cash balance of less than a tenth of the requirement.

Though the investment will be made over the next couple of years as the plant will be operational only in September 2009, the dividend payout will go down.

In FY05, the company paid out half of its net profit as investors earned a dividend of Rs 12 a share. Also, the company hardly has any debt, so that can finance the project.

But all this matters as long as the government delays on permitting BRPL to merge with IOC. The trailing 12-month EPS discounts the stock price of Rs 68 about 7 times.

Shree Digvijay Cement: Rights impetus

Infusion of cash through a rights issue could bring a fresh lease of life to the ailing Grasim subsidiary Shree Digvijay Cement. The company has announced a rights issue in the ratio of 18:1 (an investor would be entitled to 18 shares for every share held). Shree Digvijay is in debt to the hilt and it is currently referred to the BIFR.

Even in the December 2005 quarter results, the auditors commented that the company had not made provision for interest and penal interest on loans of Rs 195 crore. At the end of March 2005, the company had loans amounting to Rs 279.4 crore.

Shree Digvijay's rights issue is priced at Rs 10 and will aggregate Rs 134.19 crore. Compared with the current stock price of Rs 275, the rights issue is priced attractively.

At present, the company has a negative net worth and had an accumulated loss of Rs 202 crore without considering interest on the Rs 195 crore debt at the end of FY05.

Analysts highlight that the company is likely to use the resources raised to pay off some of its debts and once the corporate debt restructuring comes in place, the situation is likely to get comfortable.

Also, the current upturn in the cement industry helped the company report an operating profit of Rs 26.87 crore in the first three quarters of FY06, as compared to a loss of Rs 3.44 crore between April-December 2004. Grasim Industries held a 58.89 per cent stake in the company at the end of the December 2005 quarter.