Trading gains

IPCL's profit has not kept pace with sales

The upsurge in the petrochemicals sector has benefited Indian Petrochemicals Corporation Ltd (IPCL), which grew revenues 70 per cent to Rs 2778 crore last quarter.

The growth was due to a jump in trading sales to Rs 1,148 crore, compared with a measly Rs 22 crore in the previous year. However, profit growth has not kept pace with expanding sales, as the net profit grew a mere 8 per cent to Rs 81 crore.

One reason is that the cost of raw materials surged 212.79 per cent to Rs 1,736 crore in the quarter ended December 2003. Analysts point out that the surge in this input costs could be attributed to petrochemical products bought from group companies and sold by IPCL in overseas and domestic markets. That explanation is supported by the surge in trading revenues.

Further, while other companies in the industry have reported increases in staff cost, it is commendable that IPCL has managed to keep staff costs under check and in fact, these costs have declined 5 per cent to Rs 96 core. Operating profit margins declined 600 basis points to 11.3 per cent, but that's because of the very low margins on trading.

Going forward, the petrochemical cycle is expected to remain on an upswing until FY2007. As a result, demand for the company's polymer portfolio is expected to remain strong as these are crucial inputs for downstream manufacturers.

Also, IPCL would benefit from the synergies created by Reliance's recent acquisition of the petrochemicals and plastics products of Nocil. Productivity is expected to improve in the next few quarters with the company reducing employees through its VRS scheme.

The trend changes for Trent

The current volatility in the equity markets has caused a healthy correction in the stock price of Trent, from Rs 294 or 25 times estimated FY04 earnings to Rs 241 (20 times FY04 earnings). Meanwhile, the company's results for the December quarter indicate a drop in performance.

Despite the festive season, growth in revenues from retailing operations dropped to 20 per cent last quarter, compared to a growth of 54 per cent in the first half of the fiscal.

Overall revenues grew 18.7 per cent last quarter, but operating margins were flat (y-o-y) at 7.7 per cent. In the first half of the year, operating margin had jumped 450 basis points.

Last quarter's flat trend in margins was despite a 220 basis points cut in expenses on the purchase of raw material and finished goods. This was offset by a 150 basis points jump in 'other expenditure' and a 70 basis points hike in ad spend.

Earnings growth for the company was mainly driven by other income, which jumped 150 per cent and formed 61 per cent of the profit (before tax).

In the nine-month period till December, sales have growth 39.4 per cent, while profit before tax has increased 57.6 per cent. The growth was partly because of two new stores that opened in Mumbai and Ahmedabad in the first quarter of the year.

There are two more store openings lined up this year, and the much delayed food retailing foray is finally expected to happen by the end of this fiscal.

Although Trent has not divulged its exact plans for the food retailing venture yet, analysts expect it to be a big positive. Any disappointments on that end, therefore, could impact the company's valuations further.

With contributions by Amriteshwar Mathur and Mobis Philipose