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IPO Analysis
IPCL - Recommendation: BUY
Background & Business
Issue Details
Issue price 170
  195 (Reliance Petroinvestments)
Issue size 71.8 lakh shares
Face value Rs 10 each
Issue opens 20-Feb-04
Issue closes 27-Feb-04
Minimum Application 35 (Retail Investors)
Lead managers Kotak Mahindra Capital Company, SBI Capital Markets, JM Morgan Stanley
Registrar Karvy Consultants Limited

Financial Snapshot

Particulars FY04 FY03 YoY FY03 FY02 YoY
(Rs. In Crs) 9 mths 9 mths (%) 12 mths 12 mths (%)
Net Sales
5478.1
3656
49.8
5029
4740
6.1
Total Expenditure
4702
2876
63.5
3942
3826
3.0
Operating Profit
696.9
726
-4.0
982
741
32.5
Other Income
79.2
54
46.7
105
173
-39.3
Other Expenditure
600
616
-2.6
824
803
2.6
Profit before tax
176.1
164
7.4
263
111
136.9
Tax
2
50
-96.0
59
4
1375.0
Net Profit
174.1
114
52.7
204
107
90.7
Equity
249
249
249
249
EPS Annul (Rs)
9.3
6.1
8.2
4.3
Margins
OPM%
12.7
19.9
19.5
15.6
NPM%
3.2
3.1
4.1
2.3

Valuation & Recommendation

At CMP of Rs.192, the stock trades at 19x FY04 (E) EPS of Rs.10, 2 X P/BV, it is fairly priced, but with improving asset mix, increased capacity in the next two years worth Rs.350 Crs which would add 1000 Crs to its top-line in FY05. We recommend investors to buy the stock for decent returns and the 5 % strategic stake being offered at Rs.195 the downside appears limited.

IPCL incorporated in 1969 is the pioneering petrochemical company in India and its business portfolio today comprises of polymers, synthetic fibers, fibre intermediaries, surfactants, commodity chemicals, catalysts and absorbants. IPCL owns and operates three petrochemical complexes, a naphtha based complex at Vadodara and one gas based complex each at Nagothane and Dahej and it also owns a catalyst manufacturing facility at Navi Mumbai.
Reliance Petroinvestments Limited (an affiliate of Reliance Industries) have acquired a 46% stake in IPCL at Rs.231 per share in June 2002 and post – acquisition Mukesh Ambani has also become the chairman of the company.
Issue Objective
The President of India wants to disinvest its residual stake of 34%, out of which 5% would be reserved for employees, 5% for Reliance Petroinvestment and the balance 24% to institutional investors and retail. If Reliance does not exercise its stake than the 5% would be added to the offer increasing it to 29%. As this is an offer of sale from the exiting equity share capital, there is no change in its capital structure and Government will use the proceeds. The offer would create good amount of free float and liquidity in the market for retail investors.

The Finance Ministry has fixed a floor price of Rs.170 per share and the retail segment will be offered at a 5% discount on the discovered price i.e. with no lock-in period while the strategic investor Reliance which holds a 46% stake has been offered an additional 5% stake at Rs. 195 per share.
Past Performance

Dynamic management & Monopolistic positioning - The RIL-IPCL combine has dominant market share in polymers controlling over 2/3rd of India’s ethylene and polymer capacity (PE, PP and PVC).

Aggressive cost rationalization and operational integration has earned better returns for the company improving operating margins from 15.6 to 19.5% and net profit was up 52 % y-o-y from 114 Crs to 174 Crs for nine months ended Dec 2003. D/E ratio has come down from 2.3 to 1.2.
Concerns

The industry is vulnerable to the fluctuations in international crude oil prices. With crude oil prices remaining firm, feedstocks prices have increased sharply adversely affect the company's margins.

Increased domestic competition and decline in import duties on petrochemical products have even exposed to competition from multinational companies leading to lower prices of our products.
  Vikas Jain
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