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Aarati Krishnan

With fertiliser sales picking up, the second half may be the better one.

INDO Gulf Fertilisers is turning out to be a textbook case on how a de-merger, when it has the right ingredients, can unlock value for shareholders. Since its listing as a stand-alone fertiliser company, both its financial performance and stock market valuation have seen sharp improvement.

In the six months ended September 2003, Indo Gulf Fertilisers reported a 29 per cent increase in its net profits, despite a flat topline. The stock price tripled from Rs 33 at the time of listing in March 2003, to Rs 96.

But even at the current market price, the stock trades at a price-earnings multiple of just around three times its per share earnings of Rs 38.3, in 2002-03.

Investors with an appetite for risk (which arises because of the cyclical nature of the business) can consider acquiring the stock, while existing investors can stay with it.

Q2 misleading: For the quarter ended September 2003, Indo Gulf Fertilisers recorded a sharp increase both in its net sales and net profits. But to look at the second quarter's performance in isolation may be misleading.

In 2003, Indo Gulf has recorded the bulk of its kharif season sales in the September quarter. Whereas in 2002, the same revenues stretched over two quarterly periods. Due to this, Indo Gulf's financials for the six months ended September 2003 appear to be a better measure to evaluate its performance. On this count, the net sales growth may seem unimpressive. Net sales for the half-year ended September 2003, at Rs 256.9 crore, were marginally lower than the previous year's (Rs 260.1 crore).

The better half: But growth rates for the rest of the year may be significantly better. For one, there has been a belated start to fertiliser sales this year due to the after-effects of last year's drought.

However, States which represent the key target markets for Indo Gulf, have benefited from the good south-west monsoon and should see accelerated offtake in the coming rabi season.

Second, the company too appears to have adopted a cautious approach to pushing sales in the kharif season. Apart from rejigging its marketing efforts to coincide with the peak season, Indo Gulf appears to have consciously cut back production in the first half of the year, in an effort to reduce pipeline inventories. As demand accelerates, the company is also likely to ramp up production operations.

Profit signs encouraging: Finally, it is an encouraging sign that the company's profit margins have been expanding despite stagnant sales. In April 2003, Indo Gulf, along with other urea producers, changed over from a cost-plus system of subsidies to a flat subidy per tonne of urea produced.

This may have reduced Indo Gulf's per-tonne realisations at a time when input costs have been on the rise. But, judging from the 29 per cent increase in Indo Gulf's net profits in the first half, the company has taken these challenges in its stride. Better operational efficiencies appear to have yielded cost savings, bolstering profit margins. Effective deployment of working capital and better use of cash surpluses also appear to have given a leg up to profit growth by bolstering treasury income.

With no immediate capex plans in the core business, and the significant cash surpluses generated by operations, treasury income could continue to make a sustainable contribution to the company's earnings. Indo Gulf's per share earnings for the first half of 2003-04 stand at Rs 8.85.

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