Disinvestment delay in IPCL leads to project deferral - Views on News from Equitymaster

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  • Feb 23, 2000 - Disinvestment delay in IPCL leads to project deferral

Disinvestment delay in IPCL leads to project deferral

Feb 23, 2000

The delay with regard to a decision to disinvest the 25% government stake in Indian Petrochemical Corporation (IPCL) has led to a deferral of four projects involving an investment of Rs 27 bn by the company. IPCL is the second largest polymer company, has a strong distribution network and has added capacities (a 160,000 tonne polyethylene plant, a gas cracker unit and a mono–ethylene glycol plant at Gandhar) as well as import facilities in the last year.

The government currently holds a 59% stake in IPCL and the final bidders for its stake are Reliance Industries and the Haldia Petro (owned by Soros/Chatterjee combine). This, after BP Amoco, Mitsubishi as well as Dupont withdrew from the fray partly because of the continuous delays on the part of the government to finalise the disinvestment and IOC was debarred for submitting bids after the due date.

As it is, the petrochemical cycle is on the upswing with the domestic plastic prices tracking international prices and increasing by around 30% over the past nine months. However, the investment in the naphtha cracker would have helped the company in improving margins and building inventories to take advantage of the expected stable prices at higher levels over the next six months.

This is exactly what Reliance has done. Their naphtha cracker was in place (import duty: 5%) just before the upswing in the petrochemical cycle materialised, which helped them stop the import of ethylene (import duty: 15%), a product derived from naphtha. The higher value addition has helped Reliance report an operating margins of around 20%.

Market View:
While IPCL’s business fundamentals remain weak, a change in management is expected to result in a sharp re–rating of the stock.

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