Refining, petrochem products on a high, post budget - Views on News from Equitymaster

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  • Mar 2, 2000 - Refining, petrochem products on a high, post budget

Refining, petrochem products on a high, post budget

Mar 2, 2000

Reliance Industries has raised the prices of its commodity plastics and fibre intermediates post budget. The price range varies from 5% to 10%. The reduction in the import duty for crude would also benefit Reliance Petroleum along with the other refining companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum (HPCL). Reliance Industries (RIL) is India’s largest producer of fibre intermediates (polyester terephthalate and mono–ethylene glycol) and downstream petrochemicals (polypropylene, high-density polyethylene, linear low-density polyethylene). Its sister company Reliance Petroleum has put in place a 27 million tonnes per annum (540,000 barrels per day) refinery which is the world’s largest grassroots refinery at Jamnagar (Gujarat). The refinery accounts for 25% of India’s refinery capacity.

The budget has reduced the basic excise duty for polymers (viz. Poly Vinyl Chloride, Polypropylene, Polyethylene) from 24% to 16% while keeping the basic import duty for both polyester and polymers at the last year’s levels of 35%. It has also been specified that plastics are exempted from the special excise duty of 8%.

The reduction in the excise duty for polymers would benefit both the commodity plastic manufacturers Reliance as well as IPCL. The current increase in the polymer prices would to some extent nullify the negative impact on Reliance of the imposition of the Minimum Alternate Tax of 7.5%.

The only prices, which the company has not raised is the yarn prices. This is because the lowering of the excise duty on Polyester Filament Yarn (PFY), which stood at 33.6% to 16% has been nullified by the imposition of the special excise additional duty of 16%, which does not qualify for modvat credit.

On the upstream side while the crude import duty is down to 15% (from the 20% earlier) the duties on naphtha, LPG and kerosene remain unchanged. For kerosene imported for parallel marketing the import duty has been increased to 35% (from 30%). Thus the refiners get a relief on the cost of their main raw material which would provide a cushion to the downtrend in margins witnessed over the last nine months.

However, the fact remains that till the end product prices of products such as LPG, petrol, diesel, air turbine fuel are increased, the margins of the refineries will continue to remain under pressure despite the reduction in duties on crude.

Market View:
Due to the complexity of its refinery as well as the fact that the company is poised to benefit from the impending deregulation of the Administered Pricing Mechanism, RPL has been rated as a buy by most analysts. The reduction in the import duty on crude would provide a cushion to the margins.

Reliance Industries has also been rated as a buy primarily due to the rise in petrochemical prices (tracking international prices) and its holding in blue chips such as L & T and BSES. The increase in the prices would nullify to some extent the impact of the minimum alternate tax on the company.

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