Apr 12, 2004|
Petrochemicals: An Insight
Petrochemicals products find their use in every sphere of life ranging from personal care to automobiles, cement, textiles and pharmaceuticals. The current uptrend in the petrochemicals cycle therefore, prompts us to have a detailed financial view of the two major companies in this sector.
Reliance Industries, the largest private sector major in this business, controls a major share in the market along with its subsidiary IPCL. It is one of the largest producers of polypropylene in the world with capacity of 1 MT (million tonnes) and accounts for 3% of world consumption. It has a 74% market share in the domestic market. Overall, the company boasts of a market share of 48% in the polymers business.
Indian Petrochemicals Corporation is the pioneer in the petrochemicals industry in India and has three manufacturing facilities with a combined installed capacity of 8,30,000 tonnes per annum. The company has a 28% market share in the polymers business and along with Reliance accounts for 70% of the production capacity and 75% of market share. The company has 17 regional sales offices and exports to more than 30 countries. IPCL is likely to benefit from the financial, managerial and technical expertise that Reliance brings along with it. Also, the vast marketing and distribution network of Reliance provides IPCL a wider spectrum of the market to cater.
Although IPCL has been able to improve its gross profit margins over the last three years, the company has witnessed volatility over the same as compared to a steady growth in case of Reliance Industries. Further, IPCL has witnessed a steep rise in its net profits during the same period as compared to a stable but improving trend shown by Reliance. This stability in Reliance can be largely attributed to the company's diverse business profile ranging from petrochemicals to oil and gas and textiles. Thus, it can be concluded that Reliance is less prone to the cyclicality of the petrochemicals business as compared to IPCL. Reliance has been able to maintain its steady net profits given the fact that it has a vast distribution and marketing network enabling it to cater to over 3,000 customers worldwide. This enables the company to gain further premium as far as pricing is concerned.
IPCL derives around 70% of its revenues from the polymers business while petrochemicals business accounts for nearly 45% of Reliance Industries' revenues and 55% of profits. Reliance's presence in upstream segments of exploration and downstream activities of refining and marketing along with other diversified businesses such as textiles de-risk the company's business model.
Currently, IPCL is trading at 1.9x its price to book value multiple based on FY04E while Reliance is trading at 2.3x its price to book value multiple based on FY04E. The higher multiple to Reliance is justified given the company's wider market scope and diversified nature of business. Also, at the current price, valuations of IPCL seem to be stretched. However, the company is likely to benefit from Reliance's management given the fact that its external dependence for feedstocks (naphtha and natural gas) is likely to reduce along with the usage of Reliance's marketing network, giving IPCL much needed global penetration.
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