X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Size does matter... - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • May 11, 2000

    Size does matter...

    Size does matter. No one can lend more credence to this phrase than the Reliance Group, one of India's leading private sector groups. This 'Growth is Life' Group has a dominating presence in petrochemicals sector and over the next few years it is likely to emerge as a key player in the telecom, power, roads and, of course, the refining sectors.


    Reliance Petroleum: On the bourses

    Reliance Petroleum Limited (RPL), a 50 percent subsidiary, is the largest grass roots refinery in the world and the largest refinery in India. The refinery, set up at a cost of s 14.3 bn, has a capacity of 27 million tonnes per annum and accounts for 29 percent of the domestic refining capacity.

    The refinery has all the makings of a winner. It is port-based and is located close to the Middle East, a major crude surplus region. The degree of complexity of the refinery, which indicates the potential for higher value addition, is the highest among Indian refiners and compares well with its global peers. Its product quality meets the stringiest of environmental norms and specifications in the world. The refinery is so designed that it can use the various forms of crude as feedstock thus giving it an opportunity to hedge costs (infact a group company is involved in crude oil production). All these factors, combined with its gigantic size that give it tremendous scope for exploiting economies, give it an enviable edge over the existing refiners in India. They also indicate that the company will earn superior margins as compared to its peers.

    RPL, which has gone on stream only recently, will start operating at peak capacity by the end of the current fiscal year. The company, however, lacks one thing - a dedicated retail distribution network. To overcome this lacuna it has entered into an agreement with Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) to market its controlled products (68% of total production) until 2002, when the proposed deregulation of the entire oil sector will be completed. Since, approximately 25 - 30% of the refinery's output of decontrolled products is to be consumed by group companies, it is left with little surplus to market on its own. Thus, the problem is taken care of atleast till 2002.

    The company has already initiated measures to lock its marketing network in the post 2002 era. It has set up a joint venture with IOC to market 48% of its output, while IOC will market the rest independently.

    What adds excitement to the company's prospects is the other game plan that is brewing in the Reliance Group. It is concerning size, once again. The group company, Reliance industries, has stated its intention to bid for strategic stakes HPCL, BPCL and IBP as and when the government takes a decision on divestment. The first two of these companies have their own marketing networks and have a joint capacity of approximately 20 million tonnes per annum. IBP, on the other hand, is purely a petroleum marketing company. If the Reliance Group were to be successful in its scheme of things, it would emerge as a dominant player in the Indian energy sector. The combined entity would command well over 50% market share in domestic refining capacity (existing levels) and a marketing network that would be unparalleled by no other company, not even the IOC (a Fortune 500 company).


    New capacities in the Petroleum sector

    The plan may seem far-fetched to some. However, if the Indian energy sector is to survive the onslaught of their international peers in the post liberalisation era, it will have to focus on size and distribution network. While the first will help it leverage on economies to enable it to fight off competition on the price front, the other will help it in establishing an entry barrier in the form of a large distribution network. The size factor will also take care of the over capacity in the Indian refining sector. As competition would be limited, refiners would be able to manipulate production to protect margins. Currently, the effective difference in duties on the import of crude and other petroleum products is only 2-3%. This puts pressure on the margins of refiners as any increase would lead to imports of petroleum products becoming cheaper than domestically produced output. The Indian government has promised to step up the effective duty protection for the refining sector from 2-3% currently to 12-15%.

    RPL is well placed to face competition from multinational oil companies once they set up shop in India. It is, however, not resting on its current strengths and is instead pursuing an aggressive plan that will catapult it amongst leading oil companies globally.

     

     

    Equitymaster requests your view! Post a comment on "Size does matter...". Click here!

      
     

    More Views on News

    GAIL: A Good Show (Quarterly Results Update - Detailed)

    Mar 27, 2017

    GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.

    ONGC: Higher Realisations on Crude Support Performance (Quarterly Results Update - Detailed)

    Mar 17, 2017

    ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.

    Mahanagar Gas Ltd (IPO)

    Jun 21, 2016

    Should one subscribe to Mahanagar Gas IPO?

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    TRACK REL PETRO

    • Track your investment in REL PETRO with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    MARKET STATS