Since start of the calendar year the Reliance Industries Ltd (RIL) scrip has declined by 8.2%. Over the same period the benchmark index, Sensex, fell by 15.7 %. Over the past few weeks the stock has come under further pressure.
The RIL scrip seems to be out of favour due to weakening of the petrochemical cycle. After the Asian crisis and global financial meltdown the cycle bottomed out in FY99 and staged a recovery over the next two years. However, the cycle has once again dipped (though not expected to drop to the same extent) with the global economy decelerating over the past seven months and engulfing most of the OECD nations (Organisation for Economic Co-operation & Development). This has led to softening of international commodity prices, including polyester & polymers, as demand slackens and inventories are built up.
Being signatories of the WTO, petrochemical import tariffs have been reducing over the past few years, which are to be reduced to WTO bound levels (basic import duty on polyester & polyester intermediates - 20%, polymer & polymer intermediates - 35%). Tariffs on polyesters are at WTO bound levels but polymers could witness further correction in import duties over the next few years. Having said that, the lower duties has increased the linkage between international and domestic petrochemical product prices and reduced the leeway available to domestic manufacturers to differ adjustment in prices. Consequently, domestic manufacturers could face pressure on realizations from lower international prices.
Added to that, the challenging international business environment, could impact exports (sales volumes) of domestic manufacturers. Manufactured exports, reported by RIL, in FY01 stood at Rs 29.6 bn ($635 m), which represents 11.5% of sales adjusted for merchant exports. RIL has reported exports of Rs 7.5 bn in 1QFY02, which is 9.9% lower compared to the same period of the previous fiscal (FY01 - Rs 8.3 bn). In dollar terms the decline is even lower considering the depreciation of the rupee. Decline in dollar terms is estimated to be 14.2%.
* Fibre Intermediates
Domestic sales of RIL, consequently, represent 88.5% of turnover. On the domestic front too brakes have been applied on economic growth momentum. As per the Central Statistical Organisation (CSO) revised estimates, GDP growth in FY01 was 5.2% as compared to the earlier projections of 5.8%. Much of this slowdown was witnessed in 4QFY01, which has resulted in the malaise spilling into the new fiscal and a recovery expected only in the second half of FY02. In fact, as per recent reports, core sector growth (six key infrastructure industries) slipped to 1% for 1QFY02 compared to 9.3% in 1QFY01. The lower growth could weigh down on domestic demand leading to challenging operating environment for realizing volume growth. Interestingly, RIL has reported a 7% rise in production for 1QFY02 from 2.6 MMTPA (m metric tonnes per annum) to 2.8 MMTPA. The company operated above full capacity at 103% for the concerned period.
Adding to the pressure on volume growth, RIL has reported a drop in market share for polymers and polyester intermediates. The stabilization of operations at Haldia Petrochemicals Ltd. and the subsequent filling up of capacity could have eaten into the polymer market share, especially in the Eastern region. Competition in polyester intermediates, PTA (purified terephthalic acid), has intensified with the Mitsubishi plant ramping up utilization rates.
The increase in supply from new players and a corresponding softening in domestic demand has lead to an imbalance in the demand - supply situation. Domestic petrochemical prices, which are closely linked to the demand - supply variable, are facing downward pressure.
Corroborating this view is the performance reported by IPCL for 1QFY02. Sales for the concerned quarter rose marginally by 3% YoY, while the net profit dipped by 64.2% in this period. This could reflect significant pressure on the operating margins. The company has stated weakness in domestic and international product prices (polymers contributed approximately 72.4% to IPCL's topline). Adding to the woes, are the higher feedstock prices including naphtha, due to firm crude oil markets. All these factors portend a gloomy picture for RIL's revenues and operating margins in FY02.
The RIL scrip has been declining since the end of May '01 from a high of Rs 404. Technically, also the counter is looking weak with support at Rs 290. Breaking this level the stock has a sharp drop in support levels in the region of Rs 200. Not adjusting for foreign exchange gains in FY01 we have estimated operating profits to decline by 5.8% and PAT by 5%. However, factoring a swing in the cycle from FY02 onwards the company seems to enjoy significant earnings growth with strong cash flows.
More Views on News
Sorry! There are no related views on news for this company/sector.
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407