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RPL: Expansion...yet again! - Views on News from Equitymaster
 
 
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  • Aug 5, 1999

    RPL: Expansion...yet again!

    Reliance Petroleum Ltd. (RPL) is planning to hike the capacity of its refinery to 40 mn tonnes per annum from the existing 27 mn tonnes per annum. The cost of the expansion has been estimated at Rs 4.3 bn.

    RPL has set up the world's largest single location refinery having a capacity of 27 mn tpa, at a cost of Rs 142.5 bn. One third of the output from the refinery will be for internal consumption by other Reliance Group companies. The company has entered in to an agreement with Indian Oil Corporation to market its products, which are in favour of light distillate, LPG, and diesel. The company has plans to enter into retail distribution of its products in the near future.

    The expansion in refinery capacity will help RPL to reap advantages of the economies of scale providing the company with a competitive advantage vis a vis its peers. Reliance could emerge as a major global player in the refining industry once the expansion is completed.

    However, given that the company does not as yet have its own retail network, it will become more dependent on the oil distribution companies, with which it has entered in to an alliance. Therefore the company could either have to set up its own retail network in the future or enter continue to forge alliances with distribution companies.

    Also, it is possible that with a number of expansions already underway, there could be an over supply of refinery products in the country, thus making it mandatory for the company to venture out in the more competitive international markets. However, it must be mentioned that the refinery is located near a jetty, which again is captive jetty, and therefore the company does have ready access to international markets.

    Market View:
    RPL's advantage of size, product mix and marketing ability has led the analysts to rate the stock as a 'BUY'. The product mix is in favor of light distillate, LPG and diesel, all of which have high demand growth. The company plans to market a third of its production to group companies, thus providing it with a ready market.

     

     

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