Aug 25, 1999|
Kerosene dilutes RPL's profit projections
The Indian refining sector seems to be slipping back into an era of government controls. This is apparent from a government notification stating that all refining companies would have to ensure that 7.5% of their crude throughput is converted into kerosene. This move is likely to adversely affect Reliance Petroleum Limited (RPL) in a major way.
RPL has set up the world's largest single location refinery having a capacity of 27 m tonnes per annum, at a cost of Rs 142.5 bn.
This move by the Government follows the growing trend in the industry to substitute the production of kerosene with that of diesel and aviation turbine fuel, which in comparison are more remunerative. As a consequence, refineries would now have to switch production mix in order to comply with the new guidelines. This would upset revenue projections of companies, which presently do not comply with the guidelines. While Reliance Petroleum is likely to be the hardest hit, other refineries would be affected only marginally.
The reason for the sharp fallout in case of RPL is that it had not planned any production of kerosene in the initial years. Under the present guidelines however, the company would now have to produce 2.025 m tonnes of kerosene per annum. This will adversely affect revenue projections and consequently the bottomline of the company.
However, this decision could come as a blessing in disguise for Indian companies. The recent spurt in domestic refining capacity has created a scenario in which India would soon have a diesel surplus, which would then have to be exported. However, as prices in the region are subdued due to excess supply, diesel would have to be exported at a substantial loss. The move to alter product mix would reduce the glut in diesel supply, and also defer the possibility of having to export at a loss.
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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