Reliance Industries Limited has hiked the price of polyethylene and polypropylene for the second time during the month of September. The move has been sparked off by slower capacity additions in the global market and a firming up of demand. On an average, the prices have been revised upwards by Rs 2,000-Rs 3,000 per tonne.
Reliance Industries (FY99 Sales Rs 14.5 bn) is India's largest private sector company. Its activities encompass polyester, fiber intermediaries, polymers, chemicals and branded textiles. The new ventures are in the core sectors of oil and gas, power and telecom.
With this hike, the company has increased the prices of polyethylene and polypropylene by 10.9% and 17% respectively from August 1, 1999. The surge in prices lends credence to the view that the petrochemicals cycle has been in the recovery mode for some months now. The slowing down of new capacity additions and the recovery of demand in Southeast Asia have supported this surge in prices. The hike in prices will lead to better margins and topline growth for the company.
Source CMIE (monthly averages)
However, concerns remain. The company operates in a commodity business, where prices are determined by the market forces of demand and supply. Therefore, even a hint of fresh capacities going on stream or a slowing down of demand growth could lead to a drastic fall in prices, as experienced between December 1998 and January 1999.
Analysts have rated the stock as a 'BUY'. The reasons in favor of the 'BUY' recommendation are firstly, the upturn in the petrochemicals cycle, following the recovery in S E Asia, and secondly, the fact that the company, having completed its capex plans, is likely to generate cash this year.
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