Reliance acquires 36% in Raymond Synthetics

The Reliance Group has announced that it has entered into an agreement to buy Raymond Ltd's entire stake (36%) in Raymond Synthetics Ltd. The deal is expected to cost Rs 220 m and is to be followed by an open offer for an additional 20% stake in Raymond Synthetics. The buyout is being routed through a Reliance Business associate, Silvassa Yarn and Investments. 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.

The acquisition of Raymond Synthetics has thrown up a number of opportunities to exploit the synergies between the two companies.

Reliance's share in the polyester filament yarn (PFY) market will increase to 32% (25%) post acquisition. It will thus be able to consolidate on its market leader position and exploit the economies of scale and scope that arise from being a large volume player.

The Raymond plant is located in the North, while Reliance's facilities are concentrated in the Western region. Thus, the company will be able to serve its customers in the north from the newly acquired plant, thus reducing transportation expenses and improving product availability.

Another advantage is that the Raymond plant will now consume raw material (purified tereohthalic acid (PTA) and monoethylene glycol (MEG)) supplied by Reliance under a long-term conversion agreement. This will provide Reliance with a captive consumer for 6% its PTA and MEG production and at the same time enable it to earn higher margins that will be realised on account of value addition.

The strategy seems well thought out. However, concerns pertaining to a downturn in the petrochemicals cycle persist. Given the company's highly leveraged position in the petrochemicals sector, a downturn could affect future growth in bottomline.

Market View:
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.