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Petrochem prices surge - Views on News from Equitymaster
 
 
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  • Sep 30, 1999

    Petrochem prices surge

    Newspaper reports state that international petrochemical prices have jumped over 23% over the past few weeks. On the back of this surge in prices, Reliance Industries (RIL), has announced its third price hike in the last one month.

    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 surge in petrochemical prices has been supported by the economic recovery in the economies of Southeast Asia and Japan. Moreover, according to research houses, the build up of capacity is likely to slow down for some time, leading to a better demand supply environment.

    Reliance is likely to be a large beneficiary of this recovery, mainly due to its large and efficient capacities. Also, due to its integrated nature, the company is able to keep a tab on costs. As a result, any increase in prices, directly adds to the bottomline of the company. The recent price hikes (three of them) can be expected to give a major boost to the company's bottomline.

    However, the business is commodity based. The prices are determined purely by demand and supply. Therefore, any increase in capacity, or decline in demand, can exert a downward pressure on prices. Moreover, the recent surge in crude prices will increase the cost of production and could adversely affect margins. It must be mentioned that the company was able to pull through the last recession without much damage to its 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.

     

     

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