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Reliance looks before leaping for IPCL - Views on News from Equitymaster
 
 
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  • Oct 12, 1999

    Reliance looks before leaping for IPCL

    Reliance Industries Limited has kicked off its due diligence exercise at Indian Petrochemical Corporation Limited (IPCL). The company has yet to place its formal bid for acquiring a 25% stake in IPCL.

    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.

    Reliance Industries has let known its keenness for dominating the domestic petrochemical sector by acquiring competing companies, the most recent of which was the acquisition of Raymond Synthetics (a polyester filament yarn major). The company's decision to bid for the 25% stake in IPCL is, in all probability, motivated by the desire to prevent the back door entry of a multi national, which could in future challenge its domestic supremacy.

    This rationale for acquiring a stake in IPCL is more than justified. Reliance, although a world class manufacturer, has focussed its efforts on the domestic market, with export accounting for approximately 4% (FY99) of total sales. The entry of an MNC will force it to venture out in the international markets, which are undoubtedly more competitive. This could adversely affect the company's bottomline, atleast till the time it is able to set up export related infrastructure and marketing facilities.

    With IPCL in its basket (25% of it) the company will have nearly complete dominance in the domestic markets. It could also then pursue its export thrust, at its own will, to establish a global presence. With large capacities, and a strong domestic presence, the company would be aptly placed to challenge the global leaders in the international markets.

    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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