According to newspaper reports, Reliance Industries Limited has sent a formal communiqué to the government expressing interest in acquiring stakes in Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), Engineers India (EIL) and IBP Company.
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 is also the promoter of Reliance Petroleum Limited, which has a refining capacity of 27 m tonnes per annum.
The company's decision to bid for the public sector oil companies was inevitable, given its desire to become the leader in the industry. HPCL and BPCL, together command tremendous marketing clout and have a refining capacity of just under 20 m tonnes per annum. IBP on the other hand is a dedicated marketing company, while EIL has expertise in oil rigs and other research related activities. If these companies were to come under one umbrella, say for example the Reliance Group, the resultant group would become the leader in the oil sector, dwarfing even the Indian Oil Corporation (IOC), India's sole Fortune 500 company.
For the Reliance Group, the acquisition fits into its overall strategy of dominating the oil and petrochemical sectors. It already has a significant presence in the petrochemical sector, and with the recent commissioning of its petroleum refinery, it has become one of the largest refiners in the country. With deregulation looming large (April 1, 2000), oil companies need to step up volumes and strengthen their marketing infrastructure. Such a consolidation, as envisaged by Reliance, will make it a force to reckon with once the sector is deregulated.
However, that the government will prefer to offload stake in favour of a private party without inviting competitive bids seems optimistic. There is likely to be intense competition among domestic and multinational companies as and when the government decides on offloading its stakes in these companies. There is also likely to be a significant problem relating to the merging of cultures between the private companies and the public sector companies.
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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