Reliance Industries has announced an average 7% cut in the prices of polypropylene and polyethylene. The cut comes after the company witnessed a sharp upsurge in prices over the last 3-4 months.
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 slowdown in international demand and the consequent sluggishness in prices is being attributed to a new import rule in China that requires importers to 'guarantee deposits' before importing raw material. This has led imports to virtually stop importing in view of the drain on company resources.
Petrochemical companies are now faced with the prospects of thinner margins as costs continue to increase (due to high crude prices) and realisations come under pressure.
Reliance has an added advantage of having very large capacities and a high level of integration. This permits the company to control costs. Now, with Reliance Petroleum having gone on stream, the company will benefit from still lower raw material costs (RPL will supply 30% of its output to RIL). This will enable the company to minimise the deterioration in margins.
However, it must be noted that the company has managed to post a growth in bottomline in worse conditions mainly due to its focus on volume driven growth rather than price driven growth. Also, the company's cost control measures need to be appreciated. These factors will hold the company in good stead in this scenario of a dip in prices.
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 free cash flows this year.
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